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Section 199A Basic Comparisons
Posted November 23, 2018
Joe Public earning $100,000 with and without additional taxable income.
|ln||No S||S Corp||No S||S Corp|
|2||less W-2 Wages inc. SEHI, HSA, etc.||0||35,000||0||35,000|
|3||less Payroll Taxes||0||2,678||0||2,678|
|4||Net Business Income Section 199A||100,000||62,323||100,000||62,323|
|5||Adjustments to 1040 / NBI|
|6||less Social Security Tax||5,726||0||5,726||0|
|7||less Medicare Tax||1,339||0||1,339||0|
|8||less SEHI, HSA, etc.||0||0||0||0|
|9||Other Taxable Income||0||0||60,000||60,000|
|10||Adjusted Gross Income*||92,935||97,323||152,935||157,323|
|11||Itemized / Std Deductions||24,000||24,000||24,000||24,000|
|12||Taxable Income Before Section 199A||68,935||73,323||128,935||133,323|
|13||Section 199A Net Biz Income||20,000||12,465||20,000||12,465|
|14||Section 199A W-2 Wage Limit||0||17,500||0||17,500|
|15||Section 199A Taxable Income Limit||13,787||14,665||25,787||26,665|
|16||Section 199A Benefit||13,787||12,465||20,000||12,465|
|17||Marginal Income Tax Rate||12%||12%||22%||22%|
|18||Income Tax Benefit from Section 199A||-1,654||-1,496||-4,400||-2,742|
|19||plus Self-Employment Tax||14,130||0||14,130||0|
|20||plus Tax on Line 12 Delta (above)||0||526||0||965|
|21||plus Payroll Tax||0||5,355||0||5,355|
|22||Net Tax After Section 199A Benefit||12,475||4,386||9,730||3,578|
|23||Net S Corp Benefit $||8,089||6,152|
*includes the S Corp W-2
There are several notables, takeaways and explanations-
Assumptions are $100,000 in business income prior to $35,000 in reasonable shareholder salary. Married taxpayer with $24,000 as a standard deduction (Line 11), with and without an additional $60,000 in taxable income (Line 9) such as a spouse or pension.
Notice how under an S corporation scenario (the second and fourth columns) the adjusted gross income (Line 10) is higher than a garden variety LLC or sole proprietorship. This is because issuing a W-2 is limiting the amount of Social Security and Medicare taxes paid, and subsequently deducted to ultimately determine taxable income. This has always been the case before and after the Tax Cuts & Jobs Act of 2017. No change.
Taxable Income Before Section 199A Deduction (Line 12) is used for illustration purposes only. The Section 199A deduction will eventually reduce adjusted gross income to arrive at taxable income for income tax purposes (a deduction from AGI). Our illustration is purely for the difference between a non-S Corp and an S Corp. It is not an income tax calculation.
Lines 13, 14 and 15 compute the various Section 199A calculations and will be used to determine any limitations. In this example, since taxable income is below $315,000 the only two limits are Section 199A based on business income (Line 13) and Section 199A based on taxable income (Line 15). The Section 199A based on W-2 limitation is not used.
Line 16 is the selected Section 199A benefit depending on the calculation and income limitation rules.
Notice that under a non-S Corp scenario the limiting factor (or as nerdy military types say, limfac) is Section 199A based on taxable income whereas the S corporation scenario the limiting factor is Section 199A based on net business income. This should make sense.
Line 18 is the income tax benefit based on the Section 199A calculation. Remember we are thinking in terms of taxes, so the Section 199A calculation must be put into an income tax savings context based on marginal tax rates.
Next, we add self-employment taxes to the non-S Corp (Line 19), and income taxes and payroll taxes to the S Corp (Lines 20 and 21) to arrive at the cash in your pocket difference by being taxed as an S corporation. In this example, an S corporation is saving $8,089 for no additional household income and $6,152 with $60,000 in additional income. Of this savings, the bulk remains because of self-employment tax savings.
Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
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