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No way out of payroll tax snafu

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in Small Business Tax,Small Business Tax Deduction Strategies

Q. We couldn’t afford to pay a company officer while we worked on a project. Now that we’re paying him in 2013, can we call it a loan? R.B.T., San Mateo, Calif.

A. No. You can’t simply convert compensation for services rendered into a loan by characterizing payments as loans even if you add interest based on a repayment schedule. The amounts paid are taxable in 2013 subject to income tax withholding and payroll taxes. Therefore, the officer owes federal employment tax at the usual 7.65% rate and so does the company. For 2011 and 2012 only, the employment tax rate for employees was cut by two percentage points to 5.65% on amounts up to the Social Security tax wage ceiling.

Tip: The Social Security tax wage ceiling, which was $110,100 for 2012, increases to $113,700 for 2013.

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