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Fall into two payroll tax breaks

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in Small Business Tax

Social Security tax and Medicare tax—the two components of FICA—can take a big chunk out of your paychecks.

Alert: You can’t avoid FICA tax on wages. However, as fall approaches, you might be able to lessen the tax impact with a couple of deft moves.

For 2017, the 6.2% Social Security tax applies to a wage ceiling of $127,200. Furthermore, the 1.45% Medicare tax applies to all wages. So you must pay FICA tax of 7.65% on the first $127,200 of wages and 1.45% after that. At higher wage levels, you may also owe the additional 0.9% Medicare tax.

Here are two strategies that may provide some tax benefits.

1. Watch out for the wage ceiling. Once you clear it, your take-home pay will go up, but you can do even better by using the extra cash flow to increase your retirement plan contributions.

For example, say you surpass the wage ceiling in September and free up an extra $1,000 of monthly take-home pay for the rest of the year. By adding that money to your 401(k) plan, assuming you remain under the annual contribution limit of $18,000 ($24,000 if you’re age 50 or over), you’ll reduce your adjusted gross income (AGI) by $3,000. If you’re in the 33% federal income tax bracket, that’s an income tax saving of $1,000. Plus, you’re putting aside more for retirement.

2. Exempt your child’s earnings. Do you plan on having your teenaged child work at your family-run business after school, on weekends or during school vacations? The child’s wages are exempt from Social Security and Medicare taxes if he or she is under age 18.

Tip: The exemption only works if your business is a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a husband-wife partnership, or a husband-wife LLC treated as a partnership for tax purposes.

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