Sen. Ruben Gallego, (D., AZ), introduced a bill yesterday named the You Earn It, You Keep it Act. The House version was introduced by Rep. Angie Craig, (D., MN).
Highlights of the legislation include…
1 – To permanently eliminate all taxes on Social Security Benefits. The OBBBA, which was passed earlier this year, eliminates taxes on these benefits as long as a taxpayer is within certain limits. It’s also only a temporary fix.
2 – The bill increases the cost of Social Security on workers and employers by removing the cap on Social Security costs. Currently, the tax is only levied on earnings up to $176K.
3 – If signed into law, these changes would begin in 2026.
Let me leave you with this…
I’m writing about this because it’s the sort of legislation that will probably find legs. This was instituted by Democrats and one of the rallying cries from the last election was No Tax On Social Security.
The New Administration only softened their stance once the numbers came out showing the deficit that OBBBA will create. The question now becomes, if passed, what would it cost?
In prior years, the Social Security Administration was constantly worried about funding. This was solved by increasing the wage base that applies to the tax, allowing for the additional funding.
That base has increased by $38,400 in the past five short years. And now there’s a proposal on the table to eliminate the cap altogether.
This would make S Corps even more appealing.
Remember that Shareholders of S Corps are only required to pay Social Security and Medicare Taxes on a reasonable salary. The rest of their compensation can be removed via distributions, which saves on payroll taxes.
Owners of C Corps normally take out larger salaries to remove the problem of double income taxation, but now the entirety of their salaries might be subject to Social Security. Whether this law is passed or not, there are significant tax planning benefits for many C Corp owners if they convert to an S Corp.
In order to explain, let’s use an example. Joanne B. Owner has a C Corp, where she takes a $150K salary.
If we convert her to an S Corp, drop her salary to $50K and take out a $100K Distribution, she’ll save $15,300 in payroll taxes her first year alone. As long as we look at the compensation for her type of business and determine that a $50K salary is reasonable, there’s nothing wrong with this tax planning structure.
I’ve done this with countless C Corp Owners over the past 36 years saving them millions of dollars in taxes. That’s millions with an M. And we can do the same for S Corp Owners who are also taking a larger salary.
If you find yourself in this position, we’d love to talk.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.