Updated July 2, 2015
Payroll Tax Problems Chicago Illinois are common. So let’s begin our discussion with a quiz question. If you are an entrepreneur and you write yourself a payroll check for $100, what do payroll taxes cost you? It’s all your money after all, whether its inside your company or your personal checking account. What percentage do the taxes cost you?
a) 20% – 30% b) 30% – 40% c) 40% – 50% d) 50% – 60%
Most clients will say around 30%. But the correct answer, in the lower W-2 brackets is D…50% to 60%. Please allow me to explain.
All of this depends on your filing status and how many exemptions you have. But generally, if you write yourself a check for $100 in salary, you will end up with about $69. But before the social security and medicare taxes are deposited into the IRS, they must be doubled which is an additional 7.65%. Also, you have unemployment taxes on top of the payroll which depending on your circumstance average somewhere around 4%, So for every $100 that you pay yourself it costs you $111.
Most things in accounting only make sense when you look at them backwards, so here goes…
You pay yourself $100. You get $69, but it costs you $111. In other words you spend $42 in tax for every $69 that you receive. That isn’t a 30% tax. It’s a 60% tax. Certainly the unemployment taxes vanish after $12,900 in compensation. But no matter how you look at it, this is not a 30% tax.
Why can’t entrepreneurs afford to make their payroll tax deposits? In many instance, they are just too expensive.
What can you do to remedy this problem? Change how you are taking money out of your business.
The Five Legal Ways to Take Money Out Of A Business Are
1) W-2 Salary
5) Dividends, Distributions, and Draws
We already know that taking money out as a W-2 is one of the most expensive ways to do it. I’m certainly not saying that you can get away without paying payroll taxes in an active trade or business. There are a couple of instances where you can, but for the most part, you cannot. The point is that if the correct tax planning is put into place, you don’t have to pay these excessive taxes on all of your compensation. You can take a reasonable W-2, a reasonable rent on the physical premises, and a reasonable interest on your shareholder loan. Rents and interest are passive forms of income and are not subject to payroll taxes.
Dividends, distributions, and draws are another way to legally take money out of your enterprise. Which one you take, has everything to do with the type of entity that you have. You may choose to get out of your sole proprietorship or partnership just so that you can take a distribution which isn’t subject to payroll taxes. But this is a matter of planning. These solutions don’t just present themselves. They are a matter serious thought and planning.
If you are having Payroll Tax Problem Chicago Illinois or issues with your accounting in general, we would love to help. I love hearing from my readers, and can be contacted at
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.