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Comment by anonymous246 | Hacker News Reader

This is one of those few instances where I actually support the IRS and also support the law that's being contemplated.

S corps (and AFAIK LLCs) are supposed to have "pass through" taxation. I think it's fair that all income (whether salary or profit distributions) from S Corp is treated as regular W-2 income.

If you don't care about the simplicity that "pass through" offers, register a C-corp.

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So then as a small Sub-S owner (wife and me), I would have to pay FICA and Medicare on the money spent on health care insurance, disability insurance, etc., which you as a W-2 employee do not pay payroll taxes on.

In the end, the payroll tax savings are not that great for a small Sub-S. And as you get older, toward retirement, if you pay yourself too low, you take a big hit on SSA benefit payments (which are based on your latest 40 qtrs).

The biggest bang for the PIA effort is if to can write off a vehicle purchase through a Section 179 deduction, and various other hardware purchases.

The tax code already goes way, way out of its way to make it easy to pay for health insurance; get a high-deductable plan and build an HSA. It's what you should be doing anyways, even if you don't care about taxes.

The fact of the matter is, as a member of the workforce, you owe FICA on your compensation. This isn't a subject of dispute. The IRS says you do, the courts say you do, your accountants will say you do. This issue comes up on HN roughly once a year, and the story has never changed.

"...you owe FICA on your compensation". Exactly. I want to be taxed (and get the same breaks) as my corporate client employees. Business writes off all possibly related equipment, as do I. I try to write off everything a C-corp would for employees, but it is much more difficult for us (and very time-consuming even trying to be IRS-compliant).

Again, payroll tax savings (on the income/distribution differential) does not usually add up to that much money.

Hey can you provide some reference for the SSA benefit payments being "based on your latest 40 qrtrs."

I could only find this worksheet online: http://ssa.gov/pubs/10070.html

And under "Estimating your Social Security retirement benefit" your payments appears to be based on your highest index earnings over 35 years.

Since you asked me, yes, my two cents is if you pay for insurance out of distributed profits, you should be treated exactly the same was as a W-2 employee with no health benefits buying insurance on his own would be (I'm stating it this way because I don't know the payroll tax situation for a W-2 employee w/o benefits buying them himself).

If the benefits are provided by the S-corp to employees (i.e., to you), I don't think the question arises. The money used to buy the employees' insurance is removed from the profits, so it won't be part of distributed profits. Since tax is only on income, you won't pay taxes on insurance.

Per the IRS:

> The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.

As for your suggestion that all pass-through income is W-2 income - that would never work. It implies that all business "profits" were paid to its shareholders (that's what payroll / W-2 income is). A cash distribution to its owner is not the only thing a company chooses to do with its profits!

I don't know how it is for S-corps with passthrough, but for LLCs opting for passthrough taxation results in exactly what you describe: you owe taxes even though the profits were not distributed to you because the company decided to reinvest. Search for "allocated profits", "distributed profits", and "phantom income". You owe taxes on allocated profits, not distributed profits.

Opting to be taxed as a coporation (or C-corp) avoids all these problems (at the expense of "double taxation").

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