S Corporations in Retirement

Retiring soon? Considering consulting?

An S Corp could cost you.

Let me explain. 👇

You retired earlier this year. While pondering next steps, you started consulting for your former employer.

Congrats! You have a business.

You’re the only owner of your new business and have no employees.

After expenses, you expect to clear $100,000 in profit.

You’ve heard from friends that EVERYONE has an S Corporation to save on self-employment taxes. While a Schedule C/sole proprietorship would be the default tax treatment, you decide you need an S Corp instead.

Who wants to pay unneeded self-employment taxes on $100K of profit, right?

But there’s a non-obvious threat 💥 to your strategy. It stems from:

1. You already met the Social Security tax max for the year.
AND
2. S Corp owners general need a salary from the S Corp, reducing self-employment tax savings.

At your former job, your company withheld Social Security taxes from your paycheck. These - along with Medicare taxes - are called FICA taxes and they are the W-2 person’s equivalent of self-employment taxes.

The current salary maximum for Social Security taxes is $147,000. Once you hit that, no more Social Security taxes are withheld from your paycheck for the rest of the year. You may not think much of this if you only work at one place during the year. But if you’ve ever worked multiple jobs in the SAME year, you may have noticed that you ‘reset’ at the new job. Your new employer starts withholding Social Security taxes from your paycheck even though you’ve hit your annual max.

This is generally not a problem for individual taxpayers. There’s a mechanism on your personal tax return that allows you to offset your INCOME taxes with any SOCIAL SECURITY taxes paid above the max. Problem solved.

The issue is on the COMPANY side. 💡 Not only do employers withhold 6.2% of salaries for Social Security taxes, they then MATCH this 100%. And companies - including your S Corporation - aren’t allowed an offset on THEIR tax returns for duplicative Social Security taxes paid. Reminder: you’re likely required to claim a salary from your S Corp. While you’ll receive an offset on your personal tax return for your share of Social Security taxes, your S Corp’s match of that amount is forever gone.

And I haven’t even MENTIONED the administrative costs of running an S Corp - tax return filings, bookkeeping help, payroll service provider.

👍Verdict: Be cautious of starting an S Corporation for consulting work in your retirement year.