Comparing tax burden of W2 vs K1 income - 2 job offers

[MetroDoc]

I am comparing 2 job offers and want to get the compensation numbers as close to apples-to-apples comparison as I can.

Assume: My federal income tax bracket is 20% and my state income tax is 0%

Job A: $100k annual income paid via K1

Job B: $100k annual income paid via W2

Here is my understanding of how the taxes would work in each scenario.

Job A:

I pay the employer half of payroll tax which is 7.5% = $7500

I then pay 20% income tax on $100,000 - $7,500 = 20% x ($92,500) = $18,500

Total taxes = $26,000

Job B:

I pay 20% income tax on $100,000 = $20,000

Total taxes = $20,000

My question is whether I am calculating the tax burden correctly in each scenario.

Thanks.

[Peds]

Tax brackets are progressive.

[ENT Doc]

MetroDoc wrote:

I am comparing 2 job offers and want to get the compensation numbers as close to apples-to-apples comparison as I can.

Assume: My federal income tax bracket is 20% and my state income tax is 0%

Job A: $100k annual income paid via K1

Job B: $100k annual income paid via W2

Here is my understanding of how the taxes would work in each scenario.

Job A:

I pay the employer half of payroll tax which is 7.5% = $7500

I then pay 20% income tax on $100,000 – $7,500 = 20% x ($92,500) = $18,500

Total taxes = $26,000

Job B:

I pay 20% income tax on $100,000 = $20,000

Total taxes = $20,000

My question is whether I am calculating the tax burden correctly in each scenario.

Thanks.

Click to expand...

In all seriousness, you need to incorporate some important facts into your calculations, namely:
1. Tax brackets are progressive, as Peds said
2. Pass through companies now get a special deduction for tax purposes
3. As a partner you're responsible for all the FICA taxes
4. You don't subtract FICA from your income to calculate taxable income, but you do need to subtract out deductions and account for other income and credits.

[Peds]

ENT Doc wrote:

MetroDoc wrote:

I am comparing 2 job offers and want to get the compensation numbers as close to apples-to-apples comparison as I can.

Assume: My federal income tax bracket is 20% and my state income tax is 0%

Job A: $100k annual income paid via K1

Job B: $100k annual income paid via W2

Here is my understanding of how the taxes would work in each scenario.

Job A:

I pay the employer half of payroll tax which is 7.5% = $7500

I then pay 20% income tax on $100,000 – $7,500 = 20% x ($92,500) = $18,500

Total taxes = $26,000

Job B:

I pay 20% income tax on $100,000 = $20,000

Total taxes = $20,000

My question is whether I am calculating the tax burden correctly in each scenario.

Thanks.

Click to expand…

In all seriousness, you need to incorporate some important facts into your calculations, namely:
1. Tax brackets are progressive, as Peds said
2. Pass through companies now get a special deduction for tax purposes
3. As a partner you’re responsible for all the FICA taxes
4. You don’t subtract FICA from your income to calculate taxable income, but you do need to subtract out deductions and account for other income and credits.

Click to expand...

Yes I didn't want to write all that. ✌️

[AlexxT]

MetroDoc wrote:

Job A: I pay the employer half of payroll tax which is 7.5% = $7500

Click to expand...

To clarify, in job B you would pay payroll taxes of 15%. ( employee half and employer half ).

Plus, as employer, there will typically be additional  payroll taxes such as disability and unemployment insurance that would be around 1.5% on that first 117k or so of income.

If you are paid as a contractor you will also not get any benefits, such as health insurance, 401k  match, etc.

Plus what they said above.

[jacoavlu]

AlexxT wrote:

MetroDoc wrote:

Job A: I pay the employer half of payroll tax which is 7.5% = $7500 

Click to expand…

To clarify, in job B you would pay payroll taxes of 15%. ( employee half and employer half ).

Plus, as employer, there will typically be additional  payroll taxes such as disability and unemployment insurance that would be around 1.5% on that first 117k or so of income.

If you are paid as a contractor you will also not get any benefits, such as health insurance, 401k  match, etc.

Plus what they said above.

Click to expand...

You are assuming OP is an owner in job B. I was assuming otherwise.

In a W2 employed position employee would pay 1/2 of payroll taxes - 6.2% social security (on first $128,400) and 1.45% Medicare. Plus 0.9% additional Medicare tax on wages above $200k single/$250k MFJ.

[AlexxT]

jacoavlu wrote:

You are assuming OP is an owner in job B. I was assuming otherwise.

Click to expand...

You probably know more about taxes than I do ( I'm not being humble here ) but I  googled this, and I found that: K1 general partners generally pay self employment taxes.  K1 limited partners don't.  The IRS ruled that  LLCs that generate K1's will generally pay self employment tax, and LLCs that primarily provide services are subject to self employment tax.  I assume that in this case since this is a job as a physician which can also pay a W2, that this would be a service job.  But either is possible.

[MetroDoc]

Thanks all for commenting. To clarify in Job B I would be an employee (not owner). I am not including benefits (401k, health insurance, etc) in these calcs. Those I can easily add in later when comparing.

Given the complexities of calculating taxes, is it possible to do a reasonable estimate of the tax burden in each case for $100k income?

 

[jacoavlu]

Yes, it is possible. In fact, not difficult. It is also educational to do so.

[ENT Doc]

MetroDoc wrote:

Thanks all for commenting. To clarify in Job B I would be an employee (not owner). I am not including benefits (401k, health insurance, etc) in these calcs. Those I can easily add in later when comparing.

Given the complexities of calculating taxes, is it possible to do a reasonable estimate of the tax burden in each case for $100k income?

 

Click to expand...

Look up the instructions for the 1040, 1065? (partnership instructions), Schedule C, Schedule SE, and information re: tax brackets and deduction changes from the new tax law.

[AlexxT]

Try this, or similar:

https://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx

 

Note that these calculators are  for employees.  For employer / independent contractor, you would need to subtract the additional payroll taxes.  Also, you can't use hypothetical salary numbers.   You need to use the actual salary, as some payroll taxes decrease, and income taxes increase, as salary increases.

[jacoavlu]

Payroll taxes do not decrease as income increases. The percentages are fixed.

Social security tax only applies to up to the wage base. $128,400 for 2018. It is zero above that.

There is an added 0.9% Medicare tax on wages above $200,000 single/$250,000 MFJ.

[DMFA]

When you get your 1065 K-1, it will have two primary "income" boxes - box 1, business income, and box 14, self-employment income.  Box 1 gets ported to 1040 Schedule E, which is what you pay federal income tax on.  This includes box 14 plus any partner distributions you were given.  Box 14 is what you actually earned by working, and that is subject to self-employment tax and gets ported to 1040 Schedule SE, on which you'll pay 12.4% on anything subject to SS tax ($128,400 from all sources) and 2.9% Medicare tax.

On a W-2, you pay federal income tax, plus only the employee portions of SS/MCR, which are 6.2% on SS-taxable income and 1.45% on Medicare.

...idk what this 20% tax bracket is.  Looks like you're in either the 22% or 24% based on single vs married.  Effective rate would be in the low to mid teens.

[AlexxT]

jacoavlu wrote:

Payroll taxes do not decrease as income increases. The percentages are fixed. Social security tax only applies to up to the wage base. $128,400 for 2018. It is zero above that.

Click to expand...

That's what I was referring to.  I was alluding to the fact that if he is comparing a 100k salary, which I assume is hypothetical, and not an actual attending physician's salary, that he can't simply take the numbers of 100k and scale them up, as the taxes won't be proportional.  That's why I linked to a calculator.

Payroll taxes include disability and unemployment as well as the medicare tax.  Some taxes  increase as a percentage ( income ) others decrease as a percentage ( social security if over the wage base, and an attending physicians salary will almost certainly be above that threshold ).   Unemployment taxes are usually paid by the employer only, and might or might not have a cap, therefore might or might not be proportional at higher salaries..   States might vary.  He needs to look at his own state's numbers.

I assumed that my meaning was obvious.   I didn't realize that my words would be parsed so literally.