ADA – Another Good Reason to be an S Corp

published September, 2013

Something the “ADA” tax law added was more Medicare Tax—in certain circumstances. Right now, if you have a W-2, you’re paying 1.45% Medicare tax on your wages, and your employer is matching 1.45%. This is a total of 2.9% if you’re both the employer and the employee of your own S Corporation. That’s not new.

There’s now even more Medicare tax if your W-2 earnings are over $200,000 Single or Head of Household, and if your W-2 earnings are over $250,000 Married Filing Joint. There will be an EXTRA 0.9% tax added.

In the past, investment income, as distinguished from W-2 wage income, had NO Medicare tax ever.

Now, starting in 2013, there IS a 3.8% Medicare tax on “investment income” if your “Modified AGI” is above threshold amounts ($250,000 MFJ, $125,000 MFS and $200,000 Single or HOH).

You’ll note all the quotation marks above; that’s because these terms are defined specifically for this rule, and the definitions don’t necessarily mean what you think they do.

Investment income, for THIS purpose, includes interest, dividends, royalties, rents, passive income from a trade or business or gain from selling personal property, including your house.

Investment income for THIS purpose does NOT include income from an S Corporation that you’re actively working in (nor tax exempt interest, nor sale of business properties).

The way the law is written, it would appear the plan is to collect more tax from people with high earnings and/or lots of passive income, i.e. “the rich.” The way my clients are written, we’d like to pay one or both of these “extra” taxes.