There is discussion in Washington about “suspending” some or all of the “payroll taxes”, i.e., the employer and employee FICA and Medicare taxes, to stimulate the U.S. economy in response to the Coronavirus and recent investment-market-selloff. If a “payroll tax holiday” is implemented, a business owner of a S Corporation, or a LLC that is taxed as a S Corporation, should consider increasing his/her W-2 pay to increase tax-deductible 401k or profit sharing plan contributions. Sometimes, the hesitance to increasing the owner’s W-2 pay to improve retirement savings is because the additional payroll taxes (potentially 15.3% or more of the extra W-2 pay) reduce some of the tax advantages of the increased tax-deductible retirement savings. A “payroll tax holiday” will significantly change this cost-benefit analysis. At ACSI, we frequently help business owners with this type of plan design analysis.
