Lower Rate Versus Higher SE/Payroll Tax
As we mentioned yesterday, the Senate has released their framework on tax reform and their is a 17.4% deduction for active business income. However, there is the restriction that it is limited to 50% of wages subject to withholding. I had a couple of examples on this yesterday.
The bottom line is for our farmers who farm as an S corporation and they have held their wages fairly low, they are likely not to get much benefit from the new deduction for business income. If a farmer pays him or herself lets say $50,000 of wages during the year, the maximum deduction allowed under the Senate proposal is $25,000. If farm income flowing through from the S corporation is greater than about $144,000, then any of the excess income over this amount will not be available for the 17.4% deduction.
This issue may also apply to those LLCs who have structured their operations to reduce SE tax. In that case, the members will have to decide, is it better to pay SE tax at 15.3% or forget the extra 17.4% deduction. For most farmers under the wage base, I am guessing they will pick the last option since that tax savings will likely be much lower than 15.3%.
Schedule F farmers should not have any issue since they are paying SE tax on all of that active business income.
We will keep you posted as this works it way through the Senate Finance Committee.