Question

ETHICS Troy is the sole shareholder and CEO of BQT. BQT is a very profitable S corporation. Until re- and is not eligible for the qualified business in- come deduction, and he would be allocated more business income that is not subject to cently, Troy's salary was in line with the salaries of comparable CEOS. However, Troy recently learned that he could reduce his tax burden if FICA tax and qualifies for the qualified business income deduction. After considering the poten- he were to reduce his salary. In particular, by tial benefits, Troy decided to cut his salary in half. Do you think Troy's decision is ethical? Why lowering his salary, Troy would receive less em- or why not? ployee compensation that is subject to FICA tax Points to consider: • The strategy appears to be tax motivated, but is that the sole purpose? • Does Troy have other reasons for reducing his salary other than the salary paid to similarly situated executives? • What other factors should be considered?

Answer 1

Ans. An employer's federal payroll tax responsibilities include withholding from an employee's compensation and paying an employer's contribution for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).  

Employers have numerous payroll tax withholding and payment obligations. Of the utmost importance is the proper payment of what are commonly known as FICA taxes. FICA taxes are somewhat unique in that there is required withholding from an employee's wages as well as an employer's portion of the taxes that must be paid.

The Federal Insurance Contributions Act (FICA) is the federal law requiring you to withhold three separate taxes from the wages you pay your employees. FICA is comprised of the following taxes:

(i) 6.2 percent Social Security tax;

(ii) 1.45 percent Medicare tax (the “regular” Medicare tax)

(iii) Since 2013, a 0.9 percent Medicare surtax when the employee earns over $200,000.

So, in order to reduce tax implications and to bring uniformity in the preparation and presentation of financial statements, Troy may reduce his salary.