Are Payroll Taxes Deductible?
There are only two certainties in life: death and taxes. While corporations only face the specter of death if they are liquidated or face crippling tailwinds in their business, corporations cannot escape taxation in one form or another. However, unlike individuals, corporations have certain benefits not granted to wage-earners. This includes the ability to deduct payroll taxes. Whether we are talking about an C corporation, an S corporation, an LLC, or even an unincorporated sole proprietorship, your business has the benefit of deducting all employer contributions to payroll tax from their taxable income. Employer contributions include one half of the contributions made for Social Security, one half of the contributions for Medicare tax, as well as 100% of the employee’s Federal and/or State Unemployment tax liability.
Corporations and Payroll Taxes
As you may know, payroll taxes are paid by both the employer and the employee. Corporations pay for one half of their employee’s Social Security and Medicare contributions (the other half is deducted from the employee’s paycheck). In addition to this, corporations must pay Federal and/or State unemployment tax (FUTA or SUTA) for their employees. The FUTA tax rate is 6% up to the first $7,000 in wages.
All of these payroll tax expenses are tax deductible for corporations. Corporations can also get a tax credit if they make state unemployment tax contributions which can offset the federal unemployment tax expense.
How To Deduct Payroll Tax Expenses
While there are hours of work required to identify and document allowable deductions on your corporate income tax return, when it comes to deducting for employer contributions to Social Security, Medicare, and Unemployment, it is quite cut and dry:
Corporations deduct payroll tax expenses on Form 1120 (the corporate income tax return). These expenses are considered “taxes and licenses” and are fully deductible. The sum amount of payroll taxes paid (Social Security, Medicare, and Unemployment) is deducted on line 17 of the form.
S Corporations and Payroll Taxes
There are two types of corporations according to federal tax law: C Corporations (which file their own tax returns and are considered their own entity for federal tax purposes) and S corporations (which are similar to LLCs in that their earnings “pass through” to shareholder, whom pay income taxes based on their ownership percentage of the corporation.
If you are a shareholder in an S corporation, you are probably wondering if these rules apply for your business as well. Thankfully, the answer is yes: on line 12 of Form 1120S, you are able to deduct the sum total of payroll tax expense (Social Security, Medicare, and Unemployment). Just remember that it is only the employer portion of these taxes that are deductible: if you are self employed through an S corporation, you cannot deduct your personal portion of the payroll tax liability.
LLCs and Payroll Taxes
While this article has focused on corporate taxation (C corporations and S corporations), many businesses today are incorporated as LLCS, which like S corporations are pass-through entities. Again, like both C corporations and S corporations, you have the benefit of deducting the employer portion of payroll taxes. Just remember again that your personal payroll taxes as a self employed individual cannot be deducted.
As an LLC you are required to file a Form 1065, which identifies taxable income from the LLC and allocates said income to the partners in the LLC. The employer payroll tax contributions are deducted on line 14 of Form 1065.
Sole Proprietorships and Payroll Taxes
Moving beyond incorporated business entities, there is one other type of business that has the benefit of deducting payroll tax contributions (but only the employer portion):
Sole proprietorships also have the benefit of deducting the employer contribution to payroll taxes (Social Security, Medicare, and Unemployment), even though a sole proprietorship is an unincorporated entity, and you report your income on Schedule C as you would as a regular individual taxpayer.
The employer contributions are deductible on Line 23 of Schedule C. Just remember again, that as a self-employed individual, you are able to deduct the employer portion of payroll taxes, but not the employee portion of these taxes. You receive no favorable tax treatment in regards to payroll taxes just because you are self employed.
While taxes are a certainty of life, and business taxes can cause many a headache, when it comes to deducting employer payroll tax contribution, it is quite cut and dry: you are given the right to deduct the full employer contribution (one half of Social Security and Medicare taxes, 100% of Federal and/or State Unemployment taxes). As long as you remember you cannot deduct your own personal payroll tax liability just because you are self-employed, you should be good-to-go come tax time.