By Howard Abrams, PBS Tax & Bookkeeping
Q. I am the 100 percent owner of my S corporation trucking company that owns and operates one truck. I am on the payroll, and as the driver I am receiving reasonable compensation. I was reading about the new Medicare tax on earned income, and I want to know if my pass-through income from my S corporation will be subject to the new Medicare tax?
A. No. Pass-through income is not earned income and, therefore, not subject to the new 0.9 percent additional Medicare tax on earned income in excess of $200,000 ($250,000 for married filing jointly). Only wages and self-employment income are considered earned income.
Additionally, the 3.8 percent Medicare tax on unearned income would not apply since the tax is tied to investment income received from bonds, stocks, interest and dividends.
Q. My friend told me he heard that the IRS has decided to increase their audits of small businesses. Since my one-truck operation would qualify as a small company, do I have a lot to be worried about?
A. No, I don’t believe so. The IRS is focusing on sole proprietorships and S corporations, like yours. But, based on the information you provided, we believe you are in compliance of the reasonable compensation rule and you report all your income and expenses properly. Also, you pay your employee by withholding payroll taxes and not as an independent contractor.
S-corps face the most IRS scrutiny because they are a favored tax haven for small businesses. The lower the salary to the owner employee, the larger the tax savings. All of us pay our Social Security taxes either through payroll deductions or the self-employment tax. But in the eyes of the IRS, an unreasonably low salary is disregarding the rules and subject to quite large penalties. Remember, avoid that scenario by taking a reasonable salary for what you do within your company such as driving the truck and managing the company.
Q. Adrian, a long-haul trucker, called and said she was being audited by the IRS on her 2011 income tax return. She is a company driver and wanted to know if we would represent her even though we did not prepare the return. She stated that the IRS was disallowing the business deductions she claimed. Since S corporations do not pay a self-employment tax, a low or no salary results in huge savings of Social Security and Medicare tax.
A. Audits of company driver business expense deductions, generally filed on IRS Form 1040 schedule 2106, have increased more than tenfold. Their attitude is to disallow all deductions claimed unless you can prove otherwise.
The IRS is requesting proof (see below) that support your deductions.
- A copy of your employer’s reimbursement policy, a statement that there is no reimbursement policy, or a letter from the employer explaining what expenses are reimbursed. This should include a statement as to whether or not the reimbursement plan is “accountable” or “non-accountable.”
- A statement as to whether or not reimbursement is included on your W-2 and, if so, where on the W-2 the reimbursement is reported.
- A copy of any receipts for any expenses claimed.
- Receipts for any lodging expenses claimed.
- Copies of logbooks. This includes requests for reimbursement for employees on accountable plans.
- Verification of total mileage on a vehicle.
- If actual vehicle expenses were claimed, provide receipts, invoices and canceled checks for your automobile expenses. LL
This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at pbstax.com.
Please remember everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.