conversation: User (ab0mination): "Realize it's a weird question.\n\nLong story short, my payroll company ended up paying me a salary that was higher then I expected:\n\n* pay a fee to have my W-2 'corrected' to my expected salary\n\nor:\n\n* accept the higher salary, pay $706 more then planned in taxes (already done), but be able to contribute $1500 more then planned to my SEP-IRA.\n\nNot really interested in any other options, I've gone over it with both my CPA &amp; payroll provider.\n\nSo, **at 27, would you pay $706 to be able to contribute $1500 more to your IRA?**\n\nI'm leaning towards yes.\n\n**EDIT**: Removing some details because per usual, the focus is entirely not on what I asked. *I get it, but sometimes frustrating.*"
  Self: "Your w-2 must reflect what you actually received, whether or not it was "expected". Anything else would be tax fraud."
  User (ab0mination): "It is for self-employed income, hence the SEP-IRA.\n\nI operate as an LLC, and file as an S-Corp. I (along with my CPA) choose a 'reasonable' salary, and I take the rest as profit distribution.\n\nI passed along my chosen salary to payroll company, they misunderstood, and paid me a higher salary.\n\nNo tax fraud."
  Self: "And your CPA suggest you can retroactively elect to change this?\n\nI'm unclear how a distribution from an S-Corp is getting taxed differently than salary. I'd guess just payroll taxes? But that doesn't equate to the amounts you're suggesting (or , at least, it's be helpful if yo provided a breakdown to make this clear).\n\nThis is one of those questions where there's too little information to go on. and if you're already paying for professional help, if they're worth what you pay them then should be able to answer these questions for you."
  User (ab0mination): "&gt; And your CPA suggest you can retroactively elect to change this?\n\nHe actually thought I couldn't (not sure whether he thought it'd be cost restrictive or actually impossible), but the payroll company offered (for a fee, $250). They'd essentially be retroactively altering 1 of my 3 quarterly paychecks (to bring it down to just a few hundred), and they mention some process for getting a tax refund for having overpaid on estimated taxes.\n\n&gt; I'm unclear how a distribution from an S-Corp is getting taxed differently than salary. I'd guess just payroll taxes?\n\nYou pay FICA (and I think Medicare?) on salary, but not on profit distributions.\n\n&gt; But that doesn't equate to the amounts you're suggesting (or , at least, it's be helpful if yo provided a breakdown to make this clear).\n\nRequested $20,000 salary. Received $26,250 salary. I'm eligible to contribute 25% of salary to SEP-IRA, so I'd contributed $5,000, but the increased salary would allow me to contribute $6,562.50. That's the extra $1,500 referenced (rounded).\n\n$6,250 (extra salary) x 0.153 (taxes on that salary) = $956\n\n$956 (new taxes) - $250 (payroll fee to change) = $706\n\n&gt; and if you're already paying for professional help, if they're worth what you pay them then should be able to answer these questions for you.\n\nThey answered my questions, but they left me with these options to choose from. Seemed like preference to me, so was looking for what others might do."
  Self: "I'd take your CPA's guidance on what's legal over the payroll company's, since the CPA is the one that needs to defend you in case on an audit.\n\nThe numbers are helpful. So, you're paying $250 to pay $956 less in ss/medicare. And apparently you have room left in your SEP-IRA for 2014. In that case, it's kind of a no-brainer to reduce your income and increase your "profit".\n\nAt some point, though, you're going to have a hard time standing up to to an IRS audit where you justify the breakdown. That's the main concern here, and comes back to your CPA taking responsibility."
  User (ab0mination): "&gt; I'd take your CPA's guidance on what's legal over the payroll company's, since the CPA is the one that needs to defend you in case on an audit.\n\nDirect quote:\n\n&gt; The qualitative consideration is the reasonability of the salary.  The 20k is more aggressive, but I am not uncomfortable with this amount.\n\nAnd he shouldn't be since he was the one who suggested it to begin with haha.\n\n&gt; So, you're paying $250 to pay $956 less in ss/medicare\n\nExactly, or $706 to be able to invest $1,562.50 more into my SEP-IRA.\n\n&gt; In that case, it's kind of a no-brainer to reduce your income and increase your "profit".\n\nIf it weren't for being able to invest more (when all other tax-advantaged accounts are maxed), then it would be. As it stands, not a no-brainer for me. Was leaning towards keeping it as is, but seems you're suggesting the other.\n\n&gt; At some point, though, you're going to have a hard time standing up to to an IRS audit where you justify the breakdown. That's the main concern here, and comes back to your CPA taking responsibility.\n\nYeah pretty lost there. Just having to trust that my CPA knows what he's doing. He's been in the industry since '89, a partner at his firm for 10 years, and the go-to guy for people in my industry, so I'm as confident in him as I think I could be a CPA."
  Self: "&gt;Exactly, or $706 to be able to invest $1,562.50 more into my SEP-IRA.\n\nI don't see why you're turning it around this way. Unless you're worried about being short on quarters for paying into FICA, why would you pay when you don't have to? Doesn't really matter what you do with the extra income, though if it enables you to take advantage of tax-advantaged space, all the better.\n\n&gt;Yeah pretty lost there. Just having to trust that my CPA knows what he's doing.\n\nIf your CPA's on board, then that's what matters. That was my point. I don't know why he didn't tell you how much to take as salary in the first place."
  User (ab0mination): "&gt; I don't see why you're turning it around this way.\n\nProbably not going to be able to explain any better, sorry. Trying! Thanks for reading.\n\n&gt; Unless you're worried about being short on quarters for paying into FICA\n\nNope.\n\n&gt;  why would you pay when you don't have to? Doesn't really matter what you do with the extra income, though if it enables you to take advantage of tax-advantaged space, all the better.\n\nBecause by not amending my salary, I'm able to contribute more to my SEP-IRA (since it's 25% of salary, higher salary = higher contribution limits). Where it's at right now ($26,250), I can contribute $6,562.50, but have to pay $706 more in taxes then if I received planned salary ($20,000, eligible to $5,000 contribute to SEP-IRA, have to pay $250 to get this amendment).\n\n&gt; I don't know why he didn't tell you how much to take as salary in the first place.\n\nHe did. Sort of explained [here](http://www.reddit.com/r/personalfinance/comments/2w9k0x/at_27_would_you_pay_706_to_be_able_to_contribute/coosslx), but yes he came up with the figure, it was just miscommunicated with the payroll company. Now know to be more explicit, and try to follow the payroll paperwork more carefully (was super confusing though...)."
  Self: "[editing to combine ss/medicare=fica and switching to 28%]\n\nOkay, I've sorted through it now. The original question was presented in a very confusing way. The adding and rounding numbers made it hard to decode where things came from and you're missing a variety of considerations. For instance:\n\n&gt;$6,250 (extra salary) x 0.153 (taxes on that salary) = $956\n\nbut some of that "extra" salary is going to a SEP which is exempt from FICA so the "savings" is actually only $717. And you haven't accounted for federal (and state) taxes. Plus you need to keep in mind the amount of the contribution itself that you'd "get back".\n\nOkay. I broke down and did math. Here I'm assuming a 25% marginal rate on all of this, but I played around and it doesn't make a big difference.\n\n | $26,250.00 | $20,000.00 | $6,250.00\n---|---|----|----|----|----|----\nSEP contrib | $6,562.50 | $5,000.00\nTaxable | $19,687.50 | $15,000.00	| $6,250.00\nfed tax | ($4,921.88)	|($3,750.00)	|($1,562.50)\nFICA | ($3,012.19)|	($2,295.00)	|$0.00  \nfee | $0 | | ($250)\nAfter-tax net | $11,162.81 	| |$12,755.00  				\nSEP Net | $6,562.50 ||  $5,000.00	\n\nSo, by moving $6250 from income to profits you're going to take home $1640 more post-tax and in exchange for having $1563 less in your SEP. So, yes, I would definitely take the route that leads to having more dollars and having them be post-tax instead of fewer pre-tax dollars. Even if you change around the tax rate, the cost of paying FICA is never worth it just to get the tax-deferral.\n\nNow that I've gotten far...are you already maxing your traditional/Roth IRA for the year? You can put $5500 into that alongside your SEP. Depending on what else is going on with your finances, you may actually prefer to use the Roth IRA rather than making further tax-deferred retirement contributions."
  User (ab0mination): "Had this tab open for a day trying to comprehend. Thought I was pretty sure of the situation, but now doubting it.\n\nThe only other thing I can add is this exchange with my CPA?\n\nMe:\n\n&gt; So I guess my question is what the cost difference for this year would be.\n\n&gt; 26250 - 20000 = 6250  (salary - desired salary)\n\n&gt; 6250  * 0.28  = 1750  (difference * 28% tax rate)\n\n&gt; 1750  - 250   = 1500  (tax diff - payroll fee)\n\n&gt; Not sure how to account for SS, Medicare, FICA, etc.\n\n&gt; According to those rough calculations, I feel like I'd come out $1.5k ahead if I do have the amendment made. Feel like that's probably to simplistic though.\n\nHis response:\n\n&gt; I think you are missing one key thing – when you pay yourself, the company gets a deduction and then you pick up the corresponding additional income because W-2 wages are higher so it is a wash.\n \n&gt; You are paying less FICA with a lower salary -- $6,250 x 15.3% = $956 vs $250 to redo the W-2.\n\nNot sure if that helps. Man I'm lost now.\n\n&gt; are you already maxing your traditional/Roth IRA for the year?\n\nYes. Maxxed Roth IRA + Traditional 401k for me, Traditional IRA for my wife."
  Self: "So, is anyone arguing that you *shouldn't* make the change to take less as salary and more as profit? \n\nMy point was to illustrate (and understand for myself) that you aren't just "paying $706 to be able to contribute $1500 more to your IRA". Out of pocket, you're paying:\n\n* the $1562 contribution itself ($1562)\n* *plus* the extra FICA taxes you have to pay to be able to do so (this is less than the $956 because you don't pay FICA on the portion you're putting into the SEP with the higher salary) ($717)\n* *minus* the the federal/state tax benefit you're get from putting those dollars into the IRA (-$438)\n* *minus* the fee you're saving by not making the change. (-$250)\n\nIt's misleading to equate the FICA alone to the cost of putting dollars into the SEP, since that cost is actually *in addition* to the contribution itself. Though he then overestimated the FICA cost difference and underestimated the costs associated with reducing your salary/corresponding SEP contribution amount.\n\nFor instance if I make a payroll contribution to my 401k at work, say that I get a 30% tax savings. So when I evaluate that it comes out that to put $1000 into my 401k it "costs" me $700 in takehome pay.\n\nBut in your case to put $1562 into your SEP, it'll cost you ~$1592 (corrected for 28% rate) in takehome pay. When you do the math out the FICA you're paying pretty much eliminates the tax benefit, even in the face of having to pay the $250 fee.\n"
  User (ab0mination): "Sorry, didn't mean to leave you hanging after you put so much thought into this.\n\nTo be clear, I'm honestly inclined to just believe you—I've learned a ton from your comments in this subreddit. I'm still just trying to understand.\n\nJust now getting around to calling my CPA, but he's out at the moment.\n\nI saved your table to show him, thanks for that.\n\n&gt; It's misleading to equate the FICA alone to the cost of putting dollars into the SEP, since that cost is actually in addition to the contribution itself.\n\nThat doesn't make sense to me...I have the $1562 either way, it's just whether it's in my bank account, or invested (all other complications of this situation aside, this is preferable). So I'm having trouble seeing that as a cost to factor. If anything, the cost is the lost opportunity of having that amount invested."
  Self: "&gt;That doesn't make sense to me...I have the $1562 either way, it's just whether it's in my bank account, or invested (all other complications of this situation aside, this is preferable). So I'm having trouble seeing that as a cost to factor.\n\nOkay, now I have a real keyboard. So, I think this is the big point you're missing and where the terminology gets to be a problem.\n\nIf you have $20k in income and put $1k into an account that have no fee or tax effect, do you say it "cost" zero dollars to make that investment or that it cost $1k? If you say zero, that's fine. But if that's how we're looking at things then you should *never* have a "cost" to contribute to a tax-deferred account. There should in fact be a *negative* cost, since that whole idea is you get a tax break now but are going to pay taxes later.\n\nIf the reduction in your after-tax dollars isn't smaller than the amount that ends up in that account, there's no point to the whole exercise. Would you use $1000 after-tax dollars (or more!) to put $1000 into an account that was going to be subject to income tax upon withdrawal? Whereas if you kept it after-tax and invested it, you would be subject only to long-term capital gains taxes?\n\nIf this were a Roth account, where you did't have to pay any taxes on withdrawals at the other end, it would be expected that the after-tax dollars it costs you to contribute to it are the same that ends up in the account. I can even imagine if you were in an unusually low tax bracket one year it would be worth paying a little bit more to get that tax-free treatment. But for a tax-deferred account, it only make sense if the amount of after-tax dollars it takes to fund the account is *less* than how much ends up in the account, which is why you need to take into consideration the contribution dollars themselves.\n\nSo, back to the top post question that started this all. If the "cost" you're quoting is the amount in addition to the contribution itself, then, no, even if it only cost you $1 it would not make sense to pay it to put more money into the SEP.\n\nI'm going to PM you a link to a google doc with calculations."
  User (ab0mination): "Was able to confirm 2 things:\n\n1. SEP-IRA (in my case) is tax deductible.\n2. FICA is due on the entire amount for some reason."
  Self: "I'm starting to seriously question your CPA. Wasn't his case all along that the SEP was exempt from FICA? And now I'm looking at http://www.irs.gov/publications/p560/ch04.html#en_US_2014_publink10008982 and questioning is you can actually contribute 25% as a sole proprietor."
  User (ab0mination): "Yeah I just edited my post where I just originally stated that. Maybe I just misunderstood him, but that's exactly what I wrote down when I was on the phone with him.\n\nhttps://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/How-an-S-Corp-Can-Reduce-Your-Self-Employment-Taxes/INF22938.html seems to agree with my original assumption."
  Self: "Right, I lost track of this being an S-corp. Okay, I understand now. It's the "employer" that is putting the money into the SEP in this arrangement, so the amount is technically coming out of the profit portion not the salary portion, and so there was no FICA on that part to start with.\n\nBut! When you reduce your salary you are paying FICA on *that much less income*, which is where the "FICA savings" is coming from. So you're saving $956 in FICA with the lower salary, paying $391 more in federal taxes (and maybe some state) due to putting less into the tax-deferred account, and paying $250 to make the change.\n\nI updated the spreadsheet I PMed you. The after-tax cost of putting that $1563 into the SEP is still $1878 (if we include the contribution itself as a "cost", which I tried to articulate why it has to be done that way).\n\nAs I take a step back now it occurs to me that the only case in which it wouldn't be worth the $250 fee was if you were only shifting a very small amount of money, so the benefit didn't outweigh the cost. At the point where we're talking about $6250 less of income the the benefit of having it taxed as profit instead of income is pretty clearly worth it, and in fact, the more you can counts as profit instead of income the better. It's just a question of what's justifiable to the IRS."
  