Deferring director salaries may save social security taxes.

• Author: Kautter, David J.

Before 1991, it did not matter whether taxpayers elected to defer their wages or director fees for purposes of Social Security taxes; both types of income were included in the Social Security taxable wage base in the year the services were performed rather than in the year the income was received. However, the Revenue Reconciliation Act of 1990 changed this rule for director fees. For tax years beginning after Dec. 31, 1990, director fees are included in the wage base in the year payment is received. This presents a significant new tax savings opportunity. By deferring salary rather than director fees, a taxpayer may be able not only to defer paying income taxes, but to completely avoid paying Social Security taxes that might otherwise be paid in the year the deferred income is received. In some cases, the tax savings can be substantial.

Social Security taxes have two components: an old age survivors' and disability insurance (OASDI) tax and a Medicare tax. For employee wages, these taxes are often referred to as FICA (Federal Insurance Contribution Act) taxes; for self-employment income (such as corporate director fees), they are known as SECA (Self-Employment Contributions Act) taxes. For 1992, the total Social Security tax rates for employees and self-employed individuals are 7.65% and 15.3%, respectively. The Medicare portions of these rates are 1.45% for employees and 2.9% for self-employed individuals. The rates for employees are half the rates for self-employed individuals because FICA taxes are paid by both the employee and the employer, while SECA taxes are paid entirely by the self-employed individual.

For both employees and self-employed individuals, the 1992 wage base is $55,500 for OASDI and $130,200 for Medicare. Thus, if a taxpayer...