Does this change the incentives on how S-Corps structure salary versus distribution? Sometimes people keep salary low (but still "reasonable") and distributions high to limit FICA. Other times people inflate their salary (and keep distributions low) to be able to contribute more to 401k profit-matches and social security.
Since it's a pass-through, it seems like taxable income might be roughly the same either way, so maybe it doesn't impact the size of the deduction all that much. Has anyone thought through this?
Why do you think that's absurd? Social Security is basically a very inefficient (and potentially insolvent) retirement plan. The more you put into it, the more you should get out. That's why people would want to maximize contributions.
I guess you'd have to do the math and maybe there's an edge case but it seems almost totally and completely inconceivable that you'd be better off increasing your rate of payroll income (which also adds the 2.9% Medicare tax as well) in hopes of one day getting larger social security checks, rather than the alternative of keeping and saving it now.
I doubt many people expand their salary to maximize social security contributions but I can say with certainty that people expand their salary to allow maximal 401k contributions, which your parent also referred to ...
It doesn’t change the incentive structure much. This will lop 20% off of each owner’s taxable income after their other deductions. So you’ll still want to pay on the low side of “reasonable” while still optimizing for 401k contributions.
Since it's a pass-through, it seems like taxable income might be roughly the same either way, so maybe it doesn't impact the size of the deduction all that much. Has anyone thought through this?