Gingrich avoided $69,000 in Medicare tax in 2010?

"Republican presidential candidate Newt Gingrich avoided paying about $69,000 in payroll taxes in 2010 by using a tax strategy that characterized money he collected from one of his companies as profits rather than salary...

Gingrich paid himself a salary of about $420,000 but also collected $2.4 million in profits from his S-corp, said Robert...after he reviewed Gingrich’s 2010 tax return.

That means Gingrich avoided Medicare taxes of 2.9% on that $2.4 million, saving about $69,000 in taxes for 2010.

A spokesman for Newt Gingrich has not yet replied to a request for comment.

An S-corporation passes income through to its shareholders, who then report the money on their individual tax return.

But how they report that income determines whether or not they pay employment taxes, including Medicare taxes, on it.

Generally, if they receive the money as wages, payroll taxes are owed.

If they receive it as a share of the corporation’s profit, the taxpayer won’t owe payroll taxes.

...Unlike Social Security taxes, which apply only to wages up to about $106,800 (that figure changes based on inflation), there is no upper income limit for the Medicare portion of payroll taxes.

On their tax return for 2010, Gingrich and his wife Callista reported a $2.4 million profit from ...Gingrich Productions last year.

The crux of the matter has to do with whether the shareholder is an employee actively contributing to the operation, or simply an investor reaping a profit.

...“Service businesses are only allowed to distribute a fair return on investment from an S-corp. as profits exempt from Medicare taxes,” McKenzie said.

“The remainder of profits must be paid as salary subject to a 2.9% Medicare tax levy.”

It’s been called the “John Edwards loophole” in the past, because the former presidential contender used the same strategy to pay himself from his law practice.

The tax strategy is not uncommon: In a 2009 report, the Government Accountability Office said that S-corps. underreported about $23.6 billion in shareholder compensation in 2003 and 2004, which could “result in billions in annual employment-tax underpayments.”

“There are a multitude of cases where the IRS has successfully challenged [this] improper tax strategy,” McKenzie said in his email. “Individuals like Gingrich and Edwards are good examples of why Medicare is facing insolvency in several years.”

Andrea Coombes