Table of Contents
Write a comment
in this episode i'm going to talk about s corporation through this video you may discover that an s corporation election is right for you you could possibly save a lot of money if you decide to elect your business as an s corporation so you probably clicked on this video because you are in the process of starting your business hello everyone i'm andrew from malai law where we help entrepreneurs just like you start your businesses without having to deal with all the complicated legal forms our don for you service is backed by over 1 95 google reviews and we can help you start your business as well i am a law graduate who just recently took my bar examination i am currently waiting for my bar examination results and now i'm helping entrepreneurs just like you start your businesses if you are a business owner or a potential business owner if you've spoken with a cpa a tax person may have introduced you to the idea that your business should be taxed as an s corporation a lot of business people don't know how an s corporation affects their business it is my goal through this video to talk to you about an s corporation and to break it down in simpler terms so business owners like yourself can learn a little bit more about the nest corporation so when you're forming a business you begin by choosing a business entity now you have two options for this business entity first option is to form an llc the second option is to form an s corporation a corporation can elect to be an s corporation and whether you're a c corporation or an s corporation is strictly a federal tax issue it does not affect the type of entity you are in the eyes of the state or how the business operates on a daily basis it is strictly related to federal taxes some people say there are two corporations c and s corporations however that's not really the right way to say that a corporation can elect to be an s corporation and whether you're a c corporation or an s corporation is strictly a federal tax issue it does not affect the type of entity you are in the eyes of the state it does not affect how your business runs on a day-to-day basis again it is strictly related to federal taxes if you form a corporation the corporation defaults to a c corporation as c and s corporation those names come from the subchapter of federal tax code if you're a c corporation which is the default i will explain to you what happens with these taxes money comes in taxed as a corporation a separate entity that must pay its own taxes basically this means that when the business makes money the company must pay taxes on that money then once that money is distributed to shareholders the distribution is then taxed again subject to double taxation basically meaning that it is taxed twice as opposed to an llc which is a pass-through entity this means when money comes in it is only taxed once at the individual level of the business owners the llc is not its own separate taxable entity it is taxed in relationship to the business owners what happens when you elect to be treated as an s corporation the s corporation gets to avoid that double taxation a corporation can elect to be an s-corporation by filling out irs form 2553 the income and the losses to the corporation are taxed at the individual level of the shareholders the corporation is not paying that tax what does this mean it is going straight through to the shareholders shareholders are able to personally deduct the expense from their taxes as well that is amazing so the question you're probably asking yourself is why are not everyone why aren't more business owners electing their corporations to be taxed as an s corporation the thing with s-corporations is that the irs is very strict there are certain requirements that must be met in order for a business to meet and to be eligible for an s-corporation example the corporation must be a domestic corporation it cannot be a foreign corporation shareholders must all be individuals there's a little bit of a difference when it comes to corporations the partnerships and corporations can be shareholders of corporations however as corporations members cannot be partnerships or corporations there must be 100 or fewer shareholders only one class of stock few types of businesses that are not a legible for that so if your business is related to something along the lines of an insurance company or a financial institution those look more into it if you are illegible or not i recommend that you look a little bit more into it to determine whether or not you are eligible now if you meet requirements of an s corp it may be able to save your company a lot of money on taxes it is important to note however that llcs can also be elected to be taxed as an s-corporation llc pays taxes once instead of twice like a corporation this means that taxes passed through to the owners of the llc an owner of an llc you have to pay self-employment taxes employee of a business you get paid and some taxes are taken out but the thing is you need not pay self-employment taxes if you are an owner of the business you have to pay self-employment taxes which go to social security and medicare business owners get to take wages as employees from the company they get to pay income taxes from that money that they get paid as employees but they don't have to pay that self-employment tax if your llc is taxed as an s-corporation because they are being paid as employees and any additional income that comes in is taxed as dividends electing to be treated as an s-corporation is a way to avoid paying that self-employment tax so you may be telling yourself i'm a business owner i'm gonna go ahead and set up an s-corporation and i won't take any money out only my dividends will be subject to taxation the thing with that is irs says that all llc's taxed as an s corporation the owner employees must take reasonable wages custom pay this basically means that you must search and you must do research and you must look to see what other people in your same field are getting paid cannot just avoid paying anything and avoid paying taxes altogether do a little bit of research and determines how much someone in your position would make uh the similar practice that you participate in and so you must pay yourself that amount whatever that custom amount may be and the additional income is dividends electing to be taxed as an s corporation is a way to save a bit by not having to pay self-employment taxes this was a short and basic explanation to elect to be treated as an s corporation a lot of other things are also to be considered that i will not dive into today but if you are starting a business and you believe it is the right way to go or your business is building right now and it's growing i advise that you speak with the right cpa or a good tax attorney and if so if you determine that an s corporation is right for you that is very good you will save money on taxes it's important to note that i am not a tax expert i received a tax concentration in law school but i am not a tax expert if you have any questions about anything discussed make sure you click the link in the
Thanks for your comment Chong Chaboya, have a nice day.
- Stacey Hime, Staff Member
so what's the difference between an s-corp and an llc well first off both of them are actually llc's when we refer to an llc here we're talking about an llc taxed as a sole proprietor we'll just call it an llc and then when we talk about an s corp we're actually referencing an llc tax as an s corporation both llc's and s corps provide business owners with a couple of things legal protection so that they're there's a corporate veil between the company's assets and your personal assets they provide some operational advantages like partnerships and the ability to collaborate with others and they both serve as pass-through entities for taxes which means the profits and losses will flow through to the business owner so let's get a little more specific here for both an llc and an s corp you're going to be figuring out your tax on your net profits now net profit is what's left over after you subtract all your deductions and write-offs from your business's gross income now in an llc your entire net profit will be subject to what's called self-employment tax remember when you were an employee at another company and your paycheck had that little fica or medicare deduction well when you have an employer and an employee relationship your employer would have paid half the social security limit and medicare tax while the employee paid the other half now that you're self-employed you'll get to pay the tax of fifteen point three percent on all net earnings up to the social security limit which changes each year but is at eighteen a hundred and eighteen thousand five hundred for two thousand fifteen after you hit the social security limit all your earnings above that you'll owe medicare taxes which is two point eight percent then after you pay yourself employment tax you'll be subject to state and federal income tax this is simplifying it a bit but essentially you'll be paying an increasingly higher or marginal tax rate on your earnings the more you earn the higher your tax rate so with an llc you'll pay 15.3 self-employment tax on all of your net profits then you'll pay state and federal income taxes on your personal tax return let's look at a quick scenario uh focusing just on the self-employment taxes for a fictitious llc taxed as a sole proprietor here if you had taken in total revenue of whatever then after your deducts deductions and expenses you had a net profit of a hundred thousand dollars your self-employment tax bill would come up to fifteen thousand three hundred so we've got a hundred thousand dollars in net profit and fifteen thousand three hundred dollars in self-employment taxes breaking that down a little bit that's a monthly bill of 1275 dollars just for your self-employment taxes now after you've done your self-employment taxes you'll still owe state and federal income taxes which if you were single and had let's say 85 000 in taxable income just your federal income tax bill would be about 17 thousand three hundred and twenty five dollars on top of your self-employment taxes that's not even factoring in your state income tax property taxes or anything else you pay that seventeen thousand in federal income tax is just for a single person paying on 85 000 in income so this puts your total tax bill excluding fees sales taxes property taxes state income taxes or other dues the total tax bill at a conservative 33 thousand dollars a year that means you're taking home 8 300 a month and writing a check to the government for 2750 a month just for self-employment taxes and federal income taxes if that doesn't get your heart racing a little bit i'm not sure what will so the question is what can we do about this conundrum well the most popular strategy employed is incorporating to an s corp with an s-corp you'll incorporate and become an employee of your corporation then you'll take two forms of income the first part of your income is that you'll pay yourself a salary and the second part of your income is what's called a distribution or a dividend so we're going to split up the income into these two parts the salary and then the distribution what you'll see in a minute is that the salary is subject to the 15.3 self-employment tax while the distribution is not so you're paying 15.3 percent on your salary but not on your distribution because the distribution income isn't subject to that fifteen point three percent tax the temptation can be to falsely shift all your income over to the distribution and not take a reasonable wage which is why the first part of your income or that salary or wage or payroll must be reasonable according to the irs there are multiple factors that dictate what kind of a salary you need to pay yourself the salary needs to be reasonable for your experience comparable salaries economic conditions and a bunch of other factors this is super important you must take a bona fide reasonable salary so now let's take a look at a fictitious s corp example now looking at the same hundred thousand dollars of net profit you'll pay yourself for this illustration a sixty thousand dollar salary then you would take out forty thousand dollars in distributions this is just an example the tax benefit is that the salary is subject to that fifteen point three percent s e tax but the distributions are not subject to the sc tax this means that forty thousand dollars in distributions aren't subject to a fifteen point three percent tax putting your total self-employment tax due down from fifteen thousand three hundred when you were an llc to nine thousand one hundred and eighty as an s corp that's a forty percent decrease rather than paying one thousand two hundred and seventy five dollars a month in se taxes as an llc you'll be paying 765 a month as an s corp that means you've essentially freed up 510 dollars in monthly cash flow in this scenario in a scenario like that 510 dollars a month can easily help you save for retirement pay off your mortgage early hire some help reinvest in your business advertise or invest in real estate sooner now if you've already become an llc and you like the idea of becoming an s corp you have to file for an s election in order to become an s corp before march 15th that's a whole month before april 15th when your taxes are due or you'll have to wait till the next year strategies that utilize an s-corp can give you tools to help mitigate your taxes but these strategies should be handled by a competent cpa or a tax professional here at nuance financial we specialize in helping small businesses from across the country implement these strategies as part of a long-term tax plan so check out the description below and go to nuancefinancial.com we'd love to connect with you and provide a free consultation you
Thanks Emerson your participation is very much appreciated
- Stacey Hime
About the author
I've studied battlefield archaeology at Ohio Wesleyan University in Delaware and I am an expert in cyborg anthropology. I usually feel frustrated. My previous job was animal scientist I held this position for 22 years, I love talking about shuffleboard and dancing. Huge fan of Russell Westbrook I practice modern pentathlon and collect non-sports trading cards.
Try Not to laugh !
Joke resides here...