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Written by : Chu Hardenbrook
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Thanks for your comment Margeret Lennon, have a nice day.
- Chu Hardenbrook, Staff Member
hey business warriors welcome to the show I do have to apologize that there is a big concrete mixer truck parked outside today and I don't know if you're gonna be able to hear it in the audio I've waited for several hours and it hasn't moved so we're just gonna start recording and today we are gonna be talking about how to save even more taxes with your small business and it's about basically converting your business structure to escort okay from LLC partnership taxation to escort taxation so let's kind of start from the beginning and let's explain how it works with an LLC so if you're a multiple member LLC generally you will be taxed by default text as a partnership and that's you know that's the way it works here in New Jersey your state might be different you'll have to check that out and with LLC income it's what they call a pass-through business so the LLC itself is not taxed but the income passes through onto your personal tax return and is taxed personal rates and you know if the business has two members and their each have a 50% share 50% of the profit goes to each of them and it's taxed at their personal rates on their personal tax returns the pros of LLC's are you have a limited liability and then you can also have deductions okay so like any money you spend for your business that eats into your profits can be deducted and then you don't have to pay tax on that money for example the rent I pay on this office here which is a really crappy deal because like I said concrete mixer trucks are parked right outside I've got to change it soon but anyway that money is a tax deduction so I'm not taxed on that money I'm only taxed on my profit so that goes through on to my personal tax return and then I'm taxed but the disadvantage of the LLC structure is that you become liable for self-employment taxes this is sometimes known as FICA taxes and it includes Social Security Medicare a few things like that there's a few different components to it but it works out at about fifteen point three percent now when someone is an employee and they work for another company they pay half of that okay they pay seven point six five percent out of their salary so that's why you see on your pay stub there'll be like Social Security tax withheld etc a few little things like that small amounts that's basically seven point six five percent of your salary and well we just said it's fifteen percent right for self-employed that's because when you're an employee your company the company you work for pays the other half the other half of that fifteen point three percent so let's say your salary is a hundred thousand dollars a year and we're just using that level because it's it's one hundred okay so it's easy to you know say percentages in relation to the salary you're gonna end up paying seven thousand and six hundred and fifty and your company on top of your hundred thousand salary will pay seven thousand six hundred fifty so it actually costs the company one hundred and seven thousand six hundred fifty dollars to employ you okay it doesn't just cost them one hundred thousand dollars but the problem is when you're self-employed there's no employee picking up the tab for that extra seven point six five percent so you or your LLC or whatever ends up having to pay the full fifteen percent okay fifteen point three percent so it really can be quite a lot for self-employed people that is where the beauty of the escort comes in okay now escort we don't recommend switching to escort right away okay because there are a few things about escort that you need to know and the main thing is that you need to pay yourself a set salary and then you can also pay yourself a share of profits or you know a dividend on your shares in the business on top of that okay now the advantage of this is the salary you pay yourself you have to pay that fifteen percent on okay just like normal normal LLC or normal employee whatever you have to pay those FICA taxes so it's just Korea etc but the dividend that you pay yourself you do not have to pay any of that fifteen percent okay so you just pay federal and state income taxes if your state has an income tax some states don't but yeah you just pay income taxes on it you do not have to pay the Social Security Medicare part on the dividend part of your income so let's give an example the IRS says that you have to have a re simple income okay so you have to pay yourself a reasonable income thus your company needs to be making a certain amount of money all right because if you pay yourself say ten thousand dollars a year and then you take fifty thousand dollars as a dividend that's not a reasonable income okay they they'll see that as you gaming the system if you get audited it's gonna be very bad and it'll increase your chances of getting audited because it'll be like hey this guy's paying himself tendo ten thousand a year but he's getting like 50 grand in dividends I think he's playing the system so this is why we only really recommend this once your business starts get a little bit bigger okay a reasonable income the IRS actually doesn't have any definition of what a reasonable income is okay so it's kind of down to you to decide I met with my CPA yesterday my accountant because we're actually thinking of changing to escort well not thinking of it we are gonna do it and we're preparing it now we're gonna change to escort as of January 2019 and we're gonna use escort structure for our business next year because of the tax advantages I asked my CPA what a reasonable income is and she replied to me well you've got a look at the industry look at other you know jobs in that industry manager of a small media company because that's what our company does generations Media LLC and then you've also got a look at does the income you're paying yourself cover your expenses okay your living expenses basic living expenses like rent electricity bills any like child care you pay for your groceries shopping all those sort of basic living expenses if your salary that you're paying yourself covers those basic living expenses then that should be okay and then say extra money like going on a luxury vacation once a year or investing money in the stock market saving up money to buy a house that could come from your dividend okay because that's kind of like extra but the basic living expenses has to be covered by your your income that's what they the CPA recommended in order to kind of appear that that income is reasonable alright so I asked her if we earn $100,000 each a year how much of that would we pay as an income and she recommended 50% so pay yourself $50,000 as income and $50,000 as a dividend on that $50,000 salary income you're gonna have to pay the 15% in FICA taxes okay but on the dividend part you do not have to pay that what's 15% of 50,000 it's $7,000 so operating as an S corp is gonna save you roughly and I'm kind of simplifying it here rounding the figures and stuff but it'll save you roughly 7,000 dollars a year if you're taking $100,000 in income half of it as a fixed salary and the other half as dividends okay so that's basically the S corp stru
Thanks Frank your participation is very much appreciated
- Chu Hardenbrook
About the author
I've studied archaeology of china at University of Rio Grande in Rio Grande and I am an expert in marine biology. I usually feel hopeful. My previous job was printing/graphic arts reproduction technician I held this position for 25 years, I love talking about fantasy sports and woodworking. Huge fan of Sean Astin I practice snowboarding and collect insert cards.
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