The major tax benefit for your business being taxed as an S corporation is the savings from self-employment taxes that are passed from your S corporation through to your personal tax returns.
Sole proprietor example – If the business had revenue of $140,000 and $40,000 in expenses, it would result in taxable net profit of $100,000. Each and every dollar would be taxed 15.3% for FICA taxes (employer and employee side of social security and Medicare taxes), 25% for Federal taxes and 7% for state taxes, resulting in 47.3% of taxes on every dollar earned. YOU ARE HALF THE PERSON YOU USED TO BE BECAUSE OF TAXES!!
S corporation example – The same $140,000 revenue and $40,000 expense results in $100,000 net profit as mentioned above, but the $100,000 needs to be split between reasonable compensation payroll for the shareholder and pass-through income to your personal tax return. The tax savings come from the amount that is passed through from your S corporation to your personal tax return, avoiding the 15.3% FICA taxes.
You save $1,530 in self-employment taxes for every $10,000 passed through your Schedule K-1 from your S corporation tax return to your personal tax return. So, in the example above, you would save $7,650 each year on the pass-through income.
The tipping point for pursuing the S corporation tax saving strategy is $40,000 to $50,000 of net profit in your sole proprietorship, because you will need to pay for your S corporation tax return to be prepared and for payroll processing. Keep in mind that there will be two tax returns to be prepared: an 1120S corporate tax return and your 1040 personal tax return.
Please book a discovery call to find out how we can help you save on taxes and increase your net worth.
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Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
