When should your business be taxed as an s-corporation that's going to be the topic
of this video and specifically when does it make financial sense for your business to be taxed as
an s-corporation so um i'm going to be talking about how the s corporation saves you money
the cost associated with having an s corporation and sort of what is the break-even point how much
profit do you need for it to make sense to be taxed as an s-corporation this is your first
time watching my name is Navi Maraj i'm a cpa that specifically works with realtors around
the country save thousands of dollars in taxes but if you're not a real estate professional
please do continue to watch because this strategy really applies to all small businesses um so let
me just lay the foundation here um i on my youtube channel you'll find a video that i shot recently
where i said hey there are four reasons where i believe you should not have your business taxed
as an s corporation um and that's right you heard me say four reasons why not to okay um everyone is
talking about why you should be an escort but i'm telling you there are reasons why you shouldn't be
some of those reasons are and you know the topic of this video is um you know you're not making
enough profit for it to make financial sense and we're going to take a deep dive into that in this
video but the other reasons were if you might have w2 income so you are employed somewhere you make
a high salary but you also have a business on the side it may not make sense for your business to be
taxed as an s corporation another reason might be your state does not recognize the s corporation or
taxes it very heavily and so you don't see any real tax savings there um and the fourth reason
was you pretty much do passive activities in the eyes of the irs an example of that would be
investing in buy and hold rental real estate where you are the landlord and you have a tenant
and you just make passive income which is that rental income in that situation you would not
want to be taxed as an s corporation so this again this video is going to be taking a deeper
dive into sort of reason number one which was um you know you may not be profitable enough
and it may not make sense so let me sort of transition to the whiteboard here and we'll
dive into this okay so i'm saying here that if your business is taxed as a sole proprietorship
or maybe it's a single member llc which is taxed as a sole proprietorship i know that
already might be a little bit confusing i've got videos on my youtube channel that talk about
you know when to form an llc corporation all that different stuff so watch that video that'll make
more sense so i'm saying here your tax is a sole proprietorship so you had a revenue
of sixty thousand dollars yet expenses of twenty thousand dollars which left you with a profit of
forty thousand dollars right some of you might be saying wow 20 000 expenses that's kind of high
considering you only made 60 000 in sales well you know when you work with an accountant
who knows about different tax strategies they're going to show you strategies that
sort of increase your expenses and so that's why i kind of put twenty thousand dollars in expenses
there so your profit is forty thousand dollars so what taxes do you have to pay as a small
business owner you know making forty thousand dollars a profit well you pay two types of taxes
those taxes are self-employment taxes so you'll pay fifteen point three percent of the profit in
self-employment taxes so that equates to about six thousand dollars and you'll have federal income
tax that you'll have to pay on the forty thousand dollars so i don't know where you're gonna fall
within the tax brackets zero percent is probably not realistic but you're probably falling between
ten and as upwards of forty 40 um depending on what you know if you have state income tax or not
so again you pay two types of tax on your profit self-employment tax federal and state income tax
but what happens when you're an s corporation right what is this strategy all about well
this strategy is all about self-employment tax so what i'm trying to drive home here is that
it has nothing to do with income tax okay this all has to do with self-employment tax you're
going to pay the income tax at about the same rate when you're an s-corporation but what changes is
the self-employment tax so specifically you know you still have forty thousand dollars in profit
when you're in s-corp right you didn't sell any more product or offer any more services
when you're in s corp but what happens is this forty thousand dollars in profit is split into two
buckets right so i call i put w2 here what i mean by that is the irs wants you to take a reasonable
salary when you're an s-corporation so here i'm saying on forty thousand dollars of profit
that reasonable salary might be about half it might be like fifty percent of this so
you'll take a salary of twenty thousand dollars and that salary will pay self-employment tax um
so 20 000 times the 15.3 percent you're gonna get self-employment tax of about three thousand
dollars right now what happens to the other half you know the second bucket well that second bucket
you're going to take as a distribution from your s corporation and so how much self-employment tax
do you pay on the distribution and the answer is zero so you don't pay any self-employment
tax on distribution on the distribution so in this example as an s corporation you pay three thousand
dollars in self-employment taxes whereas here you paid um six thousand dollars in self-employment
taxes so you have a savings of three thousand dollars right the six thousand here versus the
three thousand there gives you a three thousand dollar uh tax savings again federal income tax
you're gonna pay that here and you're gonna pay that as an s corp so that really doesn't matter
so what are the costs associated with having an s corporation so you're going to have a few you
might have a couple more than these but these are the big ones so you're going to have to either
form an llc or create a corporation and then elect to have it taxed as an s corporation and so
when you form that llc or corporation you are going to have to file an annual report with
your state each year and the fees on that depend or change i should say from state to
state right so this could be as cheap as 100 it could be as much as 300 so i'm just saying 150
another fee that you'll have is tax prep fees so you know if you're dealing with a competent cpa
or accounting professional who is taking the time to teach you strategies implement those strategies
they're probably going to charge you anywhere from 800 to 1200 okay so i'm saying you know your tax
prep costs might be about a thousand dollars if you're working with you know a not so good
accountant who's just gonna take the numbers that you give them and throw it in their tax software
then maybe you can get away with paying less but again you get what you pay for you might
end up paying more in taxes if that's the type of professional that you decide to work with
other costs you have are payroll i believe i said earlier that with an s corporation you
have to take a quote-unquote reasonable salary per the irs trust me you probably don't want
to be dealing with the paperwork associated with having payroll because you have to make either um
or not either but both quarterly and annual tax reporting requirements and so you really don't
want to deal with that you want to be focused on running your business and growing revenue and so
you'll hire a payroll processing company to do that so that might cost about 50 bucks a month or
600 for the year so when you add up all these costs you get about 1 750 right so from here i'm
saying this is kind of like the break-even point where i think it makes sense to maybe have your
llc taxed as an s-corporation because you know you would have been paying 6 000 in self-employment
self-employment taxes here now you only have to pay three so you save three thousand dollars in
taxes but then you have these costs right so when you take the three thousand dollars of tax savings
and you deduct the seventeen hundred fifty dollars in additional costs you're really pocketing about
1250 dollars in your pocket right so you don't want to deploy this strategy to break even
you want to deploy this strategy when you can at least make you know 1200 and put that back in your
profit but what about when you start making more money than this right what about if your profit
is more like sixty thousand well and then in that example you might tweak some of these numbers you
might tweak how much you get paid in the form of a salary versus a distribution and so you
might save more like fifty five hundred dollars in self-employment taxes or if your profit is
seventy five thousand dollars then you might save more like sixty five hundred and if your profits
you know a hundred thousand dollars or more then you can easily save ten thousand dollars
in taxes sort of by deploying uh this strategy right um so i hope that you found this video to
be informative and you receive some value out of it maybe i cleared some things up for you that
are not so clear when you watch other videos or you're trying to research this on your own
as i mentioned earlier i'll be producing other videos on those other three reasons where i
said it may not be a good idea to be taxed as an s corporation so you can learn the reason
why i'm saying these things and apply it to your small business so make sure you subscribe so you
can catch that content as i release those videos if you'd like to contact me and you're watching
this on face sorry on youtube rather you'll see the information below in the description
or if you're on other you know social media platforms and you're watching this video
just visit my website which is navimarajcpa.com or you know click on my profile within that
social media site and i'm sure there's a link in there to take you to my website
or maybe my scheduling page to um spend some time with me so i appreciate all the comments
all the feedback i've been getting like i said do subscribe and i will see you in the next video