in this video we're going to be talking about the s corporation specifically
you know what it is and how it can save you thousands of dollars in taxes
self-employment taxes is is what the strategy is so
for those of you who don't know me um my name is Navi Maraj
i run an accounting firm markets to real estate professionals such as your
you know real estate agent realtor or broker um
but if you're tuning in to this video and you're not a real estate
professional but you're another small business owner
stay tuned because this strategy works for all uh
small businesses so let's jump right into the material right
so i have sort of two sides on on this uh whiteboard here set up for
you on the left hand side we're talking about
this you know the tax structure of a sole proprietorship
and so you're either a sole proprietorship doing just business as
your own name or you formed an llc and it's taxed as a
sole proprietor let me pause for a moment there and say
if that already is confusing you then go check out my
youtube channel there's another video on there where i talk about
llc's and s corporations and and regular corporations and
which one might be right for you as well as there's another video
on there talks about like what taxes does a business owner have to pay
and we'll talk about what self-employment tax is what federal
income taxes with state employment taxes sorry state uh income
taxes and that those two videos if you watch
those first we'll give you the foundation for this
video so but in this example i'm saying you're a
realtor or you run a small business and you have a hundred thousand dollars in
sales so again i catered a realtor so for my
realtor clients out there that means your 1099
has a hundred thousand dollars in commissions right and so you have thirty
thousand dollars in expenses you might have a little bit
more but i'm just saying in this example a hundred thousand in sales thirty
thousand dollars expenses such as like a mileage deduction home office
advertising et cetera so 100 000 minus a 30 equals 70 000
well how much self-employment tax do i have to pay on that 70 000.
well if you're taxed as a sole proprietorship you're going to pay
15.3 percent times the 70 000 in profit and so you'll pay 10 710
in self-employment tax ouch right um so what are your options anything you
can do about that i mean if you're not working with the right accountant
they might tell you no there's nothing you could do but that's not true
the reality is you can form or have your entity taxed as an
s-corporation so um again what do i mean by tax as an s
corporation go check out one of those other videos it'll clear things up and
it'll be crystal clear for you i explain it in a very
um easy to understand way but if you have an s corp or
your entity's taxed as an s corp of course that's not gonna help you sell
more items right so you'll still have a
hundred thousand dollars in sales you'll still have thirty thousand
dollars or so on expenses and you'll still have net income
of seventy thousand but how do things differ from there the difference is
now instead of this full seventy thousand dollars being subject to
self-employment tax we're gonna split this seventy thousand
dollars into two separate buckets okay so in one of those buckets is gonna be a
salary that you take from the company so you'll actually get a w-2 as if you
worked for another company and you'll pay self-employment tax on
that amount you take as a salary so in this example i'm saying 30 000 is
what you take as a salary so you multiply that by the fifteen point three
percent and you're paying four thousand five
hundred ninety dollars in self-employment tax
but what about the other forty thousand how do you get access to that cash
well that you're going to take in the form of a distribution
or i'm calling it you know the tax lingo as a k1
and so you don't pay tax or self-employment tax i should say
you don't pay self-employment tax on this forty thousand dollars
so how much self-employment tax do you pay on this zero
so net net when you compare these two different options together
you're saving over six thousand dollars in self-employment tax
now some of you're asking what about federal income tax well the federal
income tax is pretty much the same for both of these
structures as well as the state income tax if your state has a
state income tax um but i don't want you watching this
video and then running out and forming an s corporation on your own
and try to navigate this why um there's about three or four
reasons you need to consider one is the cost of an s corporation when
does it make sense to employ or deploy this strategy right you
know giving you some like high numbers you know you might incur
additional tax preparation fees and additional payroll fees of let's
just call it two thousand dollars again i'm going kind of high
it may not be that much but you know two thousand dollars so that might cut into
your six thousand dollars in savings but
you're still netting in this example four thousand one hundred and twenty two
dollars in uh and and savings um even if you factor in
that tax prep cost and those payroll costs
i say payroll cost because you have to do quarterly payroll uh
filings when you are an escort owner um some states may not necessarily um
acknowledge the s corporation elections so there might be some things there to
consider for example the state of california has
a special tax sort of associated with as corporations
um another reason would be you know if you
if your business is a side hustle if you will so
you have a w-2 that you get from your employer
but you also have this side hustle well then the equation sort of changes and
you can't use this math to calculate if it makes sense for you
or not um i guess lastly uh you know you've got a
couple different players involved in this decision meaning
the bank is going to want to see you how you set up your s corporation
the state's going to want to make sure you set up your entity properly the irs
has some say in this and if you're a realtor then
the real estate commission has some say on how they
want you to structure your entity so you need to speak to someone who understands
all those things i just mentioned to make sure the s corporation is right
before for you before you deploy that strategy
but if done correctly i've just showed you how the s corporation
can save you thousands and thousands and thousands of dollars in taxes
in general the s corporation strategy makes sense
when your net profit is about forty thousand dollars or higher okay
and you know at forty thousand dollars you'll save a couple grand
probably like around three thousand or so at uh
you know if you're if your net profit's a hundred grand two hundred grand it
just saves you more and more and more money okay another thing that i wanted
to mention to you is um you know i use the example of
30 salary and 40 percent uh distribution in this example i i
shouldn't say percent but 30 000 and 40 000 right so that's
probably like a 40 split and a 60 split that's another
factor that you need to work with with your accountant to make sure that makes
sense it could be the other way around it could be you need to take
you know 60 as a salary 40 as a distribution or 50 50
or 60 you know 40 60 30 70 20 80 even it all depends on many
different factors so don't just jump into this and start doing it on
your own there's other things that you need to consider
but don't over complicate it either right don't over analyze this just re
reach out to either myself or a tax professional that you trust to
uh explore whether the yes corporation makes sense for you
again my name is Navi Maraj if you visit my website it's navimarajcpa.com
or my youtube channel you'll find this video of course and any
other video that i do is listed on my website as well as my
youtube channel if you like what you heard today please
do like the video and subscribe and i'll see you in the next video
thanks