Should your business be taxed as an s-corporation if you also have a job where you receive w-2
income? That is going to be the topic of this video and here's a quick spoiler alert. Your
s-corp could be costing you money instead of saving you money in the following sort of scenario
that we're going to get into in the video so in order for me to explain this I first will have
to touch on a few things so I'm going to discuss what are your taxes that you pay as an employee
working you know for an employer somewhere and we're going to compare that to what it's like or
what taxes you pay rather when you have a business that's taxed as a sole proprietorship and then
we're going to bump that up against what taxes you pay if you have a business tax as an s corporation
and then we're going to talk about what happens when you're both an employee working somewhere
and you own a business and the impact of having a high-paying w-2 job combined with an s-corporation
together so if this is your first time watching my name is Navi Maraj I'm a CPA
that helps real estate professionals around the country save thousands of dollars in taxes so
that's real estate agents realtors and brokers but if you don't have or if you're not a real
estate professional stick around this is going to apply to your business as well so let me just lay
the foundation briefly so I recently created a video where i talked about four reasons in which
you should not be taxed as an s corporation and um just as a quick uh sort of recap those four
reasons were number one was you don't quite make enough profit in your business for the
s corporation to make sense the second one was you have large amounts of w-2 income and you also have
a business and that's the topic of this video so we're going to explore that further in this video
the third one was that you live in a state that doesn't recognize the s corporation
or perhaps taxes it quite heavily um and the fourth reason was you shouldn't have
passive income within an s corporation so specifically I'm talking about owning rental
real estate where you have rental income that shouldn't flow through an s corporation and so
again this video is taking a deeper dive into the second reason which is you've got high amounts of
w2 income and you own a small business so in order for me to explain this as i said I'm gonna have to
um talk about quite a bit um here's sort of like a warning you know I'm gonna try to my
best in all my videos to uh explain something in a very easy way for everyone to understand
but this topic is a bit challenging but I've laid it out in the best way i think possible
to explain this scenario so um if I've covered a topic in depth already that sort of in this
video I'm going to either link that video so you can get a better and deeper understanding of what
I'm trying to explain there if not I'll do my best to sort of recap it here as I'm going along
so let me just explain the taxes you pay as an employee okay so I'm saying you don't have
a small business you work for an employer and you're earning um you know w-2 income so what
taxes do you pay so in this scenario I'm saying that you have a quite a high salary it's one in
this example 142 800 and I picked that number for a reason and I'll explain why in a second
so what taxes do you pay as an employee well as an employee working for an employer
you're going to pay social security taxes that's on your paycheck as FICA taxes that's 6.2 percent
right so the 6.2 percent times this amount is 88.50 850 you also pay Medicare taxes of 1.45
so again the 142.8 times the 1.45 is this 2070. so in combined in FICA taxes you paid 10
920 now what you don't realize is when you work for someone else uh your employer
who you work for is also um paying into social security and Medicare for um for you i should say
only for you but they have to pay these taxes okay and so um your employer is paying this
but you don't really see that as part of your paycheck on your paycheck you just see
these contributions because these amounts are being withheld from your gross pay
and being put towards social security and Medicare for you okay now also you know when you're an
employee you'll see other withholdings from your paycheck and those are usually
uh federal income tax that's what fit is here and state income tax and I'm calling that sit right so
you're going to pay your federal and state income taxes and those are going to be withheld from your
paycheck based on you know how you completed your w-4 form when you started working there
dictates how much they're going to withhold from your paycheck and you know depending on what tax
bracket you are in uh it'll be anywhere from 10 to 37 of your income is withheld from your paycheck
at the state level for state income tax if you live in Florida like I do then we don't have
state income tax so you don't pay anything but if you you know live in a state like California
you might pay upwards of 13 again depending on what tax bracket you fall into so all
right that's explaining what taxes you pay as a employee working for an employer now
let's separate that for a moment let's say you didn't work as an employee anywhere and you had
a small business right uh what uh taxes do you pay as a sole proprietor so a couple things i
want to note is well i mentioned a moment ago that uh i chose 142.8 i did so for a reason is because
this is what's the what the irs calls your wage base in the year 2021. so what that means is
after you make your first 142 800 any money you make after that you don't have to pay
social security taxes on so the employer doesn't and you don't either as the employee right
so if you continue to earn more and more money you wouldn't pay any more social security but
you would continue to pay Medicare taxes okay um so let me now transition to you know you're not
an employee and you own a small business so you're taxed as a sole proprietorship
so in this example I'm saying you have the same amount of money but in profit right so you might
have actually had revenue of let's say a hundred and eighty two thousand eight hundred dollars
and then you had forty thousand dollars of business expenses like you know as I've
taught my other videos hiring your children and mileage deduction and what have you which brings
you down to 142.8 okay so your sole proprietor with 142 800 of profit in your small business
what taxes do you have to pay um well when you're a sole proprietor you're now the employer and the
employee right so you have to pay all of this you have to pay the 6.2 on the employer side of things
the 1.45 percent for Medicare on the employer side of things and again you pay those amounts as the
employee right so if you add this up it's close to you know 22 000 of taxes that you have to pay now
you know there are some deductions it's a small amount that you get for some of these
self-employment taxes so you won't pay exactly this amount but it's fairly close to this okay
and let me just say something real quick if you're a tax professional watching i understand that you
pay a little bit less than what I'm uh explaining here but I'm trying to keep this video simple for
the average viewer i also know that in a moment the additional Medicare tax is going to kick in
but again this is for the average viewer which is your average small business owner watching my
channel so okay so now you understand that you have to as a sole proprietor so you could be an
LLC tax as a sole proprietorship or you could just be doing business as you know john doe's
landscaping you're going to be taxed as a sole proprietorship you got to pay both sides of this
okay and so if you add this this this and this this all equates to 15.3 percent and if you do
the math uh 142 800 times the 15.3 percent gets you this number okay so uh in terms of income tax
you're going to pay the same thing right you had 142 800 in profit you're going to pay income tax
on that profit but you're also going to pay you know the what's called self-employment taxes
as a sole proprietorship see I don't know why the IRS really does this but when you're an employee
they call these um FICA taxes but as soon as you start your own small business it's not
called FICA taxes anymore it's called self-employment taxes okay so let me now
explain what happens if you have a small business and that's all you have is your small business
and you want to you know form an s-corporation to use the strategies that I've kind of taught
on my channel about how to save a bunch of money in self-employment taxes when you're in s corp
so in this example again you may have had a hundred and eighty two thousand eight hundred
dollars in revenue you had about forty thousand dollars worth of expenses and so um you're left
with a profit of a hundred and forty two thousand eight hundred dollars in your s
corp now again the s corporation is a strategy to save you money in self-employment taxes so what
would happen is with this profit you'll split off the profit into two buckets one will be a salary
that you pay yourself and the other you'll take as a distribution and so what's happening here is
as an s corp you are the employer still but you're going to pay self-employment taxes on
the portion you paid yourself um as a salary so in this example I'm saying let's take 40
of this number and pay you a salary the 60 will take um as a distribution um
uh from your s corporation and so you'll notice here that the distribution that you take doesn't
pay self-employment taxes at all which is great um and the salary portion does have to pay these uh
taxes again so now he now with the s corp you're now the employer right and you're the employee of
an s corp so you're gonna pay uh 57 000 and change times to 6.2 percent in the employer portion of uh
social security taxes same kind of thing 57 grand times 1.45 and so you're paying that amount in
Medicare taxes on on the employer side then you're also the employee so you're going to pay those
same amounts as the employee right so this is why people talk about the s corp so much right and so
you know if you have a business making this kind of profit you know as a sole proprietor you got
to pay you know 22 grand in self-employment taxes whereas here as an s corp you only have
to pay you know almost nine thousand dollars in taxes right so you know you can get uh a twelve
thousand dollar you know tax savings by you know being taxed as an s corporation versus
a sole proprietorship and so you know it's quite obvious that you would probably want to be taxed
this way so that's why there's so many videos promoting the s corporation all over YouTube
and a bunch of articles written about it right if given the scenario to pick from this
versus this you know your federal income tax and your state income tax is the same right no matter
which one you choose but when it comes to these self-employment taxes well I'd rather pay you
know the nine thousand dollars versus the twenty two thousand dollars and I'm sure you would too
but what they don't explain in those videos is how does this all work together um you know sort of in
conjunction with large amounts of w-2 income right and so now what I'm going to explain to you is
what happens when you have a high-paying job like this you know this is a dollar amount
that you're earning and you also have a sole proprietorship type business okay
well what happens here is as i mentioned that's why i kind of touched on the wage base
earlier in the video is that once you hit this amount you don't have to pay into social security
anymore right so you're not gonna pay this almost nine thousand dollars here
or this nine thousand dollars here you'll just pay sort of the Medicare portion right and so um
you get a lot of that refunded back almost all of it will get refunded back not you know the full 22
000 but specifically the social security is going to get refunded back to you
but so what happens though if you are an employee somewhere earning a high wage
and you also elect to have your business taxed as an s corporation well what happens is
you'll get the employee portion refunded back to you when you file your tax return
but what you won't get refunded back to you and the the point i want to make here is the
employer portion of this social security taxes you never get that back that's that's gone okay
so in this example I'm saying hey that's three thousand five hundred forty dollars that you're
never gonna get back whereas here you're gonna get these large chunks of money back okay um so
let me summarize what my point is you know if you're a high wage earner having a side business
you know taxed as an s corporation is likely costing you money not saving you money so
in this example the s corp will cost you three thousand five hundred and forty dollars but keep
in mind you also have additional costs associated with the s corporation right so the tax prep fees
for an s corp you know if you're working with a competent CPA or accountant they might charge you
almost a thousand dollars to prepare this tax return and again i mentioned that you're gonna
have a a payroll company since you'll be issuing payroll to yourself that might cost you about 500
bucks for the year right so when you add all that up your s-corporation could be costing you about
five thousand dollars in in additional fees or taxes each year right so um this happens
all the time more than you think I know some of you watching this and you're like hey I don't
have this issue I don't have high w-2 income but let me give you some examples this could be
here a physician you know working at a hospital earning a high salary but they also do what's
called moonlighting on the side and they earn other income that's paid to them via like a 1099
they're an independent contractor and so they might elect this strategy but it's going to cost
them money in the long run another example is you know you have a high paying job and you sell real
estate on the side that might be an example where this is uh happening to you or you could be an i.t
consultant generally i t consultants or engineers for example have a high w-2 income salary and if
they also have a small business and they you know their taxes and s corporation it may not
be making sense for them right so um does the s corporation ever make sense when you're also an
employee right that might be a question that you might have right and so the answer is yes you know
if your w2 wages are i would say less than about 100 000 then this is probably not going to be
an issue for you and you can you know continue to be taxed as an s-corporation or if your wages are
higher than the wage base you know 142.8 and you have a very very highly profitable business
like for example let's say the profit was maybe 250 000 in profit then believe it or not the s
corporation actually starts to make more sense for you because there's another type of tax i didn't
put in here call like the additional Medicare tax and you know topic for another day but basically
um that starts to make sense again okay so the s corporation uh might make sense if you have a high
wage um and you have a high amount of profit in your business as well um i just want to you know
sort of tell you one more time that the federal income tax and the state income
taxes are going to be the same across all of these scenarios right the topic of this video is really
the you know FICA and self-employment taxes I explained earlier um so i hope that was
informative I know it was a lot of information for some of you especially if you're hearing this
for the first time but the takeaway should be hey there are scenarios where the s-corporation
doesn't always make financial sense right and so in this video in particular the scenario was if
you have w-2 income and you work for someone and you have a high salary of 140 000 or more and you
also want to tax your business as an s corporation it may not make sense that's the big takeaway here
so again i plan on producing the other two videos regarding those remaining two reasons
why you shouldn't be taxed as an s corporation so make sure you subscribe so you can catch those as
they are released and if you'd like to contact me and if you're watching this on YouTube all
of my information is in the description below if you're watching on some other social media channel
I'm sure if you click on my profile or my bio or what have you you can find me or if you
can just visit my website it's navimarajcpa.com i appreciate all the comments and feedback I've been
getting some of you have been shooting me emails do subscribe and I'll see you in the next video