What to know about S Corps
If you're a business owner, chances are you've heard whispers about the magic of S Corporations and their ability to slash self-employment taxes. Buckle up as we dive into the nitty-gritty of S Corps and unlock their full potential.
So, let's start with the golden ticket: saving on self-employment taxes. Here's the lowdown: if you opt to remain taxed as a partnership, every penny of your business's profit gets hit with state and federal taxes, plus a hefty 15.3% self-employment tax. But wait, there's a loophole. By electing to be an LLC taxed as an S Corp, you can structure your earnings to pay yourself a reasonable salary (let's say $85,000) subject to payroll taxes, while the remaining profit (let's say $65,000) sails off into the sunset, blissfully free from self-employment taxes. Cue the chorus of angels – you've just saved yourself a cool $9,945.
But hold on, there's more to this tax-saving symphony. Enter the QBI (Qualified Business Income) deduction, offering a juicy 20% deduction on your profit. But here's the kicker: the deduction starts to taper off once your taxable income exceeds certain thresholds. Translation? Opting for sky-high distributions over a reasonable salary could see you miss out on this sweet tax break.
Picture this scenario: one entrepreneur opts for a $100,000 salary and $900,000 distributions, while another chooses a $275,000 salary. The result? The latter walks away with a chunky $137,500 deduction, while the former is left scraping the bottom of the tax-saving barrel with a measly $50,000. The size of your salary matters.
But wait, there's another plot twist. Contributing to a solo 401(k) can further supercharge your tax-saving strategy. The more you pay yourself in salary, the more you can stash away in your retirement nest egg.
Now, you might be thinking: won't a higher salary mean higher payroll taxes? Sure, but here's the kicker: those extra costs may pale in comparison to the tax savings and retirement benefits reaped from a beefier salary.
In conclusion, navigating the labyrinth of tax planning, QBI deductions, and salary optimization requires a skilled hand. Partnering with a proactive CPA can be your secret weapon in unlocking massive tax savings as you build your business empire. So, as the year draws to a close, seize the opportunity to fine-tune your tax strategy and reap the rewards of your hard-earned labor.
If you have any more questions regarding S Corps or anything similar, please feel free to call or email me at (615) 844-3398 or Jim.Maddux@raymondjames.com.
Disclosure:
Opinions expressed in the attached article are those of the author/speaker and are not
necessarily those of Raymond James. All opinions are as of this date and are subject to
change without notice. The information contained in this report does not purport to be a
complete description of the securities, markets, or developments referred to in this
material. Raymond James and its advisors do not offer tax advice. You should discuss
any tax matters with the appropriate professional. Prior to making an investment
decision, please consult with your financial advisor about your individual situation. The
forgoing is not a recommendation to buy or sell any individual security or any
combination of securities.
