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:
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
