$245,000 S-Corp Owner Reduces Taxes and Increases QBI Tax Deduction with 401k

today we're going to take an S corporation I'm going to show you how you can use it to get more tax-free income in retirement pay less in taxes have more money in retirement and possibly retire a little bit earlier what's going on guys welcome back to the channel or this is your first time at our Channel welcome to the channel my name is Travis sickle and let's go ahead and get started so I'm going to walk you through the numbers of this S corporation then I'm going to show you all the changes that we can make and all the math that is involved so in this S corporation there are two ways that we're going to have income the first way is going to be a distribution so we're going to have 145 000 in total distributions and then we're going to have a W-2 paycheck of a hundred thousand dollars if you're not familiar with how these two numbers work the amount of your distributions which is income it's basically looked at as like an investment so it's going to avoid your FICA taxes which are your Social Security and your Medicare taxes both for the employer and the employee e now you have to pay yourself a W-2 wage if you have enough income and that wage is going to be subject to your FICA taxes both on the employer and the employee's side now as a side note with your W-2 income you have to pay yourself a reasonable wage but I'm going to get a little bit more into that in just a minute now on this hundred thousand dollars it is 7.65 percent for the employer and then 7.65 percent for the employee making it a total of 15.3 percent so on a hundred thousand dollars we are going to have fifteen thousand three hundred dollars in total FICA taxes now if we add these two numbers up our 145 000 and our hundred thousand that's going to be two hundred and forty five thousand dollars that total amount is subject to your federal income taxes so we have a standard deduction here for the married filing joint link for 2 2023 of twenty seven thousand seven hundred dollars so what we are left with is our taxable income of two hundred and seventeen thousand three hundred dollars now from this amount right here we're gonna pay a total federal income tax of thirty eight thousand nine hundred and fifty two dollars which puts us in that twenty four percent tax bracket now a lot of people get confused how our taxes work so I'm going to go ahead and bring it up on the screen here really quickly just to show you how those taxes actually break down with your tax brackets so drawing it out here might be a little bit easier to understand so we have a gross income here of 245 000 that's standard deduction at twenty seven thousand seven hundred bring that taxable income to two hundred and seventeen thousand three hundred dollars but if we go back up to the two hundred and forty five thousand dollars and we just kind of Illustrated it right here this is the full 245 000 so we can see the standard deduction at twenty seven thousand seven hundred it's right here and if we hover over this we can see that it's at the zero percent tax bracket because it's the standard deduction so it's not taxable so visually seeing this might help you understand how their taxes actually work and then you can see in our next tax bracket here at the 10 tax bracket for the next 22 000 and then we have 67 450 at 12 and then we have a hundred and one thousand three hundred dollars at our 22 percent and then finally this twenty six thousand five fifty is at twenty four percent and you can see those tax brackets right here so even though we're in the 24 tax bracket you're not paying 24 on every dollar just twenty six thousand five fifty so now let's go ahead and take a look at our total taxes so what we have to add is our total federal income tax so that's the thirty eight thousand nine fifty two plus or fifteen thousand three hundred because we're the S corporation owners so we're paying both the employer and the employee side and that's the way you should be looking at it so if we add both of these numbers together that's going to be a total tax liability of fifty four thousand two hundred and fifty two dollars based on our 245 000 of income now let me show you what the retirement plan contributions numbers look like before we jump into some changes that we're going to make so if we take a look at the 2023 numbers we can see them right here for 2023 into our solo 401K we can make an employee contribution of 22 500. up to a total of 66 000 of total contributions which include both the employee and the employer's side now we do have a set by array down here and that's sixty six thousand dollars so if you are considering this app here's how that math would break down either the solo 401k or the set it's only going to be based on your W-2 compensation you don't include the distributions those are not included at all when it comes to retirement plans so you only include the hundred thousand dollars and for an S corporation it's up to 25 of whatever UW whatever the W2 is so in this case it's going to be up to twenty five thousand dollars so if this was a step Ira you can only do twenty five thousand dollars period but the solo 401K we can do the 25 000 plus that twenty two thousand five hundred dollars for 2023 so that total amount that we could contribute is going to be much higher with the solo 401K in almost every single instance unless your income is Way High where the profit sharing contribution would equal sixty six thousand dollars so what we want to do from here is actually make some adjustments so what we can do from there is we can actually bring down our W-2 income to sixty six thousand dollars this is going to have a significant impact on your total taxes alone because we're reducing our total taxes to 66 000 we can still contribute the maximum amount of sixty six thousand dollars to our solo 401K but again if you have a SEP IRA you can only do up to 25 percent of the sixty six thousand dollars and not a non-deductible contribution or an employee deferral in a on a pre-tax basis so by reducing our total income to sixty six thousand dollars two things you need to know first it's going to reduce our FICA taxes quite a bit that's a bonus number two is this number has to be a reasonable wage now I do have a video on on reasonable wages and how to figure that out but in a nutshell it has to be in line with what your job description is and how much somebody makes in your industry so there's no real formula or hard and fast numbers that you can go by but you do need to justify it in the event that you get audited and you're paying yourself too little why would somebody do that obviously to avoid the FICA taxes and have it all come out as a distribution but unfortunately you can't do that nor do you want to if you want to put that those dollars into a retirement plan so by doing that we're actually going to reduce our taxes from fifteen thousand three hundred down to ten thousand and ninety eight dollars this means that this isn't going to increase just by thirty four thousand it's going to be thirty four thousand plus the difference in our FICA taxes because we're going to retain those dollars so that means our total distributions will increase to 184 202 dollars bringing our total compensation to 25202 two and then we subtract our standard deduction bringing it down to two hundred and twenty two thousand five hundred and two dollars and our federal taxes are actually increasing here to forty thousand two hundred and eight dollars because of those additional FICA taxes that we're now keeping and that's going to keep us in the 24 tax bracket if we add all this up though it's still lower at fifty thousand three hundred and six dollars versus our fifty four thousand two hundred and fifty two dollars but that's not the only thing that you need to be aware of so let's go ahead and show a side-by-side comparison of these contributions so let me go ahead and bring these up for you so here's how it's going to look side by side with a hundred thousand dollars of W2 income versus sixty six thousand so the employee contribution to that solo 401K is going to be the same at twenty two thousand five hundred but our profit sharing will decrease because you can only do a maximum of 25 percent so it's going to drop from 25 thousand to sixteen five bringing that total pre-tax contribution from 47.5 down to thirty nine thousand so there's something I want to point out before we continue here so the FICA taxes are not affected by your retirement plan contributions so whether or not you put into the pre-tax or the after-tax side the traditional versus the raw side it doesn't matter what is being affected here is the federal income taxes so if we're putting into the pre-tax side your federal income taxes go down but again it doesn't affect those FICA taxes so here's what we need to take a look at now so we have a hundred thousand dollar income and sixty six thousand dollar income well guess what our FICA taxes are lower now because we're at 66 000 and FICA is our social security and our Medicare taxes so if our social security is less that we're paying into that means we're going to get less out of it so let's go ahead and compare what the difference in these two numbers would be with Social Security and I've already run those numbers so for somebody that's earning a hundred thousand dollars from age 40 till age 70 e and then has a 30-year retirement this is the estimated amount of total Social Security if you're married filing jointly with these estimates so it's going to be up to 5 million 653 176 dollars if you're earning a hundred thousand per year now let's go ahead and make some changes here and we're going to drop this income down to just sixty six thousand dollars and we're gonna see what that effect looks like so sixty six thousand dollars we're gonna drop that down I'll click save go back to our retirement and we're going to take a look at our social security and that is going to drop quite a bit down to four million 628 thousand and fifty three dollars so now we're left with figuring out how to make up that difference and it's a big one it's over a million dollars but here's how we're gonna do it so to be exact that amount is a difference of one million twenty five thousand one hundred and twenty three dollars in total Social Security over the course of our retirement so what we're going to do is figure out how to take the difference in our FICA taxes from our hundred thousand dollars and our sixty six thousand dollars which is a difference of five thousand two hundred and two dollars this is the amount that we should be saving by dropping our W-2 income now if we divide that by 12 we get four hundred and thirty three dollars per month so if we take that amount and reinvest it into the stock market let's see how that math works so if we take 433 dollars per month reinvest it for 30 years at an eight percent rate of return we're going to end up with six hundred and fifty thousand three hundred and seventy eight dollars now this is the amounts that you would have or estimated to have day one of retirement but again we have another 30 years so we're not just going to put it in a bank at zero percent we're going to still reinvest it but let's say that we dropped it down to five percent the maximum amount of income that we can have on five percent is three thousand four hundred and seventy seven dollars so if we multiplied this amount that we're now generating off of this for 12 months of the year for 30 years that is going to equal 1 million two hundred and fifty one thousand six hundred and seventy seven dollars or 226 554 more in this scenario than if we just paid into Social Security so of course there's a lot of assumptions that we're making here we're assuming that we can get an eight percent rate of return we're assuming we can get a five percent rate of return and but on the other side we're also assuming that Social Security will be here so a lot of people think that it will be reduced or it won't be here in any case you can see by making these changes that you're going to be better off given what we know right now so in this example even though we've reduced the amount that's going into our social security we've increased the amount that's in a Roth we've still saved up to the maximum of sixty six thousand dollars we're gonna have more total throughout the course of retirement and as you can see the more you have more opportunities you have and possibly being able to retire earlier so a lot of little tweaks that we've made to two different scenarios to make it a better scenario given what you're currently working with with an S corporation so if you have any questions on this stuff let me know in the comments down below and if you've enjoyed this video be sure to subscribe and we'll see on the next one

Channel: Travis Sickle

Views: 2,296

Keywords: s-corp taxes for dummies, s-corp distributions, s-corporation, solo 401k, lower taxes, s corporation

Id: zZqynbtUe3I

Length: 13min 28sec (808 seconds)

Published: Sat Sep 09 2023