$300,000 s-corp owner reduces taxes and increases QBI Deduction with Traditional and Roth 401k

if you have an s corporation or are considering an s corporation in this video i'm going to do a walk through so you can understand how to split up your income between your w-2 side and your distributions now the benefits of understanding this and doing it is it's going to help you maximize your retirement dollars both on the traditional side and the roth side we're going to reduce your taxes we're going to increase your qbi which is a qualified business income deduction also known as a section 199 a deduction and we're going to help you reduce your adjusted gross income what's going on guys welcome back to the channel or if this is your first time at our channel welcome to the channel my name is travis sickle now before we go through this walkthrough i want to give you this disclaimer or this disclosure now this is only one example it really is important to understand that your particular set of circumstances your facts are going to affect the outcome and what you should do so if you have another job you have another business in addition to your s corporation it could change the facts a little bit and if you have any questions while we're going through this let me know in the comments down at the bottom so let's go ahead and go through this walkthrough so you can really understand how to do all the things i said at the beginning of this video and i'm gonna bring it up on the screen so we can go through it together i've done most of the math just to speed up the video and again if you have questions let me know in the comments down at the bottom so in the example that we're going to run today it's somebody that is earning 300 000 from their s corporation now if you're earning less or you're earning a lot more either one is fine it could work for you but remember your particular set of facts and circumstances are going to affect exactly how you should tackle this stuff so let's go ahead and get into it but just keep that in the back of your mind so if we're taking a look at this example right here this is somebody that's earning three hundred thousand dollars i have two scenarios here here's scenario one our w-2 is 50 000 and our s-corp distribution is hundred and fifty thousand dollars and in the second scenario it's going to break down to a hundred thousand in w-2 and 200 000 in distributions so let's stick with this scenario right here for just a second so somebody that's paying themselves fifty thousand dollars will have fica taxes so you're gonna pay in social security taxes three thousand one hundred dollars as the employee and it's also going to be matched as the employer and then your medicare is going to be at 725 and that's all based on this 50 000 which works out to 3 825 and if we multiply that by two because we have both the employer and the employee side that's going to work out to 7 650 and if i bring the calculator up here and we put in 50 000 multiply that by 0.153 we have our 7650 that is the taxes that we're gonna pay on our social security and our medicare also called fica and based on this math if we're doing this we're gonna have one half a deduction so this is going to be a deduction that's going to come off of this 250 000 and that will work out to a federal taxable amount of 41 473 dollars this is the tax due on this three hundred thousand dollars broken down with fifty thousand and w two and two hundred and fifty thousand dollars as the s corporation now here's what i wanna point out so this is what we have if we add these two numbers up we get forty nine thousand one hundred and twenty three dollars let's make sure that math is correct forty one thousand four hundred and seventy three dollars plus or seven thousand six hundred and fifty dollars is our 49 123 now what you have to understand is that for the taxes on social security and medicare or fica right those are only calculated on our w-2 wages so the less from that side that we have on our w-2 the less in social security and medicare taxes that we are going to pay the distributions those are only subject to our federal tax bracket so depending on how you're filing will depend on how much you're going to pay in federal income tax but that is how that's broken down and we haven't added in any retirement savings whatsoever but let's go ahead and look at the other example just so you can understand what that looks like of moving dollars from the distribution over to the w-2 side so if we take a look at this we have a hundred thousand dollars and now two hundred thousand so still are three hundred thousand dollars in total income but this is obviously going to boost our social security and our medicare taxes which are gonna boost to fifteen thousand three hundred dollars a little bit easier to do that math based on a hundred thousand which is fifteen point three percent now if we calculate this out to our federal taxes that's forty three thousand one thirty eight and if we add those two up it's fifty eight thousand four thirty eight so significantly more than our first example but generally speaking our income was still three hundred thousand dollars in both examples it's just a matter of how we allocated it between our w2 side and our distributions so coming down here we see quite a big difference in just making that one little change now i want to go through and explain what happens when we look at your retirement plans if we start to add into your retirement plans is there anything else that we should be aware of no right now you're probably thinking let's get as much money onto our distribution side and pay ourselves the least amount on our w-2 and ideally that's really what you want to accomplish but there's a couple of things you need to understand you have to pay yourself a reasonable wage that's irs guidelines now if you don't they just come back and literally tax you on everything and they say that nothing was a distribution so you want to get this right because the irs if they catch it if they think that you're not paying yourself enough to obviously pay less in taxes than they're going to get you so you have to pay yourself a reasonable wage there is no hard number that you can use in order to pay yourself a reasonable wage but you need to document it but we're going to save that part for a different video now let's jump over to the retirement side just so i can show you with these exact same examples what it looks like if we start to make contributions into a retirement plan so if we add in the same example and i tried to keep it as organized as possible let me take it out from under here and we have our fifty thousand dollars and our two hundred and fifty thousand dollars now in this example i'm going to assume a solo 401k and we can save up to 19500 as the employee which comes from this side so you the 50 000 as far as the taxes go the federal taxes go it's reduced by 1905. but what doesn't get reduced what doesn't get reduced here is your fica taxes so you still pay social security tax and medicare taxes regardless if you put this money into your workplace retirement plan so even though we're putting it into the solo 401k we still have those taxes but by putting it into the traditional side we're reducing our federal taxes so the maximum that we can match on the employee er side would be not from this 250 it comes from this 250 but it's based on this 50 000 as a w-2 employee so the most that you can put in would be 25 percent so that's where we get to 12 500 and if we add those two up that's 32 000 in pre-tax money so this is reducing our federal taxes and we can also do a total after tax contribution of 25 000 bringing it to a maximum of 57 000 now i ran these numbers based on 2020 so for 2021 it's 58 000 but again this is just an example so you can kind of understand how this all works now the federal taxes because we put money into retirement plan drops to 34 393 dollars and if we add in our fica taxes that's forty two thousand forty three dollars and our adjusted gross income is two hundred and sixty four thousand one seventy five so that has dropped quite a bit as well now if we jump over to the hundred thousand dollar example and only do 200 000 in distributions then the amount that we can put in as an employee is exactly the same the employer side increases because our w-2 increases so going from 50 to 100 now allows us to save double the amount as well at 25 000 and that's 44 500 now this is pre-tax so quite a bit more that we can put in pre-tax and then we can close the gap by putting an additional 12 500 in after tax i think like the mega backdoor roth strategy and you can have 57 000 so in both scenarios we're able to get to the 57 000 but we were able to get quite a bit more on the 100 000 side pre-tax now another thing to note is if you're 50 and older you can do an additional 6 500 and in that 50 000 w-2 side example you wouldn't be able to actually maximize your retirement plan you would be short by 500 so something else to keep in mind while you're figuring out how much you're going to pay yourself on the w-2 side and then if we look to the total amount of federal taxes it's 33 658 and if we add those two up it's still more at 48 958 but our adjusted gross income is lower at two hundred and forty seven thousand eight hundred and fifty dollars now something interesting occurred is in this example where we're putting more money on the w-2 side and inevitably pay more fica taxes but you also increase the amount that goes towards social security now a lot of people think that social security is not going to be here on down the road so maybe you just want to discredit that but if you do think social security will be there then contributing more money into the social security system will mean that your benefits are going to be higher on down the road a little bit more difficult to calculate in this type of an example although we could run projections on your income for social security but that's something to keep in mind so even though you're paying more in taxes the bulk of it comes from the increased amount in the social security taxes now the other thing that we want to take a look at or i want to point out is the reduction in your adjusted gross income and that comes from increasing your w2 so you can allocate more towards the pre-tax side of your retirement plan now this comes into play if you might qualify for things like certain credits like the the child tax credit so if you can get your income lower you're gonna qualify for more or the stimulus checks that we had last year and that third stimulus check that we had in 2021 which gets calculated on your 2121 taxes so those are the things that you want to look out for whether or not you're going after a retirement plan for the pre-tax or the after-tax dollars but once you get through that you really want to get everything back on the distribution side again as long as you're paying yourself a reasonable wage if it if you get it too low and it triggers that irs audit then you're going to have a problem but is once you get to that maximum amount so you can allocate as much as you can towards your retirement plans and you're meeting that criteria then you want to get it over to the distribution side because the other thing that your distributions will have those distributions that will qualify you for more of the the qbi that's their section 199a let me see if i can pull it up on the screen to give you an example just so you can see it here now this is an example of just uh some math i was going through but let me pull up the um qbi page and show you what it looks like now it's going to take into consideration so you can see here it says 233 675. let me go back to the 1040 and you can see that the amount that's coming from our s corporation is 233 675. so it's taking that full amount that we have the reason it's it's that amount it's not 250 is because i was working out the math to take the deductions and the employer side contributions because those are also deductions so if we go back to here we see that just takes that number and multiplies it by 20 that becomes the deduction unless there is a reduction based on your income and whether or not you're then getting into higher incomes where there's a phase out again i'm not going to go over that part in this video but i just wanted to show you how it works so your qbi will be higher also the less that you pay yourself so again the name of the game here is to pay yourself a reasonable wage but pay yourself enough so you can get the money into the retirement plan but once you reach those maximums you're maxing out your retirement plan also i say maximums and i'm showing you the math for the maximum but if you don't want to save that amount then you might want to allocate it a little bit differently so they're synonymous if i'm saying the maximum whatever you can contribute that's your maximum so that's what you want to work these numbers around not what the maximum limit is i'm just showing you what the limits are so once you get it there then put it over to the distributions it will increase that qbi and you'll be better off but as you can see in this situation if the only thing that you're looking at is your federal income taxes then you might make the wrong decision you might not allocate it correctly because in the example it will increase your your taxes both your fica and your federal if you allocate more towards the w-2 but if we were able to put that into our retirement plan and reduce our taxes they're reducing our adjusted gross income to qualify you for more credit so that's something to consider but then on the other side if you want to put more money into the roth side of things then you can still keep your income low and make non-deductible contributions and take on that mega back door raw strategy which i've talked about in other videos so it really depends there's so many moving parts in this but hopefully going through these types of examples will make you more confident and shed some light on exactly how you should break it up what you can kind of think about in your particular situation but again there's so many different variations to this stuff that if you have another job it can completely change the outcome on what you should do because remember the social security max that you're dealing with once you get over those thresholds then it might not make sense it might not come to the same conclusion as we did in this example so something to consider if you have any questions on this let me know in the comments down below and if you've enjoyed this video be sure to subscribe and leave your comments down at the bottom

Channel: Travis Sickle

Views: 8,309

Keywords: travis sickle, s-corp taxes for dummies, qbi deduction explained, small business tips, s corp, small business, reasonable salary, income tax, qualified business income deduction, gusto payroll, qualified business income, qbi deduction, tax tips, s corporation

Id: FM4NF0-e4Ls

Length: 15min 50sec (950 seconds)

Published: Thu Oct 28 2021