4 TAX SAVING STRATEGIES--How To Pay Yourself From Your Business [Part 2] LLC vs. S-corp vs. C-corp

welcome back in this video i'm going over four tax strategies for paying yourself in your business and saving taxes this is part two i have another video that goes over how to pay yourself in your business whether it's sole proprietor self-employed llc corporation s corp and so be sure to check out that video for the basics in this video i'm going over four strategies that are more advanced situations for people who are a little further beyond who want to save taxes so with that let's jump into these four strategies for saving taxes in your business before we do that my name's amanda if you're new here you're watching the business finance coach where i simplify business to help you succeed because i believe that the world needs what you have to offer and you can actually feel supported by these tools of our civilized society instead of held back or overwhelmed by them i have free templates and many trainings as well as full-blown courses that you can check out in the description below now let's jump into the four tax strategies for how to pay yourself while saving taxes one thing to keep in mind is that there is not a simple choice that everyone should make that saves them taxes and i realize the way some people out there even on youtube are talking about some options it would appear that that is the case that you could just form an s corp and save taxes and that's not how it works these things are very dependent on your situation and genuinely generally you need to have a certain amount of income in your business before any of them are going to be applicable so when we look at the cheat sheet from the last video sole proprietor and single member llcs they don't really pay themselves for taxes they're taxed on their net income and so the first tax strategy we're going to talk about is for multi-member llc's and partnerships of course multi-member llc's are taxed as partnerships and there are two aspects check strategies that apply to multi-owner businesses the first one is to keep guaranteed payments as low as possible while we have this qualified business income deduction the cubid deduction because the smaller your guaranteed payments are in a multi-owner business the higher your cubid that 20 of income deduction is and therefore you're saving taxes so what are guaranteed payments what guaranteed payments are is an allocation of net income first to one partner so remember self-employed people they're just taxed on their net income from a business in a partnership or multi-member llc taxes a partnership the owners are also taxed on the net income of the business just based on their share of that income based on their ownership or special allocations so two partners 50 50 they take the net income from the business in their tax 50 50. well let's say one owner is actually working in the business and so we want to make sure that owner gets paid remember we can't use 10.99 we can't use w-2s and so guaranteed payments is the tool that we use in a multi-owner business to allocate a portion of net income first to one owner but you want to think about this as a salary and it's a set amount so this cannot be a percentage if you just say 10 percent of net income goes first to one owner that's not guaranteed payments and so you want to strategize in that way in a multi-owner business while we have this 20 pass-through deduction because not using guaranteed payments is going to save you taxes now you can see this is my business tax comparison spreadsheet template and so this is where you can put in guaranteed payments but again these aren't required and so leaving these out allows us to have lower taxes because we have a higher 20 percent cubid deduction right here our 20 pass-through deduction so let's do that we're now at 4390 for all of them if i pop back in now we come down and our 20 pass through just allocating that 20 or 40 000 look at the difference in the 20 deduction because it's based on this amount and we just moved a bunch of that net income down to guaranteed payments which don't count for the pass through deduction of 20 now the second way to save taxes applies to the same situation multi-member llc's or partnerships and it's by having an owner that's considered a limited partner because limited partners don't pay self-employment taxes so the general rule on those templates i just showed you whether you categorize it as guaranteed payments or the net income from the business just flowing through to the owners the owners are going to pay self-employment taxes and income taxes on their personal return which is all being calculated on that spreadsheet template when one owner is a limited partner it means that there's no self-employment taxes now limited partner general partner these are terms that apply to the partnership and not multi-member llcs and this area has never been overly clear however when we look at llc members we get to decide are they more like a general partner or more like a limited partner what makes a partner limited is not necessarily the individual roles that they play you know it's based on the influence that the member owners have on the business and so one of the biggest distinctions that court cases have shown us is that if the business is manager managed when the llc is formed versus member managed that that's a good key criteria for keeping some of the owners under a truly limited partner type of owner and so you have to have type general partner types in the business as well to actually be responsible for running the business and then the limited like partners or members in an llc they actually have no control or decision making ability in the business and if we look back over at the multi-owner business types comparison spreadsheet here we can see under our partnership llc we have the option to select general or limited partner and if we select limited partner when we come down here our self-employment taxes are gone versus here they are happening for all of the other owners so i would recommend looking at this as a tool for allowing for people to be involved or partner with you in a business in a way that allows you to save them 15 on taxes keep in mind if their income is far above 100 000 then those amounts of taxes get much smaller after that point and so it is kind of less of a tax savings granted people always like saving taxes regardless of how small they are so it's still a good structural you know aspect and you're not giving up any control of your business in the process number three is the good old s corporation so the way the escort pays taxes is that it's just like the partnership you know the net income from the business it flows through to the owners and they pay taxes based on their share of owning the business and they pay income tax on that share that comes into them they don't pay self-employment taxes which of course are the same thing as payroll taxes the social security and medicare and that is why in the s corp you must pay yourself reasonable compensation so that you are paying those self-employment or payroll taxes medicare and social security on the income you worked for because that's the way our rules work in the s corp there is an opportunity to save taxes if the amount you could pay someone to replace you doing your job in the business is considerably less than the money you're actually profiting in the business you know the excess income over your expenses your net income if that's substantially larger than your reasonable compensation then it can be worth it for you to go the route of the s corp now this comparison template that we see here is for one person so we're comparing self-employed to being in an s corp so we have two columns for the taxes the business paid and the taxes the individual owner pays and same in the corporation and this is where we put in our owner's salary and so we can see in this example we only have 50 000 net income so we're gonna pay at least around that much for an owner in a business who's doing substantial or any sort of skilled work in the business now to get this number as low as possible i do go over reasonable compensation in the course i talk about and i have this template that walks you through ways to actually calculate that as low as possible and it really is about documenting and researching and you know getting different pays online and showing how you're coming up with your number you know that goes a long way to justifying your amount but you certainly don't want to do anything ridiculous like 10 20 000 on your w-2 and the rest in dividends like that is not legitimate so i would never really go below 50 000 and so if you're not netting 50 000 a year then it's going to be really difficult but let's change these numbers let's make this 200 000 in sales 50 000 in expenses maybe we'll do 55 000 and so we've got a solid 90 000 in net income after our payroll after our owner's salary so in this type of situation we can see here here's the 150 the net income when you're self-employed being taxed for all those self-employment taxes in the s corp right here we have none zero and so here we see our payroll now we're down to calculating our personal income taxes we have our wages and we have the net income coming through versus when you're self-employed it's just the full amount for both self-employment and income taxes and so down here you can see that we're combining all the taxes in the escort business and as the individual and so the s corp is only paying 22 000 versus 31 000 in the self-employed business and you can see up here calculating the full cubid it's only based on 20 of the 90 000 under the s corp versus 20 of our total income coming through minus our self-employment taxes and that gives us 27 000 so even though we got a much bigger deduction in the self-employment under cubic this was enough net income to make it worthwhile if we increase this number to a hundred thousand which certainly being paid a hundred thousand to run a company seems rather reasonable so now we've only got 42 000 flowing through now we're look at how close we are thirty one thousand four hundred and forty two dollars under self-employed thirty one thousand one hundred and two under s corp and this is why you know i always say to people you've got to run the numbers for your situation and how you think it's going to go in your business it's impossible to just say yes you should do this or do that like you've got to look at the details more closely to be able to save taxes and another thing to consider that the spreadsheet accounts for as well is writing off a home office using your personal vehicle and health insurance when you're self-employed you get to just adapt those on your personal return with your business no problem once you've formed and elected the s corp status now you have to take extra steps to be able to deduct those items you have to set up an accountable reimbursement plan you have to pay yourself as an employee and you have to take those deductions and reimburse yourself in the business at least monthly or periodically to be doing things correctly so there's just a lot more steps in the s corp so you want to make sure that you're in a situation where it's really worth it to you now number four is probably the least tax savings but it is still advantageous and that can sometimes be if you're in the highest income tax bracket especially based on other stuff you might have going on in your personal taxes doing the corporation can be a benefit sometimes if we head back in to our situation here in the template comparing self-employed s-corp in court for a single owner business we can see over here on the corporation side now our net business income is being taxed at 21 so the corporation is the only time that we can actually leave money in the business because it's being taxed under the business return but there are still limitations on how much money we can leave in the business and let it build up without putting it out as distributions and just like in the s corp we have to pay ourselves a salary but here we can see 35 263 we're paying like 4 000 more than our other two types of businesses however if we push ourselves into the highest income tax bracket to a million and if we come down here we can see 203 thousand dollars in c-corp taxes altogether including the business taxes and the personal taxes versus 230 and the s corp and 246 and the self-employed however if we wanted to actually take this money out of the business is 842 000 then we're either going to have to increase the amount we're paying ourselves or we're going to have to take it out as dividends and dividends are taxed at preferential tax rates so i hope this is helpful to understand the four strategies to recap really quickly the first two applied to multi-member llc's or partnerships and that was to avoid allocating guaranteed payments because that amount of guaranteed payments doesn't qualify for the 20 cubid deduction number two was if you can categorize a member like a limited partner or a limited partner if you're doing the partnership a limited partner will allow them to not have to pay self-employment taxes number three is electing s-corp status in your business so that you can avoid paying self-employment taxes on the net income that flows through to your personal return from the business to be taxed if your net income is substantially greater than what your reasonable compensation is which is a reasonable amount of pay for someone in your type of position in your type of business in your region then you can save taxes and number four sometimes in the corporation if someone is far above the highest income tax bracket then they can save money with using a corporation but we're talking about kind of small amounts and it takes a lot of planning as there are rules about leaving too much money in the corporation for this very reason as well nevertheless it's a strategy that can help people so that's all those are the four tax strategies when structuring and planning how to pay yourself and your business to save taxes so if you have a small simple service based business nothing to worry about guys you are not missing out when the escort makes sense definitely go through it i have all sorts of extremely affordable programs walking you through everything you need to do to get set up right in those situations and i want to get a hold of my spreadsheet template that allows you to compare whether you're a solo owner a married couple or multiple unrelated owners then you can check out the description below for more about those spreadsheet templates and the course where i dive deeper into especially multi-owner strategies and all sorts of fun stuff like this if you enjoyed this video give it a like so that youtube knows and definitely post comments i'd love to hear from you in the comments below this video let me know what you think what this applies to your situation what you're thinking about what type of business you have i'd love to hear from you otherwise if you haven't subscribed consider subscribing and selecting the bell to be notified of my next videos and i'll see you next time and my next video coming out is going into details about the cubid the qualified business income 20 deduction so i'll see you then bye

Channel: Business Finance Coach

Views: 12,171

Keywords: how to pay myself from my llc, tax strategies for small business owners, how to pay myself as a small business owner, how to leave money in a business save taxes, how can an LLC save on taxes, how can the s-corp save on taxes, reduce taxes on owner pay from small business, self employed vs s-corp vs c-corp taxes, sole proprietor vs llc taxes, llc vs corporation, llc vs s corp, llc vs sole proprietorship, tax breaks for small businesses

Id: vb8O6K9XoeU

Length: 19min 32sec (1172 seconds)

Published: Tue Nov 17 2020