How S Corp Taxes Work

when you're done watching this video i hope that you're going to understand how s corp taxes work so what i mean by that is you might have heard of this concept called a pass-through entity and you might not you know really understand what that means or you might hear to it referred to as an informational return but i'm gonna walk you through an example of an s corporation tax return show you how the revenue and the expenses work and whatever is left over that profit how that profit then will flow into your personal return and it's on your personal return where you will end up finding out do you owe money or are you gonna get a refund all right so hopefully at some point during this video as you're watching all of a sudden the light bulb's going to go off and hopefully your understanding of this will be crystallized and you'll understand exactly how as corporation taxes work so before we jump into that i'm going to share my screen and show you some of these forms so you can under get this you know understanding but before we do so let me just quickly introduce myself my name is navi mirage and i'm a cpa who helps entrepreneurs usually by creating content on social media and implement showing them how to implement strategies right so how to save thousands of dollars in taxes so um in this video i'm doing something a little bit different i'm going to show you or help you understand and teach you how s corp taxes work so if you learn something while watching this video do me a favor and subscribe or follow me depending on which platform you are watching on all right with that said let's kind of jump into what i want to talk to you about so how escorp taxes work so let's have a look at this s-corporation tax return together okay so on my screen here we have uh the 1120s that's what this form is called that's the tax return that you would complete for ns corporation and real quickly i'll go over the top portion here but basically what i'm saying is this was uh the entity that was formed was an llc so abc llc was formed this is the address the date that the llc was formed is january 1st 2021 you know that's not likely the case for you but i'm just saying hey in the perfect world this llc was formed on january 1st 2021 that's when they uh formed the llc with the state okay in any state is the state here um and also is that is when they told the irs that they wanted to elect s corp tax treatment and so they wanted their s-corp tax treatment to be effective january 1st 2021. so as you can see this is a brand new company abc llc it's elected s corp tax treatment as of january 1st 2021. all right that's that's all that's really important here i did also check the box letting the irs know that this is um this entity is electing to be treated as an s corporation with the beginning of this tax here okay um but what i want to show you is you know how this tax return works okay so in this example i'm saying that there are 125 000 in sales or revenue whatever you want to call it okay um and that's what the total income is as well 125 000. now if this was a company that was selling products then it may have something called uh cost of goods sold right so if it had um inventory and it was selling products whatever the cost of the goods that were sold it would reduce you'd put that number in here cost of goods sold and it would reduce that total income figure further but in this example just pretend it's a service so i have a lot of real estate agent type clients there's other services could be landscaping or something like that it's a service based business so total income is 125 000. now let's take a look at the deductions here in this area okay so we're scrolling down a bit and so i'm gonna skip over line seven for a moment but if we look at this line 12 is taxes and licenses this is not income tax okay this 5 000 of tax i'm just using it as an example but this would be uh for example social security and medicare taxes for the employees of the s corporation all right in other videos that i have on youtube you can watch those but the employer the s corporation abc llc in this example is responsible for a portion of the social security and medicare taxes and so that's a number i just made up i just said it's 5 000 okay that's the taxes i'm talking about there also i'm assuming that this business has another 10 000 of advertising expense right so that could be social media ads for example whatever type of advertising your business does and then further we have line 19 which is for other deductions normally as it says here you would attach a statement listing what those other deductions were but to give you some examples that could be again if you're a realtor you know fees associated with mls fees or dues and memberships or it could be internet and cell phone and deducting your mileage for your auto a little bit of that right those other deductions that are not specifically called out here in items you know lines seven through uh 18. so you're going to lump all those other deductions together and you get another 10 grand so i'm just you know pretending that there's another 10 grand of other deductions here so if you add that up 12 16 and 19 that's 25 000 right so 125 000 in in revenue minus those 25 000 of expenses left a hundred thousand dollars worth of profit okay now an s corporation should pay what's called a reasonable compensation to the shareholder so let's just pretend in this in this instance there's only one shareholder the owner of the company okay um and so on a hundred thousand dollars of pr of profit the owner decided that forty thousand dollars was reasonable compensation for themselves all right that's a whole another discussion how much is reasonable compensation what is reasonable um there's many factors that go into that i'm just you know picking a arbitrary number forty thousand dollars okay so forty thousand dollars was the compensation paid to the officer usually via payroll all right but i don't want to get too far off track just know that the officer of the company the shareholder the owner of the company got 40 000 in payroll or wages all right so that's another expense to the s corporation so now we have 125 000 minus the 40 000 of officer compensation and the other 25 000 of other expenses that were here so that's a total deductions of 65 000 right total expenses of 65 000. so 125 minus the 65 000 gets us 60 000 if you scroll a little bit further down here line 25 amount owed you'll see that that's a big fat zero okay so you might be wondering like okay uh i thought you just said there's 60 000 of income here why is there no tax due well the reason for that is because as corporations and even partnerships uh like 99 of the time don't owe any income tax okay there are what they call pass-through entities so this income or let me back up this tax return is referred to as an informational tax return we're going to file this with the irs by march 15th of each year or we're going to file an extension giving us up until september 15th but it's an informational return we're just going to send this information to the irs but this information is going to flow through you might heard that term flow through entity or pass through entity this income is going to flow through to the shareholder okay the owner of the s corporation so let's take a look at that all right so what i have for you on this other screen here is the officer's individual tax return okay so i'm just calling this person john doe they live at the same place or their business is you know a home-based business or whatever one two three main street anywhere any state one two three four five is a zip code all right and just assume here that this person is single all right and there's no uh children there's no dependents anything like that and this person is going to state the standard deduction i'll explain what i mean by that in a second but that's what their tax return is going to look like it's very simple in other words it's a single individual with no children no tax credits any of that stuff and the only thing they do to generate income is what you just saw with the s corporation all right so you remember a moment ago i told you that um the officer compensation was 40 000 and that needs to be run through payroll so payroll taxes need to be paid and so the officer of the corporation or the s corporation is going to get a w-2 all right so this is the forty thousand dollars and let me just show you the forty thousand dollars in line seven compensation of officers is the same forty thousand dollars that's here it's the w-2 they receive from their s-corporation is the 40 000 right that's income to you then on uh line eight is the other income that came from the s-corporation so that was if we scroll down further that's this ordinary business income is the additional 60 000. so the total income that was mostly or all generated from the s corporation is a hundred thousand dollars it's the forty thousand dollars of reasonable compensation and the sixty thousand dollars of um profits that the escort owner is taking um as a i'll refer to it as a distribution but it's the portion of the profits that were not taken as reasonable compensation all right so that's 100 grand now you're going to get the standard deduction here okay so this client is taking the standard deduction this made up client and that standard deduction in 2021 was 12 550 so that amount is listed here and then there's also something called the qualified business income deduction so the math on this is basically twenty percent of the sixty thousand so whatever um income came from the business that was not officer compensation in this example sixty thousand dollars you multiply that by twenty percent that's twelve thousand and so that's another deduction that you get to take and so when you add the standard deduction plus the qualified business income deduction you get twenty four thousand five hundred fifty dollars so we went from a hundred thousand of income we took out the standard deduction we took out the qualified business income deduction and now we have taxable income of 75 450 all right scroll down a little bit more the way this works is that taxable income um that we just discussed a second ago that was 75 450 what would happen is that amount of income would sort of flow through the various tax brackets that apply to a single individual right if you are married filing jointly then there's a separate set of tax stock brackets for married couples right um but again in this example we're just saying it this person's single and as the income flows through each tax bracket this is the number that you would end up with 12 347 is the amount of taxes and in this case federal income tax that you would pay on 75 450 of taxable income all right so we're gonna keep going down this form a lot of this does not apply to us but i'm gonna um say here that when the officer of the co of the corporation the s corporation was earning or getting paid the w2 income the forty thousand dollars i'm just going to make this number up to make the math easy i'm saying that they withheld from those paychecks uh 2 347 in federal income tax okay so the owner of the business didn't get 40 grand right he got 40 grand minus some deductions from his paycheck and so i'm just saying that officer elected to withhold 2 347 from his paycheck throughout the year towards federal income tax right so we're gonna deduct that right they already paid that they owe 12 347. that's how much they were responsible for they paid 2347 throughout the year so what's left is right um this 10 000 so uh your total payments throughout the year was 2 347. so that leaves you with 10 000 all right now there are some circumstances that would uh trigger a little bit of a penalty here but um you know if you filed your tax return and you owed 10 grand when you filed the chances are you pay a little bit of an interest penalty you know not thousands of dollars but maybe a couple hundred um on owing ten thousand dollars because you should have paid that throughout the year as you are earning your income okay um so that's it that's how it works so that's the whole concept of the s corporation okay s corpse to kind of give you a recap s corpse they don't pay income tax they file an informational tax return and the profits from that business pass through the entity onto the shareholders individual tax return and i just showed you how those uh that income flows through the individual tax return and how you will end up owing income tax okay so the takeaways that you should you know have after watching this and me explaining this to you is escort tax returns they're due march 15th you could file an extension to make them due to to september 15th they typically don't owe income tax but there are informational return that you file with the irs the information from that return flows through into your personal return and it's on your personal return is where you determine or how you determine how much income tax is owed on the income generated by the s corporation all right so hopefully that was helpful and you it's clear now um how escort taxes work and how the taxes um how the profits from the escort flow into your individual return and what taxes you'll owe real quick before i let you go i want to let you know that you know this was educational video there's a lot of other videos that are some are educational some are not some of them teach tax strategies i guess that's education as well but there's more information on my website uh here's my website it's navimiragcpa.com there's a course here i really don't promote this too much but i do mention it at the end of the videos if you want to learn how all this stuff works how taxes work how accounting works how to implement all the tax rates that talk about on my channel like hiring minor children the s corp strategy uh you know saving 58 000 in a retirement account and on and on and on you can take a look at that course you can connect with me on social media here there's an expense tracker that you can download for free just put in your name and email you could file an llc or create an s corporation for free by using some of these companies just click on there you'll go to the website and start filling out those documents you can schedule a 30 or 60 minute q a session with me if you've got questions right hard to find a cpa that's available you can just schedule some time on my calendar you can email me and you can watch other content if you don't want to watch it on youtube it's organized here you can have all my videos or just you know categories that i've kind of made for you all right so you can see all that information here so with that said uh i'm gonna let you go but i really appreciate you watching again if you got value consider subscribing or following depending on what platform you're watching on and if you are watching on youtube in a moment here a couple other videos are gonna pop up uh that i recommend based on the fact that you watched this video alright so with that said i will see you in our next video

Channel: Navi Maraj, CPA

Views: 29,200

Keywords: s corp taxes, how s corps works, how taxes work, pass-through entity, flow-through entity

Id: BAhAwaAQWGw

Length: 17min 10sec (1030 seconds)

Published: Thu Mar 17 2022