S Corp Disadvantages That Can Harm You - 6 Drawbacks You Need to Know.

welcome back to our Channel clear value text my name is Brian Kim I'm a certified public accountant and in today's video we will be discussing the drawbacks of an S corporation so we're talking about the S Corp disadvantages I'm sure you can find a whole slew of videos out there talking about the greatness and the benefits of the S Corp just saying it's the greatest thing however that depends on your situation so we're gonna be providing you the drawbacks of the S Corp so you can have all the information at hand to make the best decision on whether it's right for you so I'm gonna list them out here first and then we're gonna go into details about each one so here's the list of the drawbacks so you will have potentially reduced Social Security benefits upon retirements there's the additional cost of the tax return of the S corp there's a chance depending on the work you are operating out of that you will be subject to state income taxes at the corporate level which you wouldn't have paid as a sole proprietor there's the payroll software costs there's a unemployment taxes at the state level and also the future the federal unemployment taxes as well and just the cost of your time just you going through all these additional compliance motions okay so let's dive into the Social Security benefits so let me show you how this works so do you even know how is the Social Security benefits are calculated so this is what happens each year there's a certain amount of your income that's subject to Social Security taxes we're talking about if you're self-employed even if you're an employee getting a w-2 there's a certain amount of income that's subject to Social Security taxes currently at a rate of 6.2% okay so there's a maximum of the amount that is subject to Social Security taxes per year there's an annual maximum they call that the wage base ceiling so in 2020 up to a hundred thirty seven thousand seven hundred is subject to Social Security taxes okay so if you make over that amount you're no longer going to be subject to Social Security taxes on your income so a lot of you who are making over that amounts during the year you might notice that you get a big net pay bump and don't know why that's because that means you've made over that amount in that year and you're no longer being charged at six point two percent therefore your net paychecks bigger that's because at a certain point which is adjusted for inflation each year you stop paying Social Security taxes because you've paid in the maximum amounts for that year okay so the way it works how you calculate your Social Security benefits it's based off your highest 35 years your highest 35 years of income there's a calculation that's being run but to just give you a high-level overview they look at your highest grossing 35 years and based off how much you've paid into the system your how much Social Security taxes you've paid that's how your benefits are calculated so with the S corporation perhaps you know perhaps you don't where's the bulk of the savings coming from in comparison to operating as a sole proprietor you are saving the bulk of your money operating as an S corporation by paying less Social Security taxes so how is that gonna affect you if you're paying less Social Security taxes into the system remember that's how they're calculating your benefits your Social Security benefits upon retirement they're looking how much you pay into the system for the past 35 years the highest or at 35 years and if you're paying less into the system with Social Security taxes well your benefits will be reduced then so if you did not know this I hope you learned something if you have please give me a thumbs up or like that highly appreciate that that helped our channel and okay I hope that's a revelation to you if you didn't know that because the bulk of the savings is coming from paying less Social Security taxes how is that gonna affect you that affects you negatively the Social Security benefits of my retirement okay so moving on to the next one as an s-corporation you are filing a separate tax return a separate 1120s S corporation income tax return so the way you are filing before as a sole proprietor you were filing just on an additional schedule on your individual income tax return so you're filing your business activity on your personal income tax return as a sole proprietor that's no longer the case with an S corporation with an S corporation it's a legally separate entity that needs its own tax returns so you're going to be filing a separate corporate tax return so however you're going to be doing this if you're gonna buy at home software to do this I mean that's still gonna run you probably about a hundred to two hundred dollars for the software costs or if you're gonna work with an accountant you might be paying five hundred two thousand dollars for this corporate tax return depending on where you live and accountants whatever they're charging it might be less it might be more but that's typically on average what they will be charging for this S corporation tax return so while we're talking about the tax returns you know one additional cost that might be applicable to you depending on where you live I'll give you an example so if you're in Chicago your corporation your S corporation will pay an additional corporate tax at a rate of 1.5% it's not the biggest but that's still an additional 1.5 percent corporate tax at the business level this is something that you as a sole proprietor would not be subject to because you were not operating as a corporation but as an S corporation in certain states you will be subject to an additional Britt level tax so you need to take that into consideration as an S corp again a lot the pretty much the bulk er all the tax savings is coming from the reduction of Social Security Medicare taxes which is self-employment taxes to the sole proprietor but anyways it's about income classification please check out our other videos going more in depth at in detail about that but you're doing that with the manipulation of income classification with salary on payroll versus your business income your dividend distributions so with that you need a salary with that you need a payroll system we have a whole separate video about the payroll the payroll set up and all that too but with the payroll system expect a monthly software cost of whatever payroll provider you're choosing expect the monthly software costs about $25 a month to $50 a month you know the again in the other videos we'll discuss the beauty but to recap you know they keep they take care of all the filing requirements the quarterly reports the tax deposits that w-2 creation all of that so I mean it's worth it however you're still gonna be forking over twenty-five to fifty dollars a month for the payroll software costs so that's an additional cost that you would not have as a sole proprietor another thing is that this is based on your state as well with an S corporation you will be an employee of your S corporation you will be an employee shareholder so if you are illegal if you are a legal employee of your business in most states you'll need to pay state unemployment taxes on yourself your business will need to pay state unemployment taxes on you as the employee so this is going to range from state to state per person per firm per employee but generally you're talking about state unemployment tax is about 200 to 500 dollars a year however depending on the states a lot of states that cost drops down to as low as $30 a year or $50 a year per employee per person if you have a good record of not laying your employees off so it's long as you don't lay yourself off but usually you need to build a track record of about three years for that unemployment cost to be reduced so from your year one and subsequent years until you reach that point expect to pay state unemployment taxes which is an employer tax on yourself for about two hundred to five hundred dollars annually okay and okay I mean those are the major costs but then going through all this compliance work you know we're talking about okay even if you have a Content doing your tax return well you still need to do the communication with the accountant you need to go through all those emotions and even running the payroll you know if you're gonna be doing peril yourself you know you're gonna be running through those emotions and that's gonna be eating up your time these are things that you wouldn't have have to have done if you are not an S corporation so you need to take all these things into consideration and weighing the pros and cons to decide whether it's worth it to be an S corporation now listen in this video I'm talking about only the negative things so this is like a Debbie Downer video this is she's talking about the negatives you know there are so many advantages and benefits to being an S corporation you can see our other videos but you need to wait both sides of it but ultimately what is it boiling down to it's how much taxes are you going to save as operating as an S corporation and what are the costs so if you're going to be saving $10,000 $15,000 operating as an S corporation then I would say yes you know these costs of the S corp these disadvantages of the S corp you know it's gonna be totally worth it the benefits will outweigh the costs however in a situation where your tax savings what the S corp will be about you know this is just my opinion if your savings will be about two thousand dollars you know three thousand dollars it won't be worth it at least not to me not money not from my point of view because you have all these additional costs that you wouldn't be paying if you weren't operating as an S corp and the additional time you know what's the net dollar benefit you know it's going to be a thousand dollars or maybe even a few hundred dollars you know in that situation it just wouldn't be worth it to me you know if your tax savings isn't the realm of four thousand seven thousand eight thousand that you know that's kind of a middle ground you know that's that's kind of an area where it's not clear-cut where it's clear-cut bns Clark clear-cut don't be an S corp in that situation you need to just you know it's your purpose personal preference you know to weigh the pros and cons and see whether it's worth it to you okay so I hope that this video has been helpful because a lot of times people are not going to be talking about the disadvantages of an S corp if you have any questions or comments please leave them below I'd be happy to get back to you and again if you found this video helpful please give me a thumbs up I'd highly appreciate that and though it helped the channel a lot thanks so much until next time take care

Channel: ClearValue Tax

Views: 38,192

Keywords: Drawbacks of an S Corporation, S Corp Disadvantages, Drawbacks of an S Corp, disadvantages of s corporations, s corp, s corps, s-corp, s-corps, s corporation pros and cons, s corp advantages and disadvantages, s corp advantages & disadvantages, s corporation advantages and disadvantages, disadvantages of an s corp, disadvantages of an s corporation, s corporation, s-corporation, S corp, S Corp, S-Corp, S corporation, S Corporations, s corporations

Id: 2x4_vYt-eEY

Length: 12min 20sec (740 seconds)

Published: Wed Nov 20 2019