S Corp vs. C Corp Tax Differences EXPLAINED

if you're starting a small business or maybe you have one already and you're wondering what about the C corporation is that a good business entity for me well in this video I'm going to be covering the tax differences between having your business taxes and S corporation or having your business taxed as a C corporation so I'll compare sort of an Apples to Apples example on if that business earns a hundred thousand dollars in profit how much tax would you pay if it's taxed as an S corporation how much tax would you pay if it's taxed as a C corporation so in case it's your first time watching my name is Navi Mirage I'm a CPA who creates content on social media doing things just like this educating you on different Tax Strategies and teaching you how to save thousands of dollars in taxes but I also um do this through a course and not just through social media so if you want to check that out it's on my website it's Navi Mirage cpa.com but let's jump right into this um what I've prepared for you here is pretty straightforward I'm showing you here the S corporation on the left and the C corporation here on the right so let me walk you through this so it doesn't look overwhelming or anything like that so I mentioned I was going to try to compare apples to apples so I'm saying if you have a business and it earns 125 000 in Revenue that means you sold 125 000 worth of product or you're performed 125 000 worth of services that's how much revenue your business earned and then it had expenses of twenty five thousand dollars so expenses could be tax prep fees advertising and marketing um any Tax Strategies you know internet cell phone home office things like that your business is profit then after this twenty five thousand dollars in deductions is a hundred thousand dollars okay and that's the same between the S Corp and the C corporation now with both of these entities the S Corp at the C Corp you're supposed to pay yourself a reasonable compensation for the work that you performed in the business right so in this example I'm just picking an arbitrary number here of forty thousand dollars and I'm calling you John so John's reasonable competition is forty thousand dollars okay and um the hundred thousand dollars here that you see uh for like I said forty thousand dollars of it is your reasonable compensation the remaining amount the sixty thousand dollars for the S corporation could be taken as a distribution whether or not John takes that out of the S Corp um he has to pay uh income tax on it on the C corporation um this sixty thousand dollars does not have to come out of the C corporation but you'll see in a second here um you have to pay tax on it anyway so um let's talk about what taxes do you have to pay so on this forty thousand dollars of reasonable compensation John has to pay a few different types of tax he has to pay social security uh tax and Medicare taxes so Social Security taxes are six point two percent so forty thousand times six point two percent for John the employee and John's S Corp also has to pay um Social Security taxes so the Forty thousand dollars times six point two percent on the employer side uh is two thousand four eighty so combined it's basically forty thousand times twelve point four percent would get you the total of these two um rows which is 49.60 um the Medicare tax very similar 40 Grand times the 1.45 equals the 580 and the S Corp has to pay that amount too so the Social Security and Medicare taxes paid if you sum all of these items here is six thousand one hundred and twenty dollars and you can see on the C Corp side of things it's exactly the same thing right because you determined 40 Grand was reasonable compensation and you're paying your Social Security and Medicare taxes on that forty thousand dollars and in this example equates to six thousand one hundred twenty dollars now the C corporation and not the S corporation has to pay uh twelve thousand six hundred dollars in taxes based on the profitability of the C Corp so the remaining profit after the C Corp paid the Forty thousand dollars in salary to John um would be sixty thousand dollars so you had a hundred thousand dollars in profit you paid forty thousand dollars to John right that's yourself in the form of a salary you've got sixty thousand dollars left well C Corps do not get the benefit of something called pass through taxation the C Corp itself all right the corporation the business has to pay this tax and as of right now it's a flat 21 tax rate so the math on this is the sixty thousand times the 21 equals to twelve thousand six hundred s corporations are called pass-through entities so the S corporation itself is not paying any income tax in um my example here or in general they don't pay income taxes okay now what uh taxes does John have to pay on the money that's earned here well the um roughly 100 000 worth of income right it's the 40 Grand that got paid in the form of reasonable comp and the sixty thousand that he could take as a distribution if you run that through sort of a tax estimator tool or something you'll probably get a number a little bit higher than this I'm adjusting this for something called the qualified business income deduction that's a mouthful I explain it in some of other my videos but you can go view those videos if you want but in short um John's going to pay 11 626 okay and this is treating John as he's single not married filing jointly so it's eleven thousand six twenty six John doesn't have to pay federal uh capital gains tax on this because that's um a tax that does not apply here as an S corporation let's look at the C corporation here for a moment though the federal income tax that the C corporation has to pay is only 2 921 dollars now why is that that is because the only thing that John pays as sort of income tax I'll call it like you know income tax is forty thousand dollars of income tax so um when you put the Forty thousand dollars and you consider the standard deduction and then you run it through the tax brackets at the federal level you only have to pay two thousand nine hundred twenty one dollars and income tax so it's much lower if you're just comparing that however um if John decides to take this sixty thousand dollars out of the C corporation that's going to be taxed at capital gains tax rates and I'm going to give John the benefit of the doubt here and say that this is greater than a year so it would be taxed at you know long-term capital gains tax rates now long-term capital gains tax rates could be zero percent fifteen percent or twenty percent it's typically never zero because that I don't remember the number off is up my head but it means you're have you know a total of income of less than like 40 000 or something like that most of you will fall into this 15 tax bracket and I think again you can look them up but I think if you're making over four hundred thousand then you might get taxed at twenty percent but on average I'm gonna be fair I'm gonna choose 15 I'm not gonna you know sway it to do zero percent or twenty percent so this is the nine thousand dollars it's the sixty thousand times uh fifteen percent okay now um you're not done yet right if you live in a state that has state income tax um you know you'll have to pay state state income tax so you know if you're lucky and you're in Texas maybe Washington state Florida and a few others you don't have to pay state income tax but uh some state income taxes are fixed meaning no matter what your income is you pay five percent I'm just making up that number or they could be graduated like the federal income tax brackets where you know depending on how much money you earn some of its tax at two percent three percent five percent all the way up to in the state of California it could be 13 all right but to keep things even I'm just saying hey let's just assume it's a five percent flat rate that's being charged at the state level on both of these and I'm just saying hey the income that was earned is a hundred thousand times the five percent so I'm I'm putting five thousand dollars there and I'm doing the same thing over here at the C Corp level you might be saying to yourself well Dobby why are you doing a hundred thousand um times the five percent it's because I'm gonna assume that you're taking the sixty thousand dollars out in the form of a dividend and not leaving it in the C corporation so in summary I know that was a mouthful you can see here the total tax is paid as an S corp are 22 746 dollars as a recap where is that coming from it's the six thousand one hundred twenty dollars between John's Social Security and Medicare tax and John's S Corp Social Security and Medicare tax it's the eleven thousand six twenty six in federal income tax that John has to pay and it's the five thousand dollars in state income tax that John has to pay so that total is twenty two thousand seven hundred forty six dollars at the C Corp level it's much higher it's thirty five thousand six forty one where is that coming from it's the six thousand one twenty for Social Security and Medicare tax for John and John C corporation it's the 12 600 that John C corporation has to pay because it's not a pass-through entity and the C corporation itself has to pay 21 taxes on the sixty thousand dollars it's the two thousand nine hundred twenty one dollars that uh which is the Forty thousand dollars that John paid himself that's flowing through the federal income tax brackets and then it's the capital gains taxes on the sixty thousand dollars worth of dividends um which equated to nine thousand again that's sixty thousand times the fifteen percent is nine thousand and then even more tax right um it's the five thousand dollars at the state level so when you add all that up it's thirty five thousand uh six forty one so this is why um most tax strategists would tell you you probably don't want to have your small business tax as a C corporation especially if you are um going to be needing this sixty thousand dollars and you're gonna pay it to yourself in the form of a dividend now some people get slick I will give a little caveat here they say well Navi if I don't need this 60 000 I can leave it in the C Corp account um and not take it as a dividend um and that's true and if you did that instead of nine thousand you would get zero dollars here right you wouldn't have to pay this um tax but as you can see the number is still higher you're still paying about four thousand dollars more in uh taxes okay and there's all sort of games that people play when they have that money in the C Corp some people try to lend it to themselves and do a loan and but I think it's just a bunch of garbage because at the end of the day there will be a Day of Reckoning where you do need to pull that money out of the business somehow or else eventually if you have too many too much accumulated earnings in that C corporation the iOS will catch on to that and they'll tax you on it anyway so they're on to your tricks so don't try to do that so in summary you know this is just a quick comparison on S Corp versus C Corp taxation for business earning a hundred thousand dollars in profit all right don't forget you can check my website again it's navymoronscp.com you can see the details about the course here not only do we cover basic things like this but we cover Tax Strategies right home office cell phone internet hiring minor children Health reimbursement Arrangements house savings accounts um solo 401K self-directing all these different things to save you thousands of odds and taxes so check that out again it's on my website navymorodcpa.com so I'll either see you in the course or in the next video

Channel: Navi Maraj, CPA

Views: 14,416

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Id: g97pMSgKqvY

Length: 12min 20sec (740 seconds)

Published: Wed Aug 23 2023