S-Corporation Tax Benefits: $95,000 Saved By Switching | S-Corp Taxes

what are the tax benefits of an s corp well today i'm going to answer that question and more but spoiler alert we recently saved our client over 95 000 in taxes of making one small change you guessed it switching her from a llc to an escort and if you're still being taxed let's say as an llc instead of a s corp you may be giving uncle sam a bit more than you have to so if you want to know more about how s clubs work and all of the s-corp tags benefit that put money back in your pocket you're in the right place now i have to warn you that even with all of the benefits that escort provides they're not the right choice for everyone so make sure you watch it to the end of this video because i'll be touching on what factors determine if an escort is right for you one more thing the information in this video is solely for educational purposes so you're going to want to consult with your specific tax advisor or legal advisor for your specific business okay ready to talk s corpse let's go [Music] hey i'm quran from life accounting where we help businesses increase profit and decrease taxes via smart accounting and bookkeeping so we're not going to waste any more time and we're jumping right into the benefits but here's something i want you to remember an s-corporation status is a tax designation and you can't incorporate it as corp but you can't elect to be taxed as one all right tax benefit number one employment tax savings you see owners of s corporations get to receive both the salary and dividend payments aka distributions from earnings of profit now this is a huge deal and let's unpack why within escort you only pay self-employment taxes which is 15.3 percent currently on the salary paid to the owners all right well why is that important well remember owners of s-corporations get to take both the salary and dividend payments while your salary is subject to self-employment tax your dividends are safe from self-employment tax so quran you're telling me i can pay myself only one dollar that's subject to self-employment tax and then pay the rest in dividends not quite you see the irs is hip to such thinking and requires that your salary is reasonable and aligns with your actual responsibilities of the business now the easiest way to figure out what is reasonable is to use comparable salaries for your job position so as an example if you are a doctor that owns a practice and most doctors in your area make a hundred thousand dollars then it wouldn't be reasonable to pay yourself only thirty thousand dollars other factors that determine a reasonable salary are experience level comparable salary geographic location and economic conditions even if you can't get away with paying yourself a dollar in salary the tax savings can still be tremendous let's look at an example and truly paint a picture about switching to a s-corp and changing how you receive income can lead to massive tax savings say you are a customer support rep for your company and you make an income of a hundred thousand dollars in gross earnings if you choose to be a loc tax as a normal partnership your entire 100k will be taxed at the self-employment rate of 15.3 percent before taking out federal state taxes you're left with 84 700 but if you were to elect to be taxed as a s corporation and take a salary of 40 000 in the rest and distributions only the 40k salary would be subject to self-employment taxes leaving you with eight hundred 93 eighty dollars before taking out federal and state taxes or nine thousand one hundred eighty dollars more in your pocket simply because you chose to be taxed as a s corporation not bad right note that that's nine thousand a hundred eighty dollars more in income even after you take out federal and state income taxes in short s-corps can greatly reduce your self-employment tax obligation by only paying self-employment tax based on your salary and not the total business income alright if you made it this far go ahead and like this video right now to let me know you are enjoying it and as a bonus it helps others find this video on youtube so it's greatly appreciated also don't forget to subscribe so you don't miss one of our videos that can help you increase your profit and pay less in taxes alright tax benefit number two is pass-through income as the owner of an s corporation business income credits and losses get passed through to owners instead of being attacked at both the corporate level and at the shareholder level essentially avoiding the double taxation that c-corporations are subject to this is similar to a llc now speaking of losses if your s-corp loses money those losses are then deductible on your personal income returns so for an example if you are the sole owner of an s corp and the business suffered a loss of ten thousand dollars you'll be able to take a ten thousand dollar deduction on your tax return meaning that loss can offset any other income that you have received all right tax benefit number three low risk of audit since 2010 s-corp audits have dropped over 34 according to the irs audits for s corps in 2018 were 0.22 to put it into perspective that is one in every 459 s-corps that are audited which is extremely low and the extra benefit of s-corps asset protection one other benefit of a s-corporation to be aware of is that s-corps provide owners limited liability protection just like an llc would this means that an owner's personal assets such as homes cars and cash are protected against lawsuits for example all right so how do you know if s corp status is right for you and your business you're going to want to answer these three questions number one do i make enough profit for s-corp status to be beneficial if after paying yourself a reasonable salary you have only two thousand dollars to pay yourself as a distribution is likely not worth the added effort and extra paperwork to be treated as an escort remember the biggest benefit of an s-corp is the ability to not pay self-employment taxes on your distributions if you have minimal distributions then you won't receive major benefit question number two do i plan to withdraw most of the profit from my business if you plan to take most of your profits as a distribution the escort status might be right for you alternatively if you plan to reinvest most of your profits back into your business leaving very minimal profit s-corp status likely does not make sense question number three does my state recognize s-corps you see s-corps aren't treated equally by every state states such as new hampshire tennessee and texas ignore s-corporation status and tax them as with that said you will want to check with your cpa or tax professional to determine if s corporation status is for you now if after answering those two questions you decide to elect to be taxed as the s corp here's how to do it first let's look at the s-corp eligibility requirements there must be a maximum of 100 shareholders it must be a u.s company the shareholders must be u.s residents and there can only be one class of stock if you meet the eligibility criteria here's how to elect to be a escort if you're electing s corp status as the llc you will need to file form 8832 entity classification election with the irs by march 15 for it to take effect in the current year if you're electing s corp status as a c corporation you must submit form 2553 election by small business corporation to the irs by march 15 for it to take effect in the current tax year okay so those are the major tax benefits of an escort here are the major points to remember s corporation status is a task designation so you can't incorporate as a s-corp but you can't elect to be taxed as one s-corps only pay self-employment taxes on salaries paid to the owners not the dividends or distributions business income credits and losses gets passed through to the owners of an escort s-corps have a very low chance being audited by the irs i hope you found this video useful and interesting if you did please go ahead and like this video and comment below if i did a good job explaining also don't forget to subscribe to our channel so you don't miss out on videos we're putting out to help you grow and manage your business i'm quran from life accounting until next time

Channel: LYFE Accounting

Views: 29,758

Keywords: s-corp tax benefits, s-corp taxes, s-corp tax advanatges, s corp tax benefits, tax benefits s corp, s-corp for tax benefits, s-corporation tax benefits, s-corporation tax advantages, s-corporation benefits, s-corporation advantages, tax benefits s-corporation, s-corporation tax deduction, s-corporation for tax benefits

Id: ZDbAK35uOmc

Length: 9min 47sec (587 seconds)

Published: Mon Feb 08 2021