S-Corporation Tax Calculator [Spreadsheet]--When & How the S-corp Can SAVE TAXES vs. Sole-Proprietor

welcome back in this video i'm going over how and when the s-corp election saves you taxes to answer this question we're going to be looking at how s-corps are taxed how all of the tax calculation works in the s-corp and we'll be going through my s-corp tax calculator which is part of my business tax comparisons spreadsheet template and we'll look at some examples so that you can see how this affects your personal taxes and how you really know when it's going to be the right fit for you and your business to save taxes there's a lot of myths out there we can clear all that up in this video with my spreadsheet templates so let's get started if you're new here my name's amanda you're watching the business finance coach where i simplify all the technicalities of business because i believe that the world needs your business and that these things shouldn't be complicated they're the tools of a civilized society that are here to support you check out the description box below this video for links to all sorts of freebies and spreadsheets and courses that i offer now let's jump in to my s corp tax calculator and exactly how and when the s corporation election can save you taxes okay we're gonna use my spreadsheet template for a solo owner business so that we can compare self-employed taxes to s-corp taxes for the s-corp we have a business column and an individual column because we've got to account for any and all of what's going on in the business side and the personal side to have a really accurate comparison to the self-employed and same goes for the c corp but i'm covering c corp in a separate video so i'll be leaving that out of this comparison so in this example we've got a hundred and eighty thousand dollars in business income 50 000 in business expenses and you can see that gives us net business income when we're self-employed of a hundred and thirty thousand however in an s corporation we have to pay the owner as a w-2 employee and that is also a business expense that decreases our net business income you can see owner salary here so in this example i put in 80 000 for the owner salary which may or may not be applicable we'll come back to how we determine the amount of this owner's salary in a moment on that owner's salary we're going to calculate payroll taxes now payroll taxes are the same thing as self-employment taxes they're medicare and social security the calculations are just done differently when we're self-employed versus when we're an employee when we're an employee we split those taxes social security and medicare with the business so you can see that's what's calculating here under payroll taxes this is half of the payroll taxes the owner pays the other payroll taxes out of their w-2 and so we'll have that further down in the calculation but here for the business the business gets deduct their half of owner employee payroll taxes now that's not a benefit to self-employed because as we'll see further down in the calculation the self-employed gets to deduct for income taxes half of their self-employment taxes but you can see we have very different net income here our net income in the self-employed is 130 000 but in the s corp we got to add in our owner's salary and our payroll taxes so in the escort now we're down to 43 000 in net business income after we add in our owner's salary and our payroll taxes so we're already addressing two taxes that affect the escort as we can see on my business types cheat sheet the s-corp is a flow-through entity and that means that the business doesn't pay any taxes now we're going to come back to this topic of distributions right here we'll leave that alone for a second the first thing is what happens to this net business income if we come down here to our business taxes section which is after distributions we can see this is where that 130 net income from the self-employed business is paying its self-employment taxes but right here in our business for the s corp we have no business taxes being calculated but that doesn't mean that the owner isn't taxed on the net income from the business as a flow through that net income amount is taxed we've got to go down to our personal income tax returns section down here this is where the owner is being taxed on the net income from the business it flows through to the owner to be taxed for their personal income tax however the benefit of the s-corporation is that you don't pay self-employment taxes on this amount of course the owner is going to pay self-employment or payroll taxes on the amount of their wages so because of this benefit that there's no self-employment taxes on this amount that flows through because of that the irs cares about how much you pay yourself as a salary very much and it's therefore called this concept of reasonable compensation you must pay yourself reasonable compensation a lot of you know people on youtube or writing blogs will say that oh you know you get to pay yourself just 10 or 20 thousand dollars and take the rest out as distributions and avoid taxes that's not true either you must pay yourself reasonable compensation if you pay yourself a really low wage and then you have are taking up huge distributions that's definitely a red flag however it's certainly a valid strategy to make reasonable compensation as low as you can now i go into more depth and talk about court cases in another video on reasonable compensation but let's talk a little bit about how do you get reasonable compensation to be the lowest amount possible because that's where the tax savings are here i'll explain the concept of how you can number one choose the right amount of what is reasonable compensation for you as well as get that amount as low as possible so it depends kind of what your role is in your business but let's say you like many small business owners are doing lots of tasks in your business you're doing bookkeeping you're answering emails right you're doing all of these smaller administrative tasks which you might pay someone a lower wage to do so what you can do is literally calculate out all the tasks and time that you spend on those tasks and then look up what you could hire someone for to do those different tasks and document it so if you use average there's average pay companies i have a bunch of them listed in my course but you can find all sorts online that give you average pay rates or you could even look up job positions and what they say they're paying anytime you find a number and a description you want to save that as documentation for your reasonable compensation and then let's say you decide okay i spend five hours a week doing email i spend one hour a week doing my bookkeeping and so you're going to come up with a rate for all of the time that you spend in your business and then you can calculate that together for a total salary and that's one way to get your reasonable compensation as low as possible and as you can see i'm really emphasizing documenting it because that is really important when it comes to court cases and challenging the irs and if you're audited and especially if you have a low amount and regardless because you know 100 000 could be a low amount for someone who's making millions and so it's all in perspective right it's all about documenting whatever your number is and i also walk you through a checklist to test your amount and documenting this writing out you know the things you considered after you get that number and then any adjustments you want to make and actually writing out your justification that's also going to be really important to justifying the amount of your reasonable compensation and it can be a way to make the amount lower if that's applicable for your business and your current situation so the bigger your net income is here the more money you're going to save and that's all dependent on your situation you know if i use my business for a moment and as a tax professional i tend to be very conservative you know people on youtube make millions of dollars and so when i'm choosing my reasonable compensation that's something to consider right it could certainly be considered in some positions that whatever i'm making is reasonable for that position and that's part of the reason why there is so much documentation going into justifying your amount so we've covered three things as far as our escort calculation the business pays no taxes except for its employee payroll taxes it splits employee payroll taxes on employee wages for the owner who works in the business just like anyone who works in the business as an employee number two the net business income flows through to the owner's personal return for income tax but not self-employment or payroll taxes and that's where the tax savings is with the s-corp election and therefore we want to have the owner's salary qualify as reasonable compensation but be as low as possible because that's where our tax savings are and so we have to have enough net income in the business a bigger number you know 10 20 30 40 000 plus for this to be worthwhile because we are also gonna lose the 20 cubid deduction on the amount of reasonable compensation so when we're self-employed the cubid deduction 20 is going to qualify on the entire 130 000 passing through in this example but it's only going to qualify on the 43 000 in the s core so if we come down and we look at our tax comparison here we can see that s corp is saving us but it's only saving us twenty seven hundred dollars we're at 26 708 of total taxes and self-employed and 23 912 in the s corp now the reason i wanted to save this distribution section until last is because when you take extra money out of the business a lot of people say oh it's tax at preferential rates but that is not anything different and it's not even really true it's not the benefit you generally pay zero taxes on distributions from a flow through business tax entity as long as your basis in the business does not go below zero if your basis in the business which is your investment in the business so basis is made up of the money you put into the business and then decreased by money you take out notice that you're taxed on the net income of the business regardless of the amount you took out so that amount also each year increases your basis and then when you take money out as distributions it decreases your basis and so as long as that basis doesn't go below zero those distributions have no tax if your basis does go below zero you're taxed on that amount and that increases your basis back up to zero so we can see when we add in thirty thousand dollar distribution we are taxed at forty five hundred dollars so that would be in the 15 tax rate and then those taxes will be added in down here and you can see adding that in pushed our taxes up in the escort but like i said that's not normal the general rule is distributions won't be taxed because that's how you get the money out of the business and that's also why you don't have to worry about leaving money in the business and avoiding paying taxes on it you don't have to worry about that at all and hopefully now that's crystal clear so let's look at another example let's say we lower our total sales in the business to 80 000 and we had let's say forty thousand in expenses so we're taking home a net of forty thousand dollars when we're self-employed we'll need to change our reasonable compensation in the s corp and it's going to have to be a little less than 40 000 unless we're contributing money to so that we can pay ourselves which we want to avoid doing that now let's say you decide that your reasonable compensation in this type of situation is actually eighty thousand dollars well technically that goes into arrears which means next year you would need to catch up on your salary and pay not just the 80 000 but 80 000 plus the 43 that you didn't pay yourself the year before so in this example i put in 37 000 as reasonable compensation the payroll taxes are being deducted and that brings us to a hundred and seventy dollars of net business income so if we scroll down to look at the taxes come down to our total tax summary we can see we're at 6200 in the self-employed business and 6900 in the s corp so we're paying about 700 more in this scenario but that's with the full qubit calculation we can take out the qubit and see where we're standing which in that case the s corp is saving us nine dollars and that of course is the scenario that you really want to avoid so let's look at a situation with more income and more going on let's say we have 350 000 in income let's say we have 90 000 in expenses and let's say in this type of scenario that maybe our reasonable compensation is a hundred and thirty thousand so in this case we have 260 net in the self-employed situation and 120 net in the escort when we come down to our tax summary i'm currently not including the cubid although we're still below the cubid threshold for the phase out so we'll add in the full cubit amount and so when we get down to our tax summary we're at 53 000 when we're self-employed and 56 000 in the s corp so we're actually saving money in self-employed but that's with the full cubit on if we take the cubit off then we are saving a few thousand dollars in the s corp now so calculating qubit can be quite critical and quite extensive so i do have an entire cupid calculation and i'll have a video going over this as well because just like anything else in taxes it's not very straightforward and it really depends on the details of your situation to calculate that amount lastly let's just check out a really advantageous situation where the s corp wins so if we change our 130 000 of reasonable owner salary down to 60 thousand dollars then we're gonna save medicare and social security taxes on seventy thousand dollars so if we check out the tax summary we can see here that we're down to 52 000 in the s corp and we're at 65 000 in the self-employed so now we're saving a good 13 000 in taxes the other thing we need to talk about when it comes to the s-corp as a strategy for saving taxes is that even if it saves you three thousand dollars we need to look at is it really still going to be worth it so down here i have another section of just some other costs to consider along with the s corp because there are extra steps to take and you're either going to hire someone or do them yourself certainly i have now added instructions for nearly all of these things with between my courses and my youtube videos so you do have that to go on and there are so many people setting people up incorrectly in the s corp so it is kind of you kind of need to get the information regardless to know that it's being done right or if you're paying higher fees and you're really confident with the people you're hiring that's also great but here's some things you need to keep in mind one thing i didn't even go over in the comparison here because the self-employed tax write-offs are things you get to easily take when you're self-employed but once you elect s-corp status you as an employee can't take deductions for your home office and driving a personal vehicle instead you have to set up an accountable reimbursement plan and i have templates and i teach you how to do that in my courses it's just extra steps and then you have to be sure to actually submit your documentation to your business and reimburse yourself periodically some other things to consider is you have to actually pay yourself as a w-2 employee which is a bit of a cumbersome task you know you've got to calculate payroll taxes you've got to follow state payroll taxes you've got to withhold and remit those to the irs generally quarterly you got to file the quarterly tax forms so i highly recommend a software that i teach you how to use and i they are not all equal as far as payroll software this one is by far the best and i'll include my link if you want me to get credit um if you want to check them out but i spent a lot of time researching them i recommend them and get credit because i love them so much i really looked for a solution and i find them to be far above the other options it's 39 plus a fee per employee per month however they also have great features like you can get access to an hr lawyer if needed for just like a hundred dollars you can upgrade for one month and then go back down and hr lawyers that type of advising can be quite expensive for small businesses so that's an extra perk that they offer you can also set up health insurance 401k match and other fringe benefits through them which is normal but they just do a great job and they're incredibly user friendly and i think they're great now if you bach at 39.45 a month then i would really consider if this is going to be worth it for you because again it shouldn't be that close of a call otherwise it's not worth it it should be a bigger chunk of money where you're confident that investing a few thousand dollars here and there to facilitate this is worth it so that's all for how and when the s corp saves you taxes i think we've covered everything and a few examples here and how to get your reasonable compensation documented as low as possible which is the key to saving taxes and i hope you can see how this really depends on your situation in your business to save taxes with it lastly if you want to get a hold of this spreadsheet template or the married version or the multi-owner non-related version check out the description below otherwise if you enjoyed this video give it a like so that youtube knows i'd love to hear your questions in the comments below or it answers your questions or if you still have questions on the s corp definitely let me know about it i have a bunch of videos in this series of videos so be sure to check them out if you haven't already and otherwise i will see you in the next video bye

Channel: Business Finance Coach

Views: 38,498

Keywords: How are s-corp taxes calculated?, How an s-corp can reduce your self-employment taxes?, How does an s-corp save you money?, Does an s-corp owner have to pay a salary?, when and how does the s-corp save taxes, S-corp tax saving strategies, S-corp tax spreadsheet, S-corp tax savings calculator, S-corp tax example, How are s-corp distributions taxed, How does the s-corp effect personal taxes, Do you pay taxes on s-corp distributions?, s corp vs sole proprietorship tax calculator

Id: UqujNM4IkFA

Length: 21min 24sec (1284 seconds)

Published: Thu Nov 19 2020