Small Business and W-2 Job | Does LLC or S Corporation still make sense?

Should your business be taxed as an s-corporation  if you also have a job where you receive w-2   income? That is going to be the topic of this  video and here's a quick spoiler alert. Your   s-corp could be costing you money instead of  saving you money in the following sort of scenario   that we're going to get into in the video so in  order for me to explain this I first will have   to touch on a few things so I'm going to discuss  what are your taxes that you pay as an employee   working you know for an employer somewhere and  we're going to compare that to what it's like or   what taxes you pay rather when you have a business  that's taxed as a sole proprietorship and then   we're going to bump that up against what taxes you  pay if you have a business tax as an s corporation   and then we're going to talk about what happens  when you're both an employee working somewhere   and you own a business and the impact of having a  high-paying w-2 job combined with an s-corporation   together so if this is your first time  watching my name is Navi Maraj I'm a CPA   that helps real estate professionals around the  country save thousands of dollars in taxes so   that's real estate agents realtors and brokers  but if you don't have or if you're not a real   estate professional stick around this is going to  apply to your business as well so let me just lay   the foundation briefly so I recently created a  video where i talked about four reasons in which   you should not be taxed as an s corporation and  um just as a quick uh sort of recap those four   reasons were number one was you don't quite  make enough profit in your business for the   s corporation to make sense the second one was you  have large amounts of w-2 income and you also have   a business and that's the topic of this video so  we're going to explore that further in this video   the third one was that you live in a state  that doesn't recognize the s corporation   or perhaps taxes it quite heavily um and  the fourth reason was you shouldn't have   passive income within an s corporation so  specifically I'm talking about owning rental   real estate where you have rental income that  shouldn't flow through an s corporation and so   again this video is taking a deeper dive into the  second reason which is you've got high amounts of   w2 income and you own a small business so in order  for me to explain this as i said I'm gonna have to   um talk about quite a bit um here's sort of  like a warning you know I'm gonna try to my   best in all my videos to uh explain something  in a very easy way for everyone to understand   but this topic is a bit challenging but I've  laid it out in the best way i think possible   to explain this scenario so um if I've covered  a topic in depth already that sort of in this   video I'm going to either link that video so you  can get a better and deeper understanding of what   I'm trying to explain there if not I'll do my  best to sort of recap it here as I'm going along   so let me just explain the taxes you pay as  an employee okay so I'm saying you don't have   a small business you work for an employer and  you're earning um you know w-2 income so what   taxes do you pay so in this scenario I'm saying  that you have a quite a high salary it's one in   this example 142 800 and I picked that number  for a reason and I'll explain why in a second   so what taxes do you pay as an employee  well as an employee working for an employer   you're going to pay social security taxes that's  on your paycheck as FICA taxes that's 6.2 percent   right so the 6.2 percent times this amount is  88.50 850 you also pay Medicare taxes of 1.45   so again the 142.8 times the 1.45 is this  2070. so in combined in FICA taxes you paid 10   920 now what you don't realize is when  you work for someone else uh your employer   who you work for is also um paying into social  security and Medicare for um for you i should say   only for you but they have to pay these taxes  okay and so um your employer is paying this   but you don't really see that as part of  your paycheck on your paycheck you just see   these contributions because these amounts  are being withheld from your gross pay   and being put towards social security and Medicare  for you okay now also you know when you're an   employee you'll see other withholdings  from your paycheck and those are usually   uh federal income tax that's what fit is here and  state income tax and I'm calling that sit right so   you're going to pay your federal and state income  taxes and those are going to be withheld from your   paycheck based on you know how you completed  your w-4 form when you started working there   dictates how much they're going to withhold from  your paycheck and you know depending on what tax   bracket you are in uh it'll be anywhere from 10 to  37 of your income is withheld from your paycheck   at the state level for state income tax if you  live in Florida like I do then we don't have   state income tax so you don't pay anything but  if you you know live in a state like California   you might pay upwards of 13 again depending  on what tax bracket you fall into so all   right that's explaining what taxes you pay  as a employee working for an employer now   let's separate that for a moment let's say you  didn't work as an employee anywhere and you had   a small business right uh what uh taxes do you  pay as a sole proprietor so a couple things i   want to note is well i mentioned a moment ago that  uh i chose 142.8 i did so for a reason is because   this is what's the what the irs calls your wage  base in the year 2021. so what that means is   after you make your first 142 800 any money  you make after that you don't have to pay   social security taxes on so the employer doesn't  and you don't either as the employee right   so if you continue to earn more and more money  you wouldn't pay any more social security but   you would continue to pay Medicare taxes okay um  so let me now transition to you know you're not   an employee and you own a small business  so you're taxed as a sole proprietorship   so in this example I'm saying you have the same  amount of money but in profit right so you might   have actually had revenue of let's say a hundred  and eighty two thousand eight hundred dollars   and then you had forty thousand dollars  of business expenses like you know as I've   taught my other videos hiring your children and  mileage deduction and what have you which brings   you down to 142.8 okay so your sole proprietor  with 142 800 of profit in your small business   what taxes do you have to pay um well when you're  a sole proprietor you're now the employer and the   employee right so you have to pay all of this you  have to pay the 6.2 on the employer side of things   the 1.45 percent for Medicare on the employer side  of things and again you pay those amounts as the   employee right so if you add this up it's close to  you know 22 000 of taxes that you have to pay now   you know there are some deductions it's a  small amount that you get for some of these   self-employment taxes so you won't pay exactly  this amount but it's fairly close to this okay   and let me just say something real quick if you're  a tax professional watching i understand that you   pay a little bit less than what I'm uh explaining  here but I'm trying to keep this video simple for   the average viewer i also know that in a moment  the additional Medicare tax is going to kick in   but again this is for the average viewer which  is your average small business owner watching my   channel so okay so now you understand that you  have to as a sole proprietor so you could be an   LLC tax as a sole proprietorship or you could  just be doing business as you know john doe's   landscaping you're going to be taxed as a sole  proprietorship you got to pay both sides of this   okay and so if you add this this this and this  this all equates to 15.3 percent and if you do   the math uh 142 800 times the 15.3 percent gets  you this number okay so uh in terms of income tax   you're going to pay the same thing right you had  142 800 in profit you're going to pay income tax   on that profit but you're also going to pay you  know the what's called self-employment taxes   as a sole proprietorship see I don't know why the  IRS really does this but when you're an employee   they call these um FICA taxes but as soon as  you start your own small business it's not   called FICA taxes anymore it's called  self-employment taxes okay so let me now   explain what happens if you have a small business  and that's all you have is your small business   and you want to you know form an s-corporation  to use the strategies that I've kind of taught   on my channel about how to save a bunch of money  in self-employment taxes when you're in s corp   so in this example again you may have had a  hundred and eighty two thousand eight hundred   dollars in revenue you had about forty thousand  dollars worth of expenses and so um you're left   with a profit of a hundred and forty two  thousand eight hundred dollars in your s   corp now again the s corporation is a strategy to  save you money in self-employment taxes so what   would happen is with this profit you'll split off  the profit into two buckets one will be a salary   that you pay yourself and the other you'll take  as a distribution and so what's happening here is   as an s corp you are the employer still but  you're going to pay self-employment taxes on   the portion you paid yourself um as a salary  so in this example I'm saying let's take 40   of this number and pay you a salary the  60 will take um as a distribution um   uh from your s corporation and so you'll notice  here that the distribution that you take doesn't   pay self-employment taxes at all which is great um  and the salary portion does have to pay these uh   taxes again so now he now with the s corp you're  now the employer right and you're the employee of   an s corp so you're gonna pay uh 57 000 and change  times to 6.2 percent in the employer portion of uh   social security taxes same kind of thing 57 grand  times 1.45 and so you're paying that amount in   Medicare taxes on on the employer side then you're  also the employee so you're going to pay those   same amounts as the employee right so this is why  people talk about the s corp so much right and so   you know if you have a business making this kind  of profit you know as a sole proprietor you got   to pay you know 22 grand in self-employment  taxes whereas here as an s corp you only have   to pay you know almost nine thousand dollars in  taxes right so you know you can get uh a twelve   thousand dollar you know tax savings by you  know being taxed as an s corporation versus   a sole proprietorship and so you know it's quite  obvious that you would probably want to be taxed   this way so that's why there's so many videos  promoting the s corporation all over YouTube   and a bunch of articles written about it  right if given the scenario to pick from this   versus this you know your federal income tax and  your state income tax is the same right no matter   which one you choose but when it comes to these  self-employment taxes well I'd rather pay you   know the nine thousand dollars versus the twenty  two thousand dollars and I'm sure you would too   but what they don't explain in those videos is how  does this all work together um you know sort of in   conjunction with large amounts of w-2 income right  and so now what I'm going to explain to you is   what happens when you have a high-paying job  like this you know this is a dollar amount   that you're earning and you also have a  sole proprietorship type business okay   well what happens here is as i mentioned  that's why i kind of touched on the wage base   earlier in the video is that once you hit this  amount you don't have to pay into social security   anymore right so you're not gonna pay  this almost nine thousand dollars here   or this nine thousand dollars here you'll just  pay sort of the Medicare portion right and so um   you get a lot of that refunded back almost all of  it will get refunded back not you know the full 22   000 but specifically the social security  is going to get refunded back to you   but so what happens though if you are an  employee somewhere earning a high wage   and you also elect to have your business  taxed as an s corporation well what happens is   you'll get the employee portion refunded  back to you when you file your tax return   but what you won't get refunded back to you  and the the point i want to make here is the   employer portion of this social security taxes  you never get that back that's that's gone okay   so in this example I'm saying hey that's three  thousand five hundred forty dollars that you're   never gonna get back whereas here you're gonna  get these large chunks of money back okay um so   let me summarize what my point is you know if  you're a high wage earner having a side business   you know taxed as an s corporation is likely  costing you money not saving you money so   in this example the s corp will cost you three  thousand five hundred and forty dollars but keep   in mind you also have additional costs associated  with the s corporation right so the tax prep fees   for an s corp you know if you're working with a  competent CPA or accountant they might charge you   almost a thousand dollars to prepare this tax  return and again i mentioned that you're gonna   have a a payroll company since you'll be issuing  payroll to yourself that might cost you about 500   bucks for the year right so when you add all that  up your s-corporation could be costing you about   five thousand dollars in in additional fees  or taxes each year right so um this happens   all the time more than you think I know some of  you watching this and you're like hey I don't   have this issue I don't have high w-2 income  but let me give you some examples this could be   here a physician you know working at a hospital  earning a high salary but they also do what's   called moonlighting on the side and they earn  other income that's paid to them via like a 1099   they're an independent contractor and so they  might elect this strategy but it's going to cost   them money in the long run another example is you  know you have a high paying job and you sell real   estate on the side that might be an example where  this is uh happening to you or you could be an i.t   consultant generally i t consultants or engineers  for example have a high w-2 income salary and if   they also have a small business and they you  know their taxes and s corporation it may not   be making sense for them right so um does the s  corporation ever make sense when you're also an   employee right that might be a question that you  might have right and so the answer is yes you know   if your w2 wages are i would say less than about  100 000 then this is probably not going to be   an issue for you and you can you know continue to  be taxed as an s-corporation or if your wages are   higher than the wage base you know 142.8 and  you have a very very highly profitable business   like for example let's say the profit was maybe  250 000 in profit then believe it or not the s   corporation actually starts to make more sense for  you because there's another type of tax i didn't   put in here call like the additional Medicare tax  and you know topic for another day but basically   um that starts to make sense again okay so the s  corporation uh might make sense if you have a high   wage um and you have a high amount of profit in  your business as well um i just want to you know   sort of tell you one more time that the  federal income tax and the state income   taxes are going to be the same across all of these  scenarios right the topic of this video is really   the you know FICA and self-employment taxes  I explained earlier um so i hope that was   informative I know it was a lot of information  for some of you especially if you're hearing this   for the first time but the takeaway should be  hey there are scenarios where the s-corporation   doesn't always make financial sense right and so  in this video in particular the scenario was if   you have w-2 income and you work for someone and  you have a high salary of 140 000 or more and you   also want to tax your business as an s corporation  it may not make sense that's the big takeaway here   so again i plan on producing the other two  videos regarding those remaining two reasons   why you shouldn't be taxed as an s corporation so  make sure you subscribe so you can catch those as   they are released and if you'd like to contact  me and if you're watching this on YouTube all   of my information is in the description below if  you're watching on some other social media channel   I'm sure if you click on my profile or my bio  or what have you you can find me or if you   can just visit my website it's navimarajcpa.com i  appreciate all the comments and feedback I've been   getting some of you have been shooting me emails  do subscribe and I'll see you in the next video

Channel: Navi Maraj, CPA

Views: 28,464

Keywords: LLC, Sole Proprietor, Sole Proprietorship, Corporation, S Corp, S Corporation, C Corporation, Tax Difference, Single Member LLC, Multi Member LLC, What is the difference between an LLC and S Corp, What is the difference between an LLC and S Corporation, PLLC, What is a LLC, What is a Limited Liability Company, What is a S Corp, What is an S Corp, LLC vs Corp, Sole Prop vs LLC, Start a business, How is a LLC tax, Legal difference between LLC and Corporation, W-2, Wage Base

Id: 1kufkdonBEU

Length: 18min 21sec (1101 seconds)

Published: Sun Dec 27 2020