how profitable does your business have to be in order for the S corporation to make Financial s what do I mean by that I'm saying do you need to have a profit of $40 or $30,000 like some tax gurus on YouTube would tell you or do you actually need a much more substantial number like 75 to $100,000 in profit in order for the ESC Corp to make Financial sense meaning well the tax savings offset the costs that are involved well that's exactly what I'm going to cover today in this video and so without further Ado let me go ahead and share my screen and I've created some spreadsheets here I'm going to talk you through the analysis so that you can make the right decision for yourself so I know you see a lot of text on your screen here don't worry I'm going to break this all down for you uh let's start with what's going on with these tabs here I've got a comparison at $75,000 in profit as well as a comparison at $100,000 of profit and I'll show you both first I'll break down the $75,000 I'll kind of go a little bit slower there then it will bump it up to 100,000 and you can see how the numbers change and how much profit you might need in your business in order for you to make the es Corp election for your business so what we have here is your business taxed as a sole proprietorship and this could even mean that you have a single member LLC um as long as you didn't make any type of es Corp election for that single member LLC then it will be taxed as a sole proprietorship so in your business you made $100,000 in Revenue right that's $100,000 in sales he had 25,000 in expenses and a business profit of $75,000 this does not apply right now your reasonable compensation because as a sole proprietor you the business owner do not pay yourself a salary what happens though on the $75,000 of profit is that you are to pay social security and Medicare taxes as a sole proprietor this is called self-employment taxes it's roughly 15% or so of your uh business profit uh if you want to do that calculation yourself it's more like 4 % but uh you can see that it's $10,527 that you pay in Social Security and Medicare taxes your federal income tax if you take uh $75,000 and let's just assume you're a single taxpayer okay you're not you're not a filing you don't have a filing status of married filing jointly your filing status is just single well when you throw the $75,000 through the various tax brackets and you also pay uh some other uh types of tax taxes that are involved your income tax is $5,151 so what's your total tax it's $1,738 that's the combination of the Social Security and Medicare taxes as I said before that's called self-employment taxes when you are a sole proprietor as well as the income taxes so $1 15,73 now if you listen to a lot of people on YouTube including myself in previous years I've said that hey maybe a lower number would be okay then you might make this mistake you might make $75,000 of profit or even less you might make 30 40 50,000 and make this decision and it'll be a mistake for you let me show you why as an S corporation all these numbers stay the same up here okay but now what you need to do is you need to pay yourself what's called reasonable compensation and so in my example I'm being very aggressive and just saying that your reasonable compensation would be $37,500 so what does that mean that means that you have to pay Social Security and Medicare tax on the 37,500 um this is usually 6.2% and this number here is 1.45 this is the Social Security this is the Medicare amount and so you have to pay that as the employee and then your employer which is your business has to pay it as well 6.2 and 1.45 for a total of 15.3% so if you're trying to recreate this math it's the 37,500 times 15.3% which will get you $573 okay now that means you saved $ 4,860 when you compare it to the sole proprietorship right this minus this is a tax savings of$ 4,860 but what about the income tax well you've got to pay a little bit more income tax the reason being is although you're still single what's happening is you're getting a reduced qualified business income deduction as well as you're not receiving what's called an adjustment to income for the self-employment taxes that you paid so your total taxes are 12,854 still a savings when compared to the sole proprietorship of $2,885 now that's it that's where some people will stop when they're doing this analysis but what you also need to consider are what are your fees involved for running your business as a nest Corporation so that's what this section over here relates to okay let's go through this analysis so I'm saying when you're a solo proprietor you don't have to worry about payroll meaning you don't put yourself on payroll and give yourself paychecks or anything like that you just take what's called like an owner draw when you're an es Corp you're going to want to run payroll and you're not going to want to do that yourself you're going to want to hire a company to help you with that and on an annualized basis that fee is going to be around $600 that's about 50 bucks a month okay you'll also have to pay federal unemployment taxes and usually State unemployment taxes I went very aggressive here and put $231 as the cost some states it could be closer to $400 or $500 bookkeeping and advisory you could change this if you want but I could tell you that this is a extremely conservative number I'm saying here that your bookkeeper or your Tax Advisor you're going to need to check in with them every once in a while and so perhaps your bookkeeper might charge you $100 more a month so annualized that's $1,200 for the year I guarantee you your fee is going to be higher but I just wanted to be very conservative with my estimate tax prep fees $1,800 I'm saying this this is the tax prep fees for preparing your S corporation tax return as well as your uh individual tax return might be 1,800 bucks and that's also being somewhat conservative so your total costs are 3,831 if you compare that tax prep fee with you as a sole proprietor I could see that being $750 maybe some people will charge you more some people might charge you a little bit less but I think this is about the right amount so your cost when you compare the es Corp of 3831 to the so prop of 750 you could see that the es Corp is going to cost you around $3,000 more to operate so now what is your net savings well 381 in cost your your savings was 2885 so you're in the whole 196 Even If you eliminate this bookkeeping and advisory fee you're still only saving $1,000 and so I don't really think this is worth it for you to do this okay now by the way if you're listening to me do this analysis and they like who's this guy why should I even pay attention to him my name is na'vi marage I'm a certified public accountant and tax strategist and all I do is help people for free on social media uh getting them to better understand Tax Strategies and how to implement that I also do this through a course which you can find on my website or you can click on the link in the description below my website is Navi Morad cpa.com and through taking that course you're going to learn how to do the bookkeeping and advisory yourself so you don't have that out of pocket cost you'll also save yourself money by implementing other strategies not just the S corporation but there basically what I do is I convert people who don't know anything about small business and their taxes and bookkeeping and all that stuff and convert them into tax Savvy entrepreneurs who save thousands of dollars each and every year in taxes it's not just a one-time tax savings it's through multiple years that you save this amount of money right and so you can check that out again the details are on my website Navi Morad cpa.com or click on the link in the description below however let's now this analysis for $100,000 in profit because as I said I myself when I first started made some videos saying hey maybe 40 or $50,000 of profit and the esort makes sense um but no it it really doesn't you need a lot more profitability to your business for this to really make Financial sense for you so I'm not going to run through all the numbers like I did last time we've got a $100,000 of profit here right in the soul prop and the escort you could see the taxes being paid 14,130 in self-employment tax versus 6,120 in FICA taxes that's Social Security and Medicare okay I did bump up the salary a little bit the reasonable comp to 40 Grand so your tax savings when you look at Social Security and Medicare alone is $810 however now we have to look at your federal income tax paid same things apply like they applied before meaning you've got uh you're you're losing out if you will on the adjustment to income for your self-employment tax paid as well as as a reduced qualified business income deduction and so your total taxes paid are 17,745 versus 24194 a savings of 6,448 again you have those costs we went over before in the $75,000 example they're the same I haven't changed them so not going to go through all that again and so your net tax savings is 3,367 if you want to take my course and you learn the bookkeeping and advisory and all the tax ready to implement them on your own well now your tax savings is more like $456 right but if you're paying someone to do that work it's a bare minimum of $1,200 a year for someone to help you with the bookkeeping I shouldn't say help you with the bookkeeping bookkeeping is going to cost you anywhere from 300 on up uh per month but um the additional cost from a sole proprietorship to an escorp is probably 100 bucks a month at a minimum so as you can see here this is when the es Corp starts to make Financial sense right at Le with the sole proprietorship example you got more money of yours going into Social Security and so you might get a a better benefit from Social Security when it's your time to collect whereas with the es Corp the amount that's getting paid into Social Security is based off this 40 Grand amount not this 100 Grand amount like it is with the sole proprietorship so that's something else that you need to factor into your equation with this escorp tax savings of 3,367 are you going to invest that money into a retirement account if not you know you could argue that the solle proprietorship would still be better off for you in the long run if you'd like to see more examples of this and much greater detailed analysis I have another video that will actually compare the soulle proprietorship the es Corp the partnership and even a C corporation if you're wondering what entity would be best for you from a tax savings perspective you can check that video out next it's coming up it'll be here in the corner in just a moment but in the meantime if if you enjoyed this video please do like and subscribe to the channel and I'll see you either in the course or in the next video [Music]
