A funny thing happened the other day while emailing back and forth with a colleague.
She asked me about the benefits of being an S Corp for a couple of bookkeeping clients of hers, and of course my sense antennae went up.
You know that sound power lines make on a foggy humid day?
You had me at S Corp. My favorite work thing.
People ask because they hear from other people, or get the outline of an idea from online research, that it’s a really cool thing to do if you’re a small business.
I’m here to tell you that it is. A really cool thing to do.
But, not for everybody.
Why?
Because if you’re just starting out, and you’re still able to write off most of your gross revenue in expenses, you don’t pay enough self-employment tax to make it worth it.
But once you have the train up to steam and chugging powerfully down the tracks, then you’re talking significant tax savings.
So anyway, she had asked because a couple of people she knows appear to be making enough to consider doing it, and had asked me for “an S Corp resource.”
Again with the prickling antennae. Of course I have one! In fact, I have this very cool course that will go over all the good stuff in loving detail.
Alas, she was looking more for something “in writing;” I imagine a brief overview of the best reasons why.
Well, that gave me an idea, by golly!
Here you go…
The Best Reason to Become an S Corp
A question: have you been filing and attaching Schedule C Business Income with your Form 1040? Yes? Well, you pay twice as much tax, sometimes even more, than you should be!
The adjustment to gross income on the employer portion of Self-Employment (SE) tax is a joke! And a pretty damn bad one at that, because nobody’s laughing. I know I’m not!
You’re paying almost ALL of the 15.3% taxed to both employer and employee yourself as a solopreneur, just for FICA (think: Social Security and Medicare).
This is over and above and in addition to what you’re already paying in income tax. That’s right, when you add it all together, you’re potentially going to pay over a quarter of all your net income in tax.
How do you know if you file Schedule C? Look at your last tax return. It will be after the 1040 pages and Schedules 1, 2, etc.
Then keep looking past that a little, because you also have Schedule SE for that unholy extra tax.
If you have a good year, and despite your best efforts the lowest you can get your reported net income from business is $100,000, you WILL pay $14,130 in self-employment tax.
That, ladies and gentlemen, is before the first penny of ordinary income tax.
That is the best reason to become an S Corp. Because more than half of that goes away, and you pay the rest just like an employee over time, so it doesn’t hurt all at once anymore.
The way it works is that you take a “reasonable compensation,” which is a W2 wage subject to withholding and payroll tax just like any regular employee, but for just a little under half of your projected net income.
Are you with me so far?
As an S Corp Officer-Employee of a solopreneur real estate company with a projected net income of $100K, as an example, let’s say I’m advising you to take a wage salary of $45,000/year, on which you’ll pay a total of $6,885 in FICA.
If you work it out on your calculator, you’ll find that’s exactly 15.3% of the $45,000/year salary.
What’s the difference between $14,130 and $6,885? The answer is:
$7,245. That is your savings, money you would have owed in your previous sole proprietor life, but now no longer do.
They don’t teach you this stuff in high school, but they should, am I right?
I hope this has been helpful because I sure meant it to be.
If you have any further questions, or want more information here are a couple of things you can do:
First, go to Solopreneur S Corp $avings to learn more about how you can do this entire process yourself.
This is a course that teaches the why, what, and how to save yourself this money every year you’re in business.
Also, if you know you’d like to talk to someone about having this all done for you, plus a transformation of your entire business wealth-building strategy (think CFO on anabolic steroids!), then let’s do this!
Going here will take you to my calendar.
Why pay “Uncle Sugar” (my pet name for the Ultimate Sugardaddy of America, USA) a penny more than he deserves?
A little knowledge is a dangerous thing. What will you do now to put this money back into your (and your family’s) pockets?
I’m looking forward to finding out!