When Does an S Corporation Make Financial Sense? | Sole Proprietorship vs. S Corporation

[@ryanhodge8694]

Very nice explanation. Great work! So many others just preach the benefits but being a single member business this was a great explanation of the time to consider changing.

[@NaviMarajCPA]

Thanks for the feedback Ryan. Glad you found it helpful - I agree with your statement.

[@ReadySetGoPictures]

Just a reminder. 3:50. SE Tax is 15.3%. Federal income tax can be 40%. This means 55.3% of your income is going to tax. Over half of your work is going to someone else.

[@DericAnslum]

...marginal and brackets percentages are not the same...

[@rsingh6590]

The clarity of the information is insane..... Good job paaji

[@NaviMarajCPA]

Glad you found it helpful!

[@kaizen5023]

Super helpful, I've watched a bunch of your videos and this one was the most simple and clear to me on S Corp.

[@NaviMarajCPA]

Thanks so much for the feedback. Glad it was helpful for you.

[@randomiscam8453]

Well explained! Another informative video. Thanks Navi!

[@paktra6629]

This is very helpful. Thank you Navi.

[@NaviMarajCPA]

Glad it was helpful! You're welcome.

[@imanhosseini6908]

New subscriber after two videos. Clear and knowledgeable presentation. Great content!

[@NaviMarajCPA]

Thanks, Iman. Appreciate it!

[@abduldelgado6272]

Excellent video, thanks, Navi.

[@NaviMarajCPA]

You’re welcome! Thanks for the feedback!

[@jasonmunckton2509]

Inasmuch as every business should do proper bookkeeping and accounting, some smaller businesses don't. As an S Corp there are more stringent requirements for operating as an S Corp so you may have to hire a bookkeeper as well, which increases cost, yet still may make it worth electing as an S Corp.

[@alinem.4537]

Very helpful!!! Answered all my questions. Thank you.

[@PlatinumPace]

I wish you would have explained the income tax with a question mark because that will impact your example how much total tax will be paid

[@kacolorado]

Remember, however, distributions cannot be used to fund qualified retirement accounts. This is one tax strategy. But don’t forget your IRA or ESP, that you establish as the employer, can also reduce your tax bill. You get the added benefit of saving for retirement in tax-free or tax-deferred vehicle - most people retire underfunded.

[@alexray619]

Hi Navi! Very great video. You hit all the touch points of understanding S Corp taxes and fees. Just one question. When the LLC members or member takes the distribution from your example. How is that taxed in their personal taxes on their yearly tax? I understand the distribution is reported under a K1. Thanks for the feedback and answer.

[@NaviMarajCPA]

The distributions are not subject to FICA (social security and Medicare taxes) but are subject to federal and state income taxes.

[@othboi1]

your vids are real good.

[@jessejamesjohnston]

Thanks Navi ✌

[@NaviMarajCPA]

You’re welcome Jesse!

[@jasonsignor7237]

Excellent video! Thank you!

[@pedrogalina660]

Okay, but what about if your Real Estate profit puts you in a 30%+ income bracket? Wouldn’t it make sense to set up an S-Corp to channel some of that income into a lower tax bracket? Or should that never been the case in real estate, as the potential deductions like depreciation should always bring you to a low tax bracket? Maybe it’d be best to set up an LLC with partners? Say a wife and kids? Your videos are awesome! Thank for pushing out this content!

[@NaviMarajCPA]

You'll pay federal and state income taxes regardless if you are taxed as an S Corporation or not. The S Corporation is all about saving money in self-employment taxes (Social Security & Medicare). Depreciation is a concept that usually applies to buy and hold rental real estate earning passive income. Passive income is usually never run through an S Corp. Watch this video to understand the difference - I think it may help you: kzbin.info/www/bejne/oZiVpWWPYt2Xo8U

[@michaelsimmons4883]

Navi, Great video! Can you do one on 401K rollover to a Small Business - ROBS program - and the C-corp that's required? Thanks

[@NaviMarajCPA]

Hey Michael! Thanks for the feedback and for watching. The topic you noted is not something I specialize in so I may not get to it. If you have any other suggestions, please feel free to let me know. Thanks again for watching!

[@RoxanaLuna-bm4hh]

thank you!!

[@bellspini1]

Can payroll include 1099 payouts, and if so how does that impact the overall tax burden?

[@davetravis8994]

Very helpful info. I do have a question though. Are distributions ever taxable, and if not, wouldn't it be better to reduce salary and associated expenses and increase the distribution? Thank you

[@bluedragonweb9127]

I assume reducing your "reasonable salary" and taking a larger distribution to keep the total of both salaries at/below 142.8k will at some point cause a red flag?

[@NaviMarajCPA]

I wouldn’t assume that Brian....just because a business makes $500k a year in profit doesn’t mean the owner should have a very large salary. There are more factors that go into determining a reasonable salary. For example, compare someone who leverages technology to do a lot of the “work” for them to make a profit vs. someone who works with their hands and is spending a lot of time doing the activities that generate a profit for the business. Their salaries could (and probably should) be different.

[@albertosony]

Is this taking into consideration the QBI deduction?

[@pall5114]

Navi thank you for these helpful videos. My question is many YT videos are promoting LLC with S-corp for the SS and SE tax savings as in your example. I haven't seen a video about how S-corp tax saving now affects your SS benefit when you retire. If I am a new small business set up as an LLC with projected 75-100k revenue and elect S-corp for tax savings how does that affect my ability to maximize the amount I can be eligible for SS benefit when I retire at 65-67 yr old. I don't want to save tax dollars now only to get less from social security upon retirement. I would appreciate any clarification or advice you can give me.

[@muhammadqqureshi6449]

Great video thanks

[@NaviMarajCPA]

You’re welcome!

[@kdfooaijfea3asdf]

If you use S-Corp and pay yourself as an employee (w-2), wouldn't the LLC have to withhold half of the 15.3% SE tax (7.65%)? In the end, there'll still be savings but maybe a bit less?

[@AndrewJones-cf5xy]

How do I decide what to take as 'salary' and what to take as distributions?

[@kvchiefs19]

I currently set up scorp and pay myself a salary but the payroll taxes for employee/me and employer/me are so high i dont understand how this saves money. Last yr i paid $9k in fed and state taxes. This yr around the same gross income but ive paid $16k in payroll taxes with a reasonable salary. That $16k is money gone. Im paying $7k more already in payroll taxes before i even pay fed taxes. Can someone please explain this? Thx

[@GriffinStructuresInc]

Thanks for being such a great resource Navi! Very helpful! Do you have any videos or feedback for purchasing a car using an S Corp?

[@gouthamp-mq7hr]

Sir, Do we need to file taxes on distribution or not required?

[@NaviMarajCPA]

You pay income taxes whether you take a distribution or you leave the profit in your business.

[@pratimachandler9070]

A dental CPA's fee was quoted at 750 to 950 a month. Is that reasonable?

[@alessandrocosta7967]

Hi Navi, if my business will record a loss in its first year, does it even matter if I am an LLC (partnership) or a S Corp?

[@DawnCapehart]

Hi Navi, If you are registered as a PLLC and realize at the end of the year you have made the $40k mark or over and want to file as an S-Corp but did not have a payroll company keeping track or set income you were paying yourself. Would it still be possible to file as an S-Corp?

[@yonijacobs8932]

Feel free to read this article. Seems like this is the only plausible option for a late s corp election along w no salary being paid during 2020. www.google.com/amp/s/wcginc.com/kb/electing-s-corp-filing-status-retroactive-for-2020/amp/

[@NaviMarajCPA]

Hi @Dawn Capehart. Thanks for watching! I would agree with what @Yoni Jacobs posted below. You probably won't find a lot of accountants that want to do what is written in that article but some will.

[@NaviMarajCPA]

@Yoni Jacobs, that is correct. Only option that I am currently aware of...not perfect, but really the only choice at this point.

[@_CaliGirl]

Hi Navi.... so, how much income should you pay yourself ... it seems many people stick to 2k per month or 3000. Does paying a higher salary help or a lower one? And this would be off of 200...300k+

[@RonDonProductions]

Thank you for this information! One question I have is what happens to the $20k that isn't subject to self employment tax? Does it just suppose to go back into the business bank accounts?

[@NaviMarajCPA]

What you do with that money is up to....meaning you can leave it in the business bank account (and not take a distribution) or transfer it to your personal account (take the distribution). Regardless if you do or do not take the distribution, you will still pay income (federal and state) on it. Hope this helps!

[@RonDonProductions]

@@NaviMarajCPA oh gotcha, that makes sense. Thanks again!

[@skwerl81]

@@NaviMarajCPA I've been looking everywhere for this info and couldn't seem to find it until I watched this, thank you!! I had the same Q

[@guillermorodriguez9176]

@@NaviMarajCPA that makes huge difference! you don't end saving $1,250 like you mentioned on your example above... also you save the difference of the 20k distribution after federal and state taxes, am I wrong.? great content by the way... thanks for sharing your knowledge!

[@gabe8496]

In this example you speak of paying yourself a salary based on what your profit is. But then you mention payroll. How is this happening, since you won't know you actual profit until after the end of year. How would you have paid your self based on that? Is your pay being backtracked?

[@aloksingh8950]

Can I register a company as a single member LLC (taxed as Sole Prop.) and still get W9 form?

[@yosefyaakov6502]

If I want to buy a business that makes 300k cashflow, which business type should I make

[@loganuubex389]

what's a good strategy if you're making more than $300k?

[@EmersonDickie]

How can I get in touch with you ?

[@ThankYou-zt3tr]

Do you provide these services?

[@janetf9888]

Hi Ravi… are you in NY state

[@NaviMarajCPA]

My name is Navi and am in FL. 🤣

[@joediamondcpa796]

Your example is incorrect..........you do not pay 15.3% in self employment tax! you get a 50% reduction dollar for dollar off of AGI. When figuring self-employment tax you owe, you get to reduce self-employment income by half of the self-employment tax before applying the tax rate. Say, for example, that your net self-employment income is $50,000. That's the amount you report as taxable for income tax purposes on Form 1040. But when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Not paying the 15.3 percent tax on the $3,825 difference in this example saves you $585. In addition, you can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. In the 25 percent tax bracket, that saves you $125 in income taxes.

[@vasilestana9754]

I heard that on S corp one can't benefit of those great deductions (office space rent in your home, milage on your car, cell phone bill, internet bill, uniforms, shoes, PPE, tools, internet bill). I don't think that a S corp is worth it if one makes less than 100k. What do you guys/gals think? Thank you.

[@kdfooaijfea3asdf]

well those are still considered business expenses (that $20k in this example).

[@deejamesdaboss]

But there more that one person in a corporation tho

[@DericAnslum]

...not necessarily...as made evident by the s corp election...

[@hankmoody5514]

All of this is so needlessly complex.