Using an S-Corporation Entity Structure

Hi there. I want to give you a brief overview on how an S Corp can help you minimize the impact of taxes and the strategy behind an S Corp and how it works. So first off, we're going to take the income of the business and we're going to split it into two categories, one for salary and one for income. Salary is what you earn by being the worker bee. The secondary piece of that is the income that you earn. That's for risking your capital. So we want to split those two. Now keep in mind that on the salary part you will pay Social Security taxes. That FICA adds up to 15.3%. Okay. Otherwise though, you would have to pay that FICA on all of the income if you were taxed as a sole proprietor or partnership. So this is still quite an advantage. On the secondary piece that we allocate as income, that is for risking your capital and a return on investment, you'll be able to avoid the FICA and Social Security taxes. That could be a pretty substantial amount. So for example, on a $40,000 salary, that FICA is $6,120. So the net cost of that is $73,880. And that's assuming that you're using the S Corp strategy. Now if we're looking at that from a sole proprietor aspect, that income, if it was $80,000 together, would be all subject to Social Security taxes or self employment tax and a net income that you would earn of $68,696. So that means by utilizing the S Corp Strategy, we've saved $5184. That's quite a tax savings for nice little tax move and making some elections and knowing where you're headed with the IRS in breaking down that salary, some people say, well, why do I have to pay any Social Security taxes at all? Can I just say it's all the risk of capital, all the income. The answer is no. When you work, you have to be paid a minimum wage. When we look at the IRS standpoint, if we are too greedy here, we will subject ourselves to a penalty by not having a reasonable salary, which is a requirement of an S Corp. By not having that reasonable salary, the IRS could go back and say all of the income you earned is self employment and subject to the Social Security taxes. So to eliminate or minimize that possibility, we don't want to be hog wild. The average salary that's listed based on S Corp returns is about 41.5% of the total income. Income meaning salary plus the return on capital income. So for example, if we took $100,000, that would mean that we want to take a salary of about $41,500 to be in compliance there. The other fantastic advantage that you'll have with an S Corp is reducing your audit risk. If you were to have the same income, the same expenses, and you run that through a Schedule C on your tax return and you netted over $100,000, your risk of audit is 3.9%. Now, these are some older numbers, but they're still holding true. Right now. If that same income and expense were on an S Corp tax return, that rate of audit would only be 0.38%. So you've dramatically decreased the risk of audit by taking this off the Schedule C and putting it onto the S Corp. The IRS thinks that Schedule C's may be a little unsavvy and may be taking advantage of the system and, and not really keeping the greatest of records. So they see those as low hanging fruit for an audit. They will go after you and look at those numbers very hard as a C, Schedule C. As an S Corp though, they think those people have taken some steps. They're probably working with an accountant. They probably have a bookkeeping system in place. That audit risk has been very minimal being an S Corp. So that's a fantastic reason all on its own to take advantage of that S Corp strategy. So to wrap this up, the S Corp strategy is going to save you a lot of money. I can look at your particular situation and tell you how much, but it will have a great impact to your bottom line and allow us to do a whole new rationale of things, all while decreasing your audit risks. So it is absolutely something that you should consider and I'm here to help.