408: S-Corps & Saving Taxes In 2023

But 2023, I want to emphasize this. This is the best time to do the S Corp. If you're a small business owner, whether you got a main business or a side hustle selling goods and services, I don't care what it is. You got an ebay store, you got a big company, small company. S corporation is the entity you need to be using.

Too many people pay self employment tax and those that are S corp owners currently maybe take too much salary.

How could I pay less tax every year in my business?

The S Corporation is going to save you. And especially when you're making 40 to 50,000 or more, that's when it kicks in.

Welcome everyone to the Main Street Business Podcast with Matt Sorensen and Mark Kohler. Feeling merry today. And it's not just because I'm wearing a green sweater. It's not just because Christmas is around the corner. It's because we're talking about S Corporations and saving taxes in 2023.

Yeah, but what better gift could you give to yourself than to save taxes in 2023?

You deserve it. You know what you mean. You're on the nice list. You deserve it.

Now, some of you may have heard your friend, your family member has an S corporation. You've seen it in social media, on our podcast posts or YouTube and your accountant may or may not have brought this up to you. In fact, I want to say this to all of you. Many of you may have had your accountant say, yeah, it doesn't work for you. Okay, let's just start with a clean slate right now. Bull crap. That could very well be incorrect information. I just taught my workshop this last weekend and with close to 300 people on virtual and in person, it was shocking to hear how many people said, well, my accountant said I wasn't ready for it or it wasn't going to work for me. And we ran the numbers right there in the workshop. It's just. And there was other. There was probably 100 CPA or tax professionals right there in the room agreeing with me.

So yeah, lots of misinformation. We'll clean up some of the misconceptions and the bad advice you might hear out there tell you how the strategy works and why to do it. But 2023, I want to emphasize this. This is the best time to do the S Corp. If you're a small business owner, whether you got a main business or a side hustle selling goods and services, I don't care what it is. You got an ebay store, you got a big company, small Company. Like I said, side hustle too. Doesn't matter. S Corporation is the entity you need to be using and converting or starting it from scratch. 2023, January 1st is the best time to do it. You start out that year, you have the S corp the full year. Maybe you're a sole prop in 2022. It's a great time. We have a lot of clients transitioning, getting over to the S corp for their business or making new business plans for 2023 that they're going in on and they're doing an S Corp from the get go.

Yeah. And you've got three weeks before the end of the year and you can meet with one of our tax lawyers for an hour or more with we have some comprehensive type of evaluations and build you a trifecta. We can look at your tax return or set up an entity. We got multiple options. But let's get this off the table too. For any of you that are an llc, this is where you consider the conversion, the conversion to an S corp. This is a good time of year to look back. Should I convert back to 1122 or make an election for 1123? This is critical timing and right now. So LLCs. You're okay. You're okay if you need to make that conversion. And I guess, Matt, we should get into the why. There's a variety of reasons here and I've got a couple I want to mention, but I'll let you go first. What are some reasons why someone should be thinking about this? Then we'll talk about the how and maybe some of the misconceptions out there.

Well, the why is if you're just thinking, man, how could I pay less tax every year in my business? Hmm. Well, this is why. Have you ever thought that? I mean, isn't everybody for that? So I have an S Corporation. Mark has an S corporation. If you're a client of ours that has a business selling goods or services, I'm not talking about your rentals. You got a business main hustle. Side hustle. You should have an S Corporation. You are volunteering to pay the government more in taxes by not having it. So that's why. Let's just start there.

Okay, now.

Too much wrong.

Yeah, no, it's good. Now, the type of tax we're trying to protect us from or minimize is the self employment tax or fica. For those that have been regular listeners of ours. I know you're sick of it. We'll just say we got to keep saying it over and over again. Is that too many people pay self employment tax and those that are S corp owners currently maybe take too much salary. But in an operational business, not you rental property investors, you keep your LLC the way it is. But if you're selling products, services online, in person, any sort of operational business, the S corporation is going to save you. And especially when you're making 40 to 50,000 or more, that's when it kicks in.

Yeah. And so what you're doing there, just so you know, is, is you have to take a salary from your S corporation. That's one thing that's new. So there's some mechanics in this on how the tax savings works. You're going to start taking a salary from the S corporation. You also get to take profits. See, you're the employee of your business, but you're also the business owner. So you get to take out profits, sometimes called dividends, which you don't have to pay self employment tax on. But since you're also the employee working in the business, you got to take a salary too, which is a W2 where you do pay self employment tax by letting us split up the income into two different types. We get a pick and say, oh, profit over here don't pay self employment tax, that saves me 15%. So every 10 grand that goes over there I'm saving 1500 bucks. Whereas versus over here on the W2, okay, I got to pay into Medicare, Social Security and a W2, I got to pay that self employment tax. But see, if you're just a sole proprietor and you're 10, you know, 10 grand, like you know you're paying self employment tax on everything. You don't get to split it up and say well I'm the business owner but also I got the salary. You don't get to split up. The S corp lets us split up the income and do the salary dividend split, which is where the tax savings happen.

Yeah. And for you business owners out there, you may be thinking, I've already had this configuration with my CPA and they said it was a non go or a no go or a non starter, whatever. Here's where you can have a more poignant conversation with your accountant. You say yes, there has to be reasonable salary, but I think I'm taking too much salary and I think you're being too conservative and I want to reevaluate my salary level and I want to bring in a tax lawyer, the KQS team, and have a conference call with some of them. They have been doing this for 20 years. Plus years and never had a client audited for taking too little salary. I think we're too conservative. So that's your point, number one. And I and a lot of accountants are like, oh, well, you know, the S Corporation is going to get audited and they're going to. No, they're not. The S Corporation association of America has been all over this every year. There's countless congressmen and senators that have S corporations themselves. This is not a high risk strategy, people. So you're accounting.

Joe Biden used this strategy and saved hundreds of thousands of dollars in this tax. Not tens, hundreds of thousands of dollars on this strategy because he was an S Corporation for all the speaking fees and books and all that stuff he did before he became president. So it's out there. It's the number one business entity for small business. We want to make sure you're considering it because there's two categories of people that I think are missing out on this. Those of you that are just being a sole proprietor, you're just going on schedule C on your tax return, you're volunteering to pay more in taxes to the IRS because you're not making the change. And those of you that have done an LLC because you told the LLC is easy and you or maybe you were smart about it and knew I'm just getting started, I can convert into the S Corp if I need it. So any of you, in either scenario, you need the S corp because you've just been a sole prop. The just do an S Corp now you've got 40,000 in net income where you're going to see the tax savings or you have the existing llc, we can just do a conversion over to it and get you onto the S Corp tax strategy, which is where you'll pick up the savings too.

Okay, I want to also bring up a complicated point here. Now for all of you that are like, okay, tell me something new and thank you. For those of you that our regular listeners that are just keeping up to speed on the current topics, here's where this gets a little more complicated. It's when we have partnerships and this happens all the time, where two guys, two gals, father, son, mother, daughter are in an LLC together and they go, oh, oh, we better make an S election. That could be a bad move in a partnership situation. The reason why is because two partners are going to have different lifestyles, they're going to have different expenses and maybe even some additional separate income from one another. Well, once you make an S election, you've now Created this employee relationship, which is great. Matt just talked about it. You want to be in an employee and an owner, but you don't get to take those ancillary write offs and push other income into this S corp. It's your partnership S corp. And you might want to write off auto, some travel, some cell phone, your own family board meeting. But you can't do it because you're in an S corp with another employee and another owner and it really inhibits your planning opportunities. So if any of you are in a partnership in an operational scenario, land development, fix and flips, online affiliate marketing, products, whatever, we want you to have a consult with the tax lawyer and say, okay, let's. This time of year is perfect for this. Let's keep the LLC and create two S corps, one for each partner. And now we open up the door to even better planning. So don't be too hasty to just make an S election in a partnership. Let's have a conversation about having a parent with two subs.

Yeah, like that's what Mark and I have. We both have S corps with separate income that we do some separate things. But in our partnership entity, like the law firm for example, where we're partners, we have our S corporations own that. Law firms paying all the joint expenses, employees funneling down our profit down to each of our S corps where we both pay ourselves out. Very common for partners, whether it's two or even multiple partners, where you're using an S corp as your entity that you're receiving income, you're getting your W2, you're doing your separate income and tax planning, you know, and so it just is so much better that way. So that's how you can both use the S corporation tax strategy. But it does take a little more planning in the partnership scenarios. That's a good one that sometimes gets screwed up and people come to us like it's really hard to unwind that very painful. So get some proactive planning if you're in the partnership scenario before you do the any S Corp rest election.

Love it. Next topic is some of you may be sitting on a C corporation. You were talked into a C corp previously. The C corp you realize now has got some problems because you've been borrowing from the C Corp because you wanted to get money out but not pay double tax. Maybe you had a better year than you expected and you weren't able to write off everything. So this C corp could have some major baggage. So if you make an S election, there's a waiting period until those and then those problems go away. So there's kind of this building gain and there's this time period where that it can lapse and then you're through the woods, if you will. It's fairly complicated to explain here in a podcast, but if any of you are a C corporation and you're, you're seeing the light at the end of the tunnel that there's going to be some problems, get that consultation and talk about making an election as soon as possible. And then in a few years the problems will be behind you. So don't think there isn't a way out. There's always a way out.

Yeah.

Yeah.

Now again, I want to hit. This is for a lot of you new people that are like, I've heard a little about the S Corp, but I don't know where to go. We always want to set up the S Corporation in the state where you live or doing business. Okay. Don't get sucked into going to Nevada for your entity or to Delaware to these other states. The S Corp, this is your operating business. This is where you're conducting business, generally going to be in the state where you reside, particularly if you're providing services. So look to that state. That's where we're typically going to set up. And what I will say too is remember the S Corp is a tax strategy that pays every year. When you're first setting up an S corporation, you're going to have to get used to a couple of things. So let's hit a couple administrative things you're going to get used to. There's really two main ones. One, you gotta start doing payroll. You gotta start filing a quarterly payroll report to the irs, doing some withholding, sending in some of that, you know, self employment tax to the IRS on the salary part. You also gotta file an 1120s corporate tax return. So for those of you that were a sole proprietorship before or just flying onto schedule C from your LLC that had no S election, we are adding a corporate tax return now. Okay. So there is a couple things you're gonna have to do. But guys, these forms and these two things you're filing is what gives you the tax savings. So yes, you were setting stuff to the irs, but this is where I'm saving on taxes.

Yeah, and you might spend a couple grand a year doing some of these forms and paperwork, but we hope to save you twice that, three times that or even more, make more money. You save more now on this S election and the payroll piece, when Matt says you've got to Start doing payroll. I like the way he said it. Reports it doesn't mean you have to issue yourself a paycheck. I know many of you are like, well, my income's up and down. I'll never be able to do a paycheck. Fine, don't. You can just do a quarterly report. And so we have a method for that. We have a payroll team that can just do your quarterly after the fact payroll. You don't have to wait around every two weeks for a paycheck. You can take money when you want it and need it, and then we just follow it up with a report. But don't be afraid of these forms.

Yeah. And then when you're at that court and you're like, well, how much salary do I take? Well, you know, there has to be something called the Kohler payroll matrix. All right, we have separate stuff on that. Mark's got chapter in his book on it, but that's going to tell you. And we've got a chart that says based on the salary you're making, here's how. Excuse me, the income you have, here's how much you can take in salary, and the rest is essentially profit. So that helps you get a guide for how much to be taking each quarter. And what happens with a lot of clients is they kind of get in a routine of what they're used to making and they're kind of taking the same amount every quarter, but maybe the fourth quarter right now, and I've done this with a number of clients recently, is they're looking at, all right, I've made more or less this year. Maybe I got to dial up my fourth quarter payroll or dial it down based on what I've done through the year. So I have a higher salary or lower salary based on where I feel like my income was this last year. So just know there's a little bit of thought in that. But there's a simple payroll matrix. Some Kohler guy made it super handy and helpful. But I'll tell you how to what to know to take in salary as you're hitting each quarter.

I love it. And thank you, Matt, for that. Actually, people, one thing you need to know is you're actually reducing your chances of an audit with the irs. You may be thinking, oh, these guys are aggressive. No, you're actually reducing your chances of an audit. When you're in a schedule C position, you are 15 times more likely for an audit and you're paying more tax. It's like a double whammy. And so s Corporations are just audited per capita, meaning one out of a hundred are audited compared to 15 out of a hundred when it comes to a sole proprietorship. That's the ratio. So you want to be that one person, worst case scenario, not one of the 15 that gets snagged. Think of more of the world's with Tom Cruise. You know, you don't want that, you know, that alien machine to come out and grab you. I'm out of there. I'm, I'm, I'm an S corp. Leave me alone.

Yeah, less odds. Yeah. So that's a great point because it's not just about tax savings. There's also. You're minimizing your audit risk. And that is a sad thing is a lot of people, there's, this is where those misconceptions happen of, ooh, there's a tax strategy that can save me money. I'm gonna have to worry about being audited. No, this is legit. Don't worry about it. Turns out when you look at the numbers, like Mark said, you're actually audited less. Okay.

Yeah. Can I go back to one thing you said earlier before you change topic is Matt said about the state issue. Some of you that may have an entity set up in the wrong estate and you're like, well, I was told it's better. Or I was told I get better asset protection, or I was told this. People, we have written countless articles and held countless conferences, podcasts and YouTube videos on this topic. We back it up with real law. We are not blowing smoke up your skirt. This is, this is a big issue. So if you have the wrong state, get a second opinion. And this goes back to the point we've got three weeks before the end of the year. You can. Our contact information is below. You can easily get with one of our tax lawyers for just an hour. And people, we want to save you 20 times whatever you're paying us. Get a review. Say, am I doing the right amount of salary? Am I set up in the right state? When should I pull the trigger on this? Those are the types of questions to ask tailored to you. If you search around on Google, you're going to find an answer you like, but it may not be the right answer. So get that consult.

Yeah. Let me just say this. I just want to make sure everybody gets it. If you are a small business owner, you got a side hustle and you're making 100 grand a year using an S corp over just being an LLC or sole proprietorship is going to save you like, nine grand every year in self employment tax. All right, that is huge. Okay? So that's why this is one of the number one strategies. Like I said, there's a lot of other perks about it. S Corps are audited less than sole proprietorships, so make sure you're focused on this. Now, if you have an entity that's a piece of garbage, that's like this dumpy entity you've had, we can just clean it up, or sometimes we can dissolve it and start a new entity fresh. For those of you that have something already going, we can help look at that and see the entity and see, is this something we can just add an S selection to? Is this something we can move to the right state? Is this something we need to just, like, shut down and dissolve and start something new and fresh? Because it's. It's a turd, and we can't polish a turd. So we can do that analysis with you to make sure you're in this right structure. And that's why we love doing it in 2023, because we want to close that out if that. If you have the wrong entity, the wrong structure, the wrong state, we want to close that out and be done with it for 2022. Getting the right entity, the right structure, moving forward into 2023.

Yeah. And for those of you that are catching this podcast, maybe in the spring, a few weeks, months down the road, and you're like, damn, I should have heard these guys back in December. It's okay. It's never too late to, like, try to get things dialed in. Yes, you might miss the January 1 cutoff, but it doesn't mean all of 2023 is shot. Not by any means. It's clean. Yes, we'd love that. But always stop the insanity or stop the car when you know you're going to the wrong street. So we can turn it around, we can help you out. Give us a call. And. And it may mean yes, you've gotta reevaluate who your accountant is. Because if your accountant isn't talking to you about this, you probably have the wrong accountant.

Yeah. Yeah. Okay. One other thing I did wanna note. Just a couple common questions that come up in misconceptions is we're not using LLCs for rental real estate. Maybe if you're flipping properties, you're a real estate agent or contractor. Yes. We love S Corporations for you, but for rental properties, you're getting two types of income. On rental properties, you're getting rental income and capital gain income Both those types of income are already exempt from self employment tax. The S corp strategy is designed to save self employment tax. I don't even pay it on rental income or capital gain income. So there's no reason to use an S corporation on that type of asset. Rental real estate. And in fact, there's loss limitations on S corporations for your rental real estate anyways. So stick to the llc. Stay in the llc. That's what we're doing. Any of you got rental properties? Of course we can help with the llc. But you're in the LLC lane. And this is part of our whole trifecta too, that we do with clients. So if you're kind of doing both, you've got, I got some rentals, I got a business or a side hustle. You know, you might have LLCs over here and S Corps over here. So sometimes you might need a little more coordinated plan. But don't do the S corp for your rental properties. That's just my first little caution.

Yeah, well, and we first, we put out several cautions. I don't know. Yeah, I don't really have much more. I really think there's obviously a lot to learn on this area and you're the captain of your own ship. People, I hate to say that you cannot rely on your accountant or lawyer to be, you know, thinking about you in their sleep at night and wake up and you're their first call. It's not going to happen. None of us as a business owner can pay enough for that type of service. So you have to know enough to be dangerous and identify planning opportunities. And I think this is a big one. So what's wrong? What's, what's so bad about getting a second opinion when you work again? This is not supposed to be an infomercial. I'm trying to provide resources. But seriously, if you meet with one of our tax lawyers, they're going to look at your tax return and go, oh, and by the way, your auto deduction looks weird. Your dining deduction looks weird. Why are your kids on not on payroll? Why haven't you done a solo 401k? Where's your Roth IRA? Where's your health savings account? Hell, I've got a 30 ultimate tax guide ebook that you can get on our website at the law firm or my website. And this is just one of the 30. And so if you think this is cutting edge. We think it is. And we got 29 other ones to talk about. So that's where the consult really comes into play. So book at Any time of the year and just get that.

Yeah, yeah, you need that professional, whether it's us or someone else, you need that professional looking out for you, trying to get the right tax strategies that work in your situation. When you worry about making money in your business, let us help you about saving it and doing the tax planning. But you got to take that effort to go be captain, so to speak, to go engage your first mate to help us here or someone else on the tax planning side. So. All right, well, I don't know, Mark. We got Open forum probably coming up in the next week or two. So if you got Open Forum questions, you got more questions on the S Corp or anything else you want to talk about, make sure you get over to mainstreetbusiness.com, you can submit your pod question, your questions for the podcast there for our Open Forum episode. And if you're liking the show, please get out, share it, give us five stars, kudos, thumbs up, I don't know, whatever things you can do that's positive and do that.

Yeah. And if you're not liking it, seriously, we want this to be your source for tax and legal small business scaling type topics. And so if you're like, I don't think I could give you a five store, five star. I wish you guys would do this. Put it in the open forum. Say, guys, we need more of this. We need more of that. And we need more Mark. And less Matt. We'll deliver.

We get that one quite a bit.

No, we don't.

All right, well, thanks, everybody.

You have a great holiday, everyone. And please make sure you subscribe no matter what, so that every time we have a podcast or a YouTube video post, you're getting a ping so that you know what the topic is. And if you're like, oh, I don't need that topic, great. At least, you know, so we're gonna keep trying to deliver. Thanks, everybody, and have a great holiday.