Mark Kohler compares three business structures for a landscaper earning $75,000 net income. With an S corp, you pay yourself a reasonable salary like $25,000, then take the remaining $50,000 as a distribution that skips the 15.3% self-employment tax. Sole proprietorships and LLCs taxed as sole proprietorships hit that tax on all profits.
Chapters
Now if I'm a landscaper, I really have three different ways I could operate. I could just start going out and talking to people and say, let me mow your lawn. That's called a sole proprietorship. Or I could form an llc. And then over here I could actually be an S corp. And again it could be an LLC taxed as an S corp. Now if I'm a sole proprietorship, I'm going to file on a schedule C tax return. If I'm an llc, I'm going to file on a schedule C tax return. But an S corporation files its own corporate tax return. Now let's compare these for a moment. Let's say I'm out there and I bring in 100 grand and I spend 25,000 doll dollars in expenses and I net $75,000. Well, you're going to pay self employment tax right out of the gate of 15.3%. If I do an LLC the same tax, 15.3%. I brought in the same hundred grand, I spent 25 in expenses, I net 75 and I'm going to pay 10 grand. Then I might pay fed tax, state tax, LLCs do not save tax. With an S corporation, I'm making the same hundred grand, the same 25 grand in expenses, I net 75. But check this out. No self employment tax, no corporate tax, and no Obamac is called ACA Affordable Cares act tax. So I can avoid all these taxes by becoming an S corporation. Well, there's one catch. You've got to take a salary, a reasonable salary and then everything else flows out the bottom. Now in this example, I might do a salary of 25 grand and the rest flows out the bottom 50 grand.
