Mark Kohler explains how to pay yourself as a business owner. With $75,000 in net profit, a sole proprietor pays 15.3% self-employment tax on everything. An S corporation lets you split it into $30,000 in W-2 wages and $45,000 in distributions, paying FICA only on the wages and saving thousands.
Chapters
Okay, Rachel, right now, hurry, start typing. What is your business entity? Are you a sole prop or an s corp? Oh, llc.s corp. Okay, so Rachel, your question in. I have a feeling, don't be offended, that you did not set up your S corp with us. Because in that hour where Darren across the camera from me here would be on a phone call with you, he would have answered these questions. So some people go online and set up their entity and then they call us and pay for the questions. And in the end they're at the same spot financially. But it's okay. It's okay. So Rachel says, I've got an S corp. And she said, how do I pay myself? Do I take a W2? Do I take a draw? Does this mean I'm getting a 1099? Okay, this is how it works everybody. This is how an S corp, okay, let's do a sole proprietor compared to an S corp. Now an LLC can be taxed as an S corp or a sole prop. Could be either one could be the other one. So let's say Rachel brings in 100 grand in both examples, same story, brought in 100 grand in sales. She spends 25 grand in expenses. Cell phone, auto marketing, travel, dining. Okay, so what's her net, everybody? What's her net income? 75 grand. That's her net. See, in a sole proprietor or an S corp you're going to get the same write offs. Don't do a C corp disaster, just do your S Corp. Okay, so 75 grand is your net. Now if you're a sole proprietor, people or an llc, whatever money you make, you just take it out anytime you want. And it's called, I don't know, Darren, what should I call it? Distribution, Draw, profit. Any of those names are fine. Distribution, draw, profit, you just take it out. It's a Sole Prop, LLC. But you're going to pay self employment tax of 15.3%. In this example, that's 10 grand. 10 grand before you pay state or federal tax. Not good. Alright, so we come over to the S corp and Rachel's an S corp. So Rachel, you've got an extra step, but it's going to save you big time. You're going to take all your money out and it's going to be called a draw. Anytime you want, you just take a draw and you never ever, ever are going to get a 1099. Forget about it. That's what you give other people you hire that are subcontractors. Okay? No 1099s for you. You're going to take a draw. Then quarterly, we're going to decide how much of that draw is payroll. Now, in a 75 grand example, I'm just going to. This is a semi aggressive. Well, I'm going to do 30 grand. I'm going to. This is. This is probably what we would do at our firm. In the draw, we're going to allocate 30 grand to a W2, and we're going to allocate the other 45 grand to what's called a K1 or profit or distribution. Well, I don't even want to call it distribution. I'm going to call it K1 or profit. Now, everybody, why is this so good for Rachel? She only pays fica. The F word. Fica. What? The fica. She only pays it over here. So in this example, you're paying FICA on the entire amount, but over here, we're only paying FICA on the 30. Now, Rachel, you're not going to give yourself a paycheck. You're just going to take a draw. Today I took a draw. I went online on my S Corp and transferred it into my personal bank account. I just transferred it right into my personal bank account. Cool. I took a draw. But four times during the year, I'm going to do a payroll report, and that's April, July, October. Then in January next year, I'm going to do a report, and in that report, I'm going to claim how much payroll you and your accountant decide on. And in this example, you're doing 30. So that'd be around, what, eight grand or so? Nine. Eight. Nine grand. So you would take eight grand in payroll every. Be closer to seven. Sorry. Seven grand in payroll every quarter. But you're not going to wait for a W2. You're not going to get a 1099. And the beauty of this, everybody, in summary, is she only pays FICA. Here, we save 15% on $45,000. That's going to be close to at least nine. Nine grand in savings. Right? 15% on 75,000 is 10 grand. 15% on four. Oh, no, that's going to be about six grand. We're going to save about six. Boy, my math today. So this is why, Wade, in California, you're going to go, well, I hate California. It's too expensive. Dude, the $800 for an S corp, we just saved six grand. If you set up in Delaware, you still got to set up in California, because you can't be in California and do payroll without being set up in California. So you're set up in Delaware for no good reason. So, anyway, Rachel, I don't know where she's at, in what state, but this is why you're an S corp. You're going to take a draw. Talk to my payroll team. Call Nadette and get on the payroll team. If you need that help, make sure your accountant knows what you're doing. And everybody. We're all good.
