Mark Kohler breaks down how most entrepreneurs shortchange themselves on taxes. He covers W-2 wages, distributions, expense reimbursements, retirement accounts, and S-corp strategies to cut what you actually owe.
Most entrepreneurs have no idea that there's multiple ways to take money out of their business. Some that don't even create tax liability. They think, oh, if I just take money, that's what I'm going to pay taxes on and that's all there is to do. So an entrepreneur could be compensated in multiple ways. A W2 salary draws or distributions, reimbursements for expenses that they don't even pay taxes on, but the business gets a write off for and then retirement contributions. You, you can be taking a write off to build tax deferred income or even use a Roth strategy where you never pay taxes again on that money you're building. And finally we have family members to think about. Why are you taking out all the money and paying taxes at your rate and then just supporting family members? And this could involve even more creative planning with your spouse and how they're compensated. Lots of options. And each one of these different ways you could take compensation is going to be taxed differently. And the wealthy use all of these methods to pay themselves. To be more strategic, if you just take money out of the business to pay yourself, you're probably going to pay way too much in tax. And that brings us back to that s corporation strategy. At the very top, we want to take out wages and we're required to kind of a reasonable compensation. But as much as possible we want to take in other ways. But bottom line, pay yourself intelligently and intentionally.
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