S Corp Secrets the Wealthy Use (And How You Can Too!)

Welcome back everybody. Today I'm going to break down how you can use an S corporation to skyrocket your wealth. I'm Mark J. Kohler, CPA attorney, best selling author, and I own multiple companies in the tax and legal industry helping small business owners. And every year my team and I help thousands of clients squeeze far more profit out of their businesses by using the S corporation strategy. The problems? Not enough accountants are recommending S corporations. Too many business owners either misuse the S corp and then again, so many people just don't understand the full range of opportunities that can unlock. Some even set them up incorrectly and actually paid more in taxes. So in this video, I'm going to clear the air. I'll walk you through three big ways the wealthy use S corps to save taxes, build long term wealth and unlock powerful deductions. And along the way, I'll show you how to avoid the most common mistakes that many entrepreneurs and accountants make every year. Let's dive in. First, what is an S corporation really? Well, it's pretty easy and it's very straightforward. An S corporation isn't a type of company. It's a tax election on top of a company you create at the state level. In fact, most people think an LLC is separate from an S corporation. But the reality is an LLC can be taxed as an S corporation or you can have a corporation, an Inc taxed as an S corporation. The S corp just is overlaid on top of an entity you've already created. And why does all this matter? Because the S election is a way of doing business that changes how all of your business income is taxed. Now using the trifecta, which you know I love, the left side is your operational income where your S corporation would live or your entity taxed as an S corporation would live. The right side is where your assets and investments are held, typically LLCs as holding companies to hold your rental property or other passive investments. The base of your trifecta is your trust and ultimately your 1040 tax return that ties it all together. Now with that framework, we can better understand how we use the S corporation and where it goes in our overall business and wealth building plan. This is again what the wealthy understand. So strategy number one, self employment tax. This is one of the most onerous, big terrible taxes that small business owners pay. And the S corporation is the number one method for wealthy entrepreneurs to slash self employment tax. Now for example, here's how it works. Assume you're a landscaper. You bring in $100,000 of revenue, spend 25,000 on expenses and net $75,000. Well, as a basic LLC or sole proprietorship, you're going to pay 15.3% of employment tax or self employment tax on the entire 75,000. That's over $10,000 before you even pay state or federal taxes. Now the S corporation allows you to split that income between reasonable salary, subject to payroll taxes and distributions or draws not subject to self. So with that same 75,000 of profit, we may take 25,000 in salary and $50,000 in distributions. The result is you save thousands by cutting down the FICA or self employment tax exposure on the entire amount and isolate it to the salary amount. So in this example, we now just saved 15.3% on $50,000, which is around $7,500. And that's not chump change. That's big savings. The more money you make, the more you save. But this is where entrepreneurs start to lose out on the game. They've been given misinformation from accountants and maybe some of you have heard, this is it, I don't make enough money to be an S corporation. And they get confused on when to switch from an LLC to overlaying it with the S corporation status. For me, that income crosses the line at about 40 to 50,000. When you're making that four to five, maybe $6,000 a month, you are a perfect candidate to consider the S corporation and start doing some reasonable comp planning. And you know what's crazy? Actually using an S corporation makes you far less likely to get audited compared to filing as a regular LLC or sole proprietorship. And this, my friends, is a common mistake. Thinking that an LLC is going to save taxes in and of itself. It doesn't. It is not going to be able to save you self employment tax. You cannot take a salary out of a basic LLC on a sole proprietorship. Just use the S corporation. Common mistake number two, overpaying yourself. A reasonable salary matters, but not an inflated one. And the problem is your accountant's going to be the one to probably be too conservative in this area and talk you into this mistake. Just beware and stand up for yourself. This is your tax return and it does not have to be an excessive salary to be Safe. Strategy number two, use your S Corp to fund a Solo 401K. Now once you save on taxes and you have more disposable income, what do you do with that extra cash? Well, the wealthy just don't spend it on a new BMW or Range Rover. They funnel it into a retirement account that grows tax free or tax deferred. Here's where the wealthy play a different game. They don't just save on taxes today. They use their S Corp to create another vehicle for building wealth tomorrow. Enter the solo 401k. Now here's how it works. You as the employee can Defer up to $30,000 per year or more based on your age or from your S Corp salary. Now that could be in the form of a Roth contribution or a traditional contribution. Then your S corporation, which is your company as employer, can match that contribution on top of that and that contribution could take you well over $70,000 in total 401k contributions. This means you could be putting away tens of thousands of dollars every year building wealth in a bucket the IRS can't touch until retirement or not at all. And with a Solo 401k, you're not just limited to Wall street investments. You can invest in rental real estate notes, crypto syndications, and yes, traditional stocks and mutual funds if you'd like to. Now, common mistake number three, ignoring this entirely. Too many small business owners never set up their solo 401k and leave tens of thousands of dollars of tax free wealth on the table. On a personal note, this was me for many years. I would just take all my profit and drive it back into my business. And later on I discover was business rich, or so I thought and cash poor. I should have had more retirement built up. And my contemporaries, other friends and lawyers and accountants that worked around me had built up tax free accounts while I was just putting money back into my business. People, you want a balance, don't make that same mistake I did. Another common mistake when doing this benefit planning is forgetting about health insurance. Health insurance strategies when you're doing the 401k go hand in hand. You're an employee of your own corporation and we want to take care of you. And this can generate extra deductions and even more wealth. Building on that reasonable comp concept with 401k and health insurance, it's an important topic that you've got to bring up with your accountant when you're doing your annual planning and strategy. Number three. Oh, one of my favorites, and that's to build a board of directors or board of advisors inside your corporation and unlock more deductions and even better asset protection. See, wealthy entrepreneurs don't run their companies alone. They need a board of directors or board of advisors to get advice, support and even unlock powerful deductions. This is where most people leave money on the TABLE they forget that a business is family and family is business. And you don't have to be wealthy to build your own family office. See, just formalizing annual board meetings is now the creation of your own family office. You can put all this in writing and write off your travel and trips for these special board meetings. See, with an S corporation you can add family members, friends and trusted advisors to your board. And you're going to hold board meetings on a regular other basis where business is legitimately discussed. You're going to justify deductions for travel, meals and technology and even communication throughout the year in order to operate as a board. This allows your business to build wealth and you to get the support you need for your family. For example, if your board meets for a retreat and you properly document it with minutes, the travel tied to that meeting becomes a legitimate business deduction. And in those minutes you're going to document what's called accountable plan provisions. This is what helps you audit, proof your tax return and take a lot more tax write offs. Common mistake number five, not documenting the meetings, not even holding meetings. And if you don't hold the minutes or records, the IRS can disallow the deductions. Moreover, by holding these meetings, you are increasing the asset protection the corporate veil provides. You are legitimizing the corporation itself by having these meetings in the first place. In fact, the IRS and the government encourages you to hold these meetings. Do it and save money, build wealth and have better asset protection. So there you have it. Three massive ways the rich use S corporations to explode their wealth. It's what I do to build wealth and I've helped thousands of clients every year my entire career. Use the S corporation effectively and save thousands of dollars in tax as well. And let's get specific, this allows business owners to save on self employment tax, fund 401ks and write off health insurance and even create a board of directors and have their own family office to unlock deductions, strengthen protection and bring others into the business. Folks, these aren't loopholes. They're legitimate time tested strategies the IRS allows. The difference is the wealthy. Use them consistently. If you need help building your structure, reviewing what you currently have, or getting a better tax plan, my law firm, KQS Lawyers can help you from anywhere in the country. If you already have an S corporation and need to get your minutes done, get in compliance, maybe even provide some privacy with a better address and your registered agent service, please check out below Main Street Business Services where we help clients affordably. Take care of this every day. If you found this video helpful, please, like, subscribe and hit the bell so you don't miss any future content packed with incredible tax and legal strategies. I'm Mark J. Kohler, and I'll see you in the next one.