The Truth About S-Corps (Everything Revealed)

Business owners. I am so excited to talk to you about the S Corporation. There is so much misinformation out there on when how what the savings are. What about an LLC versus an S corp? We're going to break it down right here. This is going to be your money video where you're going to be able to better succeed and excel as a business owner with the right information. Now I want you to be confident with what you're about to hear. I'm a CPA, an attorney, best selling authority, radio show host, podcaster, YouTuber. There is no one else in the country with my credentials that has more followers, more downloads and more videos, blogs and articles on this topic. I'm a member of the aicpa. I'm licensed in five different states. Lawyer or accountant. We've got a team of 150 plus employees helping clients around the country. We are legit. I want you to know you can believe in this and I stand behind it and I train other CPAs and accountants around the country. Enrolled agents with a certified advisor program backing up hundreds and thousands of business owners every year on this topic. So take out a piece of paper and write this down. Hey everybody, want to take a quick moment and talk about my sponsor, Uplift Capital. They help small businesses with funding and small business loans. Love their website, love what they're doing to help small business owners go to the next level, grow their businesses expand. Let's take a moment and go through their website. I think you're going to love what you see. What's cool is Uplift Capital does business finance differently with more options, tailored for you, less hassle and the right guidance to keep your mind at ease. They want you to apply for your loan quickly, get a decision the same day, see the funds show up in your bank account and have a system that is designed specifically just for you and your needs that you can access from any device anytime and cool. Right here on their website on my phone right now folks, it has never been more simple to get the funding you need to grow your business. Uplift Capital is about helping you grow, grow, elevate and live your American dream. Business loans have never been so easy. So where I want to start is we got to have a picture. We want to make sure this makes sense. And so what I been coined with talking about for years is the trifecta. And let me tell you how the trifecta works because that's going to help answer so many of your questions regarding the S Corporation and when it's right for you the trifecta starts with a foundation. It all begins with the trifecta. This is what I've been teaching for probably 10 plus years now around the country. And it makes so much sense for my clients that are worth millions and for my brand new business owners, young or old, male or female, large or small, this is the foundation that's going to help you build your business, build your wealth, better tax planning, asset protection, and let you know where the S Corp fits. So here's how the trifecta works. The foundation is your trust, your revocable living trust for privacy, non asset protection. Don't get sucked into some Delaware statutory trust irrevocable bs. That's a whole other conversation. Revocable living trust is for everyone. It's simple, it's easy. I've got all sorts of videos on. This is for privacy and estate planning. This is also the foundation where your 1040 goes, your tax return, all your money runs downhill. So I look at this as your tax return issue too. Not only we have asset protection, we've got money flowing all into one spot. So we divide your life in half. We put your operations over here and your assets over here. And this is just the basic trifecta. I expand on this even further as clients wealth grows and their operations grow. This is where your ordinary income goes and this is where your passive income goes. And we want a firewall between the two. For asset protection, I want operations over here with shell companies. I want entities over here that hold your assets. Anything from rental property to notes to crypto to stocks to investment syndications. That's all going over here. Well, over here is your operations. Now a day job, W2 is going to be outside the box. That could be you, your spouse, you've got an extra source of income. That's great. It goes right into your 1040. There's no tax planning I can do, hardly at all. That's going to help you solve your W2 taxation problem. And that's okay. W2s are still good. I'm not telling people, quit your day jobs. Your W2 could provide benefits and security, a great credit worthiness aspect with your credit score and a day job. Your banks are loving you, you're building assets. That's great. But over 45% of Americans now have a side hustle. That means they have a business and the wealthy in America have side hustles. They have operations, they own a business. And for many of you watching this, you're like mark, I don't have a W2. I'm a freaking business owner. And you may start out as an llc. Not even going to talk about the sole proprietorship. You got to get out of the sole prop right away. But the LLC is usually the starting point for this LLC does not save taxes. They don't. Whoever told you you have to have an LLC to start your business or, or you have to have an LLC to save taxes or your LLC needs to be in Wyoming. They're full of crap. They're a scam artist. Get a second opinion, watch out. And I'll say it all day freaking long and I stand behind it. Now there is a place for Wyoming LLCs and Nevada LLCs in Delaware and all that and some tax and wealth building strategies and asset protection. But not in your operational business. Unless you live in freaking Jackson Hole Wyoming and own a restaurant. Going to talk about an LLC in Wyoming. Okay, so for operations I want your entity set up in the state where you're doing business. Then when you start making a little too much money because you're paying self employment tax out the butt, which I'm going to talk about here in a moment, you're going to transition to an S corp. So in the trifecta your operational entity will be owned by your trust. This is operations. Could be an LLC taxed as an S corp, I'm fine with that. Or it's a plain old Inc. Doesn't matter. But it's going to be attached as an S corp. This side of the equation is your LLC or LLC is that own rental property or hold assets or investments. This is all passive income. And we're going to be doing all sorts of tax strategies over here for pass through losses, cost segregation, rentals, real estate, professional STRs, LTRs, oil and gas, blah blah. I can talk about this all day long. Don't even get me started on IRAs and 401ks and all the self directing that's going to be over on this side. But today's conversation is about when do I do an S corp and why now the best way to explain when and why for an S corporation is to compare it to the llc. So the LLC is a wonderful entity. It's a sole proprietorship, it's a side hustle. You started your business. I have dentists that have been in LLC for three years and they're paying way too much in tax. Clients that have manufacturing and operational businesses that have been an LLC because their accountant didn't tell them to consider the S corp. The problem with the LLC though, even though it's Easy. And it's great. Asset protection is that when I make money in my llc I pay what's called self employment tax. This is one of the main reasons we start to consider it in S Corp. So if I have an LLC here, let's say I bring in 100 grand in sales, I spend 25 on expenses and I net 75. Well now I'm going to pay self employment tax of 15.3%. 15.3%, that's going to be 10 grand. Then I pay state and fed wherever I'm at. So this tax is not good. It's a, it's terrible. It's a pain in the butt. We don't want that. We want to avoid this issue. I was just talking to a family member last night that thought they were an llc. Come to find out they were actually an S corp. We ran the numbers on it. They were going to say five grand or more. Just, just with that slight change of becoming an S corp, which they had actually done, it was a wonderful piece of news. The S Corporation is where we want to be when we start to make too much money. So the self employment tax is the number one trigger of when we convert to an S corp. Now let me tell you how the S Corp works. The S corp could actually even be an LLC taxed as an S corp. Very simple and easy to do with a special election. We charge a couple hundred bucks on our law firm to make the transition. And the S Corporation again will be in the state where you're doing business and where you live, you can't be. Well, it's an online business and I live in California and I don't want to pay the $800 tax. So I set up in Nevada anyway. Doesn't work. Does not work. You think California hasn't figured that out about 15 years ago? It does. Wherever you, you are a resident and your butt is sitting even on a computer, that's where you're going to pay state tax. I hate to tell you and I love to save on state tax. I got all sorts of strategies. But if you choose to live in a California or an Illinois or New York, you're going to pay out the butt in state tax. And there's no way around it unless you move out of that freaking state. If you make money in Florida and live in New York, you're going to pay New York tax on your Florida income because you're a resident of New York. And that's how it works. So in this whole equation, be careful of getting sold the pitch that this entity needs to be in Nevada, Wyoming or Delaware, it doesn't matter. We want asset protection in the state where you're operating. We want to save on self employment tax and I can freaking save you thousands. So we have our S corporation here, or LLC taxes and S Corp with us. Compare apples to apples. I make the same hundred grand. I have the same bank account. When I make this transition, nothing changes. I keep my. I keep the same bank account. I'm off to the races. And then I spend the same 25 grand on expenses. I write off everything I can. Cell phone, dining, auto, computers, electronics, home office. Boom. I pay, I write all that off. Love it. And I net 75. I made the same result. Net income of 75 grand, 6 grand a month. Well, instead of paying self employment tax on every dollar, what the S corporation allows you to do is take a salary, a W2. And the salary is only going to be a portion of your net income. We designate that salary in advance at the beginning of the year and we adjust it throughout the year. You do quarterly payroll reports. You do not have to take a paycheck. You do not have to get set up on a paycheck service. Some people do, but you don't have to. It's simple and easy. Number two, accountants are going to tell you accounts that are afraid of their own shadow and baby old farts. And by the way, I'm over age 50. I'll take you on. I have never had a client audited and lose, let alone audited or lose on this reasonable comp allocation of W2 in my entire career. I have prior IRS agents as partners in my firm and I've interviewed prior IRS agents. We've been doing payroll planning for 25 years, done thousands of S Corp returns, and never once has a client had to reallocate their designation of payroll because we were too aggressive. Oh, we've had the audits and guess what? They're going after the 1099 to other people rather not than W2s for their employees. They're like, oh, this is you paying your kids. Oh, this is your W2. Looks good to me. Done. So don't be afraid. And if you're an enrolled agent or CPA hearing this, please give me a chance. I'm going to show you my payroll matrix here in a minute. Give me a chance to show you that you've been brainwashed by some old fart in the corner office of your accounting firm that, oh my gosh, you're going to get audited. On reasonable comp or the S corp's going away. It's not going away. Joe Biden had a freaking S corp the year before he went into office, had a $13 million book deal and took 750 grand in salary. It was buried on page 32 of the Wall Street Journal. And he was saving on self employment tax and Medicare and Obamacare. And he did the same damn strategy. He probably took less payroll than I would have made him take. People, get over it. It is a strategy that millions of Americans are using. The S corporation kicks ass. Own it. Be engaged with your accountant. Have a conversation about your payroll. People, you are the captain of your ship. You've got to understand where your S corp falls in your payroll, what write offs you're taking. I'm not telling you how to do your tax return. I'm teaching you how to manage your tax return. People, your business owners, you got to know where your numbers are going. All right, so in this situation, what do I do here? I might go 5050. I could go 37 5, 37 5. I'll even be conservative with that. Usually around 75 to 100 grand. I'm on a 5050 allocation. Once we hit 100 grand in net income, I might do 40%. So I'm going to take 37,500 in payroll and 37,500 in K1. So this is what it looks like. On an S corp you have a K1 and a W2. I only pay the F word. Self employment tax. The F word. We hate fica. I pay it FICA on the entire amount in an llc. I only pay FICA on this half at an S corp. That's it. So I just saved 15.3% on this piece because I don't pay it over here. So I take the 10k and I just cut it in half. Now I'm only paying five grand in FICA and $5,000 in savings. Sounds pretty nice to me. I think it's a good Royal Caribbean cruise on the Oasis, largest cruise ship. It's so fun, right? You got use this money to build your business, to pay other taxes, to build your wealth, not to go on a cruise. That's probably reckless. People, this savings is real. And for those of you that are in California or somewhere, oh my gosh, it's $800 a year for an entity in an escort. Let me see, save five grand, pay for a tax return. Might be out about 1200 bucks around here. And then you got payroll for 100 bucks. Or so and 800 for the state, you might be out two grand a year. You gotta pay money to make money. So if I spend two grand to go through this structure throughout the year and own the process and get engaged and manage the process as a business owner using my tax advisor. And I'll give you a link down here below of where you can find a tax advisor that speaks Mark Kohler. This process might cost you two grand a year and I just save five spend to save five. I think you're ahead of the game and more money you make, the more you save. Let's bring this all together. I promised a little payroll matrix, then I want to give you some other ongoing checklists that you want to take care of when you're doing this process. The matrix is simply this meeting with your tax advisor throughout the year, regular quarterly meetings for an hour. And if you're meeting with a real tax advisor, they're saving you 10 times whatever you're paying them every time you meet. I have clients that call me up, Mark, I'll pay you $1,000 for an hour because I know you're going to make me 10. That's what a tax advisor does for you guys. Small business owners, I know it's hard to find them, but I got a network that I am certifying advisors around the country. No longer do you need to go to TurboTax and Google and just wish for the best. So the more money you make, the lower your payroll goes as a percentage. So this is your payroll percentage and you accountants out there, these are your draws or net income. We're going to look at your M2 and we're going to look at the distributions to dictate our salary level. So when I have a client that's about 100 grand net, we might be over here at a 40% allocation. So with 100 grand we might split that into 40,000 payroll and 60k net. That's where we want to go with that. So this split is what saves us because I'm not paying self employment tax on this chunk. The more money you make, the more you save. So as again as a client starts making more money, I'm going to drive their payroll percentage down. I usually flatline it at maybe 20%. I have clients to make a million dollars a year and only take 200 grand in salary. They can fund their 401k, do the solo, do a lot of different other strategies, maybe a cash balance plan, a DB plan, all sorts of goodies, but they keep their salary level down because we don't want to pay the fica. The Medicare goes on and on. Obamacare goes on and on. So we want to as my clients start making more money, we're going to use the S Corp to our advantage. Now final point. I want to make sure that you're doing all the things to maintain your S corporation. Let me just give you a quick checklist. You're going to have an entity that is clean. You are going to to make sure that you have proper legal documentation, set up bylaws, minutes. If you have an LLC operating agreement, corporate books, stock certificates, membership certificates. Our company get KQS lawyers the links down below. We have such an affordable cleanup system where we can clean up your current entity and get it in compliance with the state. And guess what we've got coming down this next year? The CTA, the Corporate Transparency Act, FinCEN, the Big Brother. You've got to report your ownership and make sure your docs are clean to the feds. Starting 1-1-2024. We have a whole system for that and it's included at no extra charge when you set up an entity at our office because we know what the hell we're doing. No longer you're going trying to knock this out online and hope it works out. Use a real lawyer with attorney client privilege where no one can hear that conversation and what you strategize about and set up the entity right and folks were less than 1200 bucks for most entities around the country. We're cheaper than the scam artists selling you crap in Wyoming or Nevada or Delaware. Give the law firm a call down below. Going to get your entity cleaned up. We want to have good entity docs. You need to have an ein. You need to have a bank account and then you're going to do annual company maintenance every year you're going to have minutes done and maintain the entity and inside it. You're going to have accountable plans for tax strategies, writing off home, office, auto travel, dining. You got to have accountable plans in your minutes or if you get audited, you can't do it. And then you're going to nail your payroll level. So if you can be talking with your advisor on a regular basis maintaining this entity, it's a machine that's going to help you be more successful, make more money and better live the American dream people. It's real, it's legit and I stand behind it 100%. Check out my books on Amazon, get onto the blog, just Google Mark J. Kohler YouTube Please follow I've got a great podcast. I'm here for you. I love Main Street America. I love small business. Get your advice from legit licensed professionals that have a service platform that they stand behind with malpractice insurance and licensure to do it right. We want to build a relationship with our clients and get you to a tax advisor. And if you go to markjkohler.com I have the Tax Advisor Network, the Tax Pro network where you can go and find an interview an advisor in your area or across the country, young or old, male or female, big firm, small firm, enrolled agent, cpa, get over there. Find an advisor that you can meet with quarterly that understands this crap. People don't give up. American dream is real. See you on the backside.