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Small Business and W-2 Job | Does LLC or S Corporation still make sense? - YouTube
Channel: Navi Maraj, CPA
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Should your business be taxed as an s-corporation聽
if you also have a job where you receive w-2聽聽
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income? That is going to be the topic of this聽
video and here's a quick spoiler alert. Your聽聽
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s-corp could be costing you money instead of聽
saving you money in the following sort of scenario聽聽
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that we're going to get into in the video so in聽
order for me to explain this I first will have聽聽
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to touch on a few things so I'm going to discuss聽
what are your taxes that you pay as an employee聽聽
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working you know for an employer somewhere and聽
we're going to compare that to what it's like or聽聽
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what taxes you pay rather when you have a business聽
that's taxed as a sole proprietorship and then聽聽
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we're going to bump that up against what taxes you聽
pay if you have a business tax as an s corporation聽聽
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and then we're going to talk about what happens聽
when you're both an employee working somewhere聽聽
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and you own a business and the impact of having a聽
high-paying w-2 job combined with an s-corporation聽聽
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together so if this is your first time聽
watching my name is Navi Maraj I'm a CPA聽聽
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that helps real estate professionals around the聽
country save thousands of dollars in taxes so聽聽
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that's real estate agents realtors and brokers聽
but if you don't have or if you're not a real聽聽
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estate professional stick around this is going to聽
apply to your business as well so let me just lay聽聽
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the foundation briefly so I recently created a聽
video where i talked about four reasons in which聽聽
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you should not be taxed as an s corporation and聽
um just as a quick uh sort of recap those four聽聽
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reasons were number one was you don't quite聽
make enough profit in your business for the聽聽
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s corporation to make sense the second one was you聽
have large amounts of w-2 income and you also have聽聽
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a business and that's the topic of this video so聽
we're going to explore that further in this video聽聽
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the third one was that you live in a state聽
that doesn't recognize the s corporation聽聽
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or perhaps taxes it quite heavily um and聽
the fourth reason was you shouldn't have聽聽
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passive income within an s corporation so聽
specifically I'm talking about owning rental聽聽
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real estate where you have rental income that聽
shouldn't flow through an s corporation and so聽聽
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again this video is taking a deeper dive into the聽
second reason which is you've got high amounts of聽聽
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w2 income and you own a small business so in order聽
for me to explain this as i said I'm gonna have to聽聽
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um talk about quite a bit um here's sort of聽
like a warning you know I'm gonna try to my聽聽
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best in all my videos to uh explain something聽
in a very easy way for everyone to understand聽聽
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but this topic is a bit challenging but I've聽
laid it out in the best way i think possible聽聽
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to explain this scenario so um if I've covered聽
a topic in depth already that sort of in this聽聽
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video I'm going to either link that video so you聽
can get a better and deeper understanding of what聽聽
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I'm trying to explain there if not I'll do my聽
best to sort of recap it here as I'm going along聽聽
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so let me just explain the taxes you pay as聽
an employee okay so I'm saying you don't have聽聽
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a small business you work for an employer and聽
you're earning um you know w-2 income so what聽聽
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taxes do you pay so in this scenario I'm saying聽
that you have a quite a high salary it's one in聽聽
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this example 142 800 and I picked that number聽
for a reason and I'll explain why in a second聽聽
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so what taxes do you pay as an employee聽
well as an employee working for an employer聽聽
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you're going to pay social security taxes that's聽
on your paycheck as FICA taxes that's 6.2 percent聽聽
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right so the 6.2 percent times this amount is聽
88.50 850 you also pay Medicare taxes of 1.45聽聽
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so again the 142.8 times the 1.45 is this聽
2070. so in combined in FICA taxes you paid 10聽聽
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920 now what you don't realize is when聽
you work for someone else uh your employer聽聽
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who you work for is also um paying into social聽
security and Medicare for um for you i should say聽聽
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only for you but they have to pay these taxes聽
okay and so um your employer is paying this聽聽
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but you don't really see that as part of聽
your paycheck on your paycheck you just see聽聽
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these contributions because these amounts聽
are being withheld from your gross pay聽聽
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and being put towards social security and Medicare聽
for you okay now also you know when you're an聽聽
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employee you'll see other withholdings聽
from your paycheck and those are usually聽聽
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uh federal income tax that's what fit is here and聽
state income tax and I'm calling that sit right so聽聽
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you're going to pay your federal and state income聽
taxes and those are going to be withheld from your聽聽
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paycheck based on you know how you completed聽
your w-4 form when you started working there聽聽
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dictates how much they're going to withhold from聽
your paycheck and you know depending on what tax聽聽
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bracket you are in uh it'll be anywhere from 10 to聽
37 of your income is withheld from your paycheck聽聽
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at the state level for state income tax if you聽
live in Florida like I do then we don't have聽聽
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state income tax so you don't pay anything but聽
if you you know live in a state like California聽聽
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you might pay upwards of 13 again depending聽
on what tax bracket you fall into so all聽聽
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right that's explaining what taxes you pay聽
as a employee working for an employer now聽聽
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let's separate that for a moment let's say you聽
didn't work as an employee anywhere and you had聽聽
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a small business right uh what uh taxes do you聽
pay as a sole proprietor so a couple things i聽聽
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want to note is well i mentioned a moment ago that聽
uh i chose 142.8 i did so for a reason is because聽聽
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this is what's the what the irs calls your wage聽
base in the year 2021. so what that means is聽聽
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after you make your first 142 800 any money聽
you make after that you don't have to pay聽聽
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social security taxes on so the employer doesn't聽
and you don't either as the employee right聽聽
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so if you continue to earn more and more money聽
you wouldn't pay any more social security but聽聽
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you would continue to pay Medicare taxes okay um聽
so let me now transition to you know you're not聽聽
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an employee and you own a small business聽
so you're taxed as a sole proprietorship聽聽
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so in this example I'm saying you have the same聽
amount of money but in profit right so you might聽聽
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have actually had revenue of let's say a hundred聽
and eighty two thousand eight hundred dollars聽聽
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and then you had forty thousand dollars聽
of business expenses like you know as I've聽聽
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taught my other videos hiring your children and聽
mileage deduction and what have you which brings聽聽
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you down to 142.8 okay so your sole proprietor聽
with 142 800 of profit in your small business聽聽
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what taxes do you have to pay um well when you're聽
a sole proprietor you're now the employer and the聽聽
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employee right so you have to pay all of this you聽
have to pay the 6.2 on the employer side of things聽聽
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the 1.45 percent for Medicare on the employer side聽
of things and again you pay those amounts as the聽聽
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employee right so if you add this up it's close to聽
you know 22 000 of taxes that you have to pay now聽聽
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you know there are some deductions it's a聽
small amount that you get for some of these聽聽
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self-employment taxes so you won't pay exactly聽
this amount but it's fairly close to this okay聽聽
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and let me just say something real quick if you're聽
a tax professional watching i understand that you聽聽
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pay a little bit less than what I'm uh explaining聽
here but I'm trying to keep this video simple for聽聽
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the average viewer i also know that in a moment聽
the additional Medicare tax is going to kick in聽聽
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but again this is for the average viewer which聽
is your average small business owner watching my聽聽
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channel so okay so now you understand that you聽
have to as a sole proprietor so you could be an聽聽
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LLC tax as a sole proprietorship or you could聽
just be doing business as you know john doe's聽聽
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landscaping you're going to be taxed as a sole聽
proprietorship you got to pay both sides of this聽聽
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okay and so if you add this this this and this聽
this all equates to 15.3 percent and if you do聽聽
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the math uh 142 800 times the 15.3 percent gets聽
you this number okay so uh in terms of income tax聽聽
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you're going to pay the same thing right you had聽
142 800 in profit you're going to pay income tax聽聽
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on that profit but you're also going to pay you聽
know the what's called self-employment taxes聽聽
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as a sole proprietorship see I don't know why the聽
IRS really does this but when you're an employee聽聽
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they call these um FICA taxes but as soon as聽
you start your own small business it's not聽聽
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called FICA taxes anymore it's called聽
self-employment taxes okay so let me now聽聽
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explain what happens if you have a small business聽
and that's all you have is your small business聽聽
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and you want to you know form an s-corporation聽
to use the strategies that I've kind of taught聽聽
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on my channel about how to save a bunch of money聽
in self-employment taxes when you're in s corp聽聽
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so in this example again you may have had a聽
hundred and eighty two thousand eight hundred聽聽
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dollars in revenue you had about forty thousand聽
dollars worth of expenses and so um you're left聽聽
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with a profit of a hundred and forty two聽
thousand eight hundred dollars in your s聽聽
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corp now again the s corporation is a strategy to聽
save you money in self-employment taxes so what聽聽
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would happen is with this profit you'll split off聽
the profit into two buckets one will be a salary聽聽
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that you pay yourself and the other you'll take聽
as a distribution and so what's happening here is聽聽
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as an s corp you are the employer still but聽
you're going to pay self-employment taxes on聽聽
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the portion you paid yourself um as a salary聽
so in this example I'm saying let's take 40聽聽
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of this number and pay you a salary the聽
60 will take um as a distribution um聽聽
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uh from your s corporation and so you'll notice聽
here that the distribution that you take doesn't聽聽
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pay self-employment taxes at all which is great um聽
and the salary portion does have to pay these uh聽聽
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taxes again so now he now with the s corp you're聽
now the employer right and you're the employee of聽聽
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an s corp so you're gonna pay uh 57 000 and change聽
times to 6.2 percent in the employer portion of uh聽聽
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social security taxes same kind of thing 57 grand聽
times 1.45 and so you're paying that amount in聽聽
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Medicare taxes on on the employer side then you're聽
also the employee so you're going to pay those聽聽
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same amounts as the employee right so this is why聽
people talk about the s corp so much right and so聽聽
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you know if you have a business making this kind聽
of profit you know as a sole proprietor you got聽聽
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to pay you know 22 grand in self-employment聽
taxes whereas here as an s corp you only have聽聽
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to pay you know almost nine thousand dollars in聽
taxes right so you know you can get uh a twelve聽聽
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thousand dollar you know tax savings by you聽
know being taxed as an s corporation versus聽聽
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a sole proprietorship and so you know it's quite聽
obvious that you would probably want to be taxed聽聽
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this way so that's why there's so many videos聽
promoting the s corporation all over YouTube聽聽
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and a bunch of articles written about it聽
right if given the scenario to pick from this聽聽
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versus this you know your federal income tax and聽
your state income tax is the same right no matter聽聽
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which one you choose but when it comes to these聽
self-employment taxes well I'd rather pay you聽聽
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know the nine thousand dollars versus the twenty聽
two thousand dollars and I'm sure you would too聽聽
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but what they don't explain in those videos is how聽
does this all work together um you know sort of in聽聽
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conjunction with large amounts of w-2 income right聽
and so now what I'm going to explain to you is聽聽
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what happens when you have a high-paying job聽
like this you know this is a dollar amount聽聽
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that you're earning and you also have a聽
sole proprietorship type business okay聽聽
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well what happens here is as i mentioned聽
that's why i kind of touched on the wage base聽聽
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earlier in the video is that once you hit this聽
amount you don't have to pay into social security聽聽
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anymore right so you're not gonna pay聽
this almost nine thousand dollars here聽聽
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or this nine thousand dollars here you'll just聽
pay sort of the Medicare portion right and so um聽聽
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you get a lot of that refunded back almost all of聽
it will get refunded back not you know the full 22聽聽
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000 but specifically the social security聽
is going to get refunded back to you聽聽
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but so what happens though if you are an聽
employee somewhere earning a high wage聽聽
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and you also elect to have your business聽
taxed as an s corporation well what happens is聽聽
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you'll get the employee portion refunded聽
back to you when you file your tax return聽聽
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but what you won't get refunded back to you聽
and the the point i want to make here is the聽聽
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employer portion of this social security taxes聽
you never get that back that's that's gone okay聽聽
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so in this example I'm saying hey that's three聽
thousand five hundred forty dollars that you're聽聽
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never gonna get back whereas here you're gonna聽
get these large chunks of money back okay um so聽聽
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let me summarize what my point is you know if聽
you're a high wage earner having a side business聽聽
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you know taxed as an s corporation is likely聽
costing you money not saving you money so聽聽
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in this example the s corp will cost you three聽
thousand five hundred and forty dollars but keep聽聽
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in mind you also have additional costs associated聽
with the s corporation right so the tax prep fees聽聽
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for an s corp you know if you're working with a聽
competent CPA or accountant they might charge you聽聽
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almost a thousand dollars to prepare this tax聽
return and again i mentioned that you're gonna聽聽
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have a a payroll company since you'll be issuing聽
payroll to yourself that might cost you about 500聽聽
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bucks for the year right so when you add all that聽
up your s-corporation could be costing you about聽聽
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five thousand dollars in in additional fees聽
or taxes each year right so um this happens聽聽
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all the time more than you think I know some of聽
you watching this and you're like hey I don't聽聽
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have this issue I don't have high w-2 income聽
but let me give you some examples this could be聽聽
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here a physician you know working at a hospital聽
earning a high salary but they also do what's聽聽
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called moonlighting on the side and they earn聽
other income that's paid to them via like a 1099聽聽
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they're an independent contractor and so they聽
might elect this strategy but it's going to cost聽聽
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them money in the long run another example is you聽
know you have a high paying job and you sell real聽聽
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estate on the side that might be an example where聽
this is uh happening to you or you could be an i.t聽聽
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consultant generally i t consultants or engineers聽
for example have a high w-2 income salary and if聽聽
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they also have a small business and they you聽
know their taxes and s corporation it may not聽聽
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be making sense for them right so um does the s聽
corporation ever make sense when you're also an聽聽
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employee right that might be a question that you聽
might have right and so the answer is yes you know聽聽
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if your w2 wages are i would say less than about聽
100 000 then this is probably not going to be聽聽
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an issue for you and you can you know continue to聽
be taxed as an s-corporation or if your wages are聽聽
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higher than the wage base you know 142.8 and聽
you have a very very highly profitable business聽聽
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like for example let's say the profit was maybe聽
250 000 in profit then believe it or not the s聽聽
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corporation actually starts to make more sense for聽
you because there's another type of tax i didn't聽聽
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put in here call like the additional Medicare tax聽
and you know topic for another day but basically聽聽
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um that starts to make sense again okay so the s聽
corporation uh might make sense if you have a high聽聽
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wage um and you have a high amount of profit in聽
your business as well um i just want to you know聽聽
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sort of tell you one more time that the聽
federal income tax and the state income聽聽
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taxes are going to be the same across all of these聽
scenarios right the topic of this video is really聽聽
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the you know FICA and self-employment taxes聽
I explained earlier um so i hope that was聽聽
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informative I know it was a lot of information聽
for some of you especially if you're hearing this聽聽
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for the first time but the takeaway should be聽
hey there are scenarios where the s-corporation聽聽
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doesn't always make financial sense right and so聽
in this video in particular the scenario was if聽聽
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you have w-2 income and you work for someone and聽
you have a high salary of 140 000 or more and you聽聽
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also want to tax your business as an s corporation聽
it may not make sense that's the big takeaway here聽聽
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so again i plan on producing the other two聽
videos regarding those remaining two reasons聽聽
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why you shouldn't be taxed as an s corporation so聽
make sure you subscribe so you can catch those as聽聽
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they are released and if you'd like to contact聽
me and if you're watching this on YouTube all聽聽
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of my information is in the description below if聽
you're watching on some other social media channel聽聽
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I'm sure if you click on my profile or my bio聽
or what have you you can find me or if you聽聽
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can just visit my website it's navimarajcpa.com i聽
appreciate all the comments and feedback I've been聽聽
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getting some of you have been shooting me emails聽
do subscribe and I'll see you in the next video
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