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What Is an S Corporation and Does It REALLY Save You on Taxes? - YouTube
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all right everybody i'm logan alec i'm a
[1]
cpa and in this video i want to talk
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about s-corporations i want to set the
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record straight in this video because i
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have seen too many pieces of content
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online from well-meaning people
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basically implying that once you make a
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certain amount of money in your business
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you got to set up an s corp to save on
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taxes i've even seen
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tax professionals make this
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recommendation as well almost blindly
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well folks the truth is that s corps are
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not for everybody there are some
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warnings i have for you about s corps
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that i will share with you later in this
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video my business is personally
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structured as an s corporation for tax
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purposes because that's what made sense
[33]
for me
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it might make sense for your business as
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well or it might not so in this video i
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want to set the record straight i'm
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going to cover how you become an s
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corporation how as corporations can save
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you on taxes with an easy to follow
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example then i'll get into the
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advantages and disadvantages of scorp so
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you are fully informed before running
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your business as an escort for income
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tax purposes before we start i do want
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to mention a company that i am working
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with right now called collective that
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basically uh specializes in s
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corporations they handle everything for
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you from a corporation which is you know
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setting up your llc or corporation to
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making the s election itself
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to bookkeeping support to payroll
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support
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filing your personal and business tax
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returns every year you can ask them
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questions throughout the year so as a
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cpa this really impressed me that they
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can do all of this under one roof
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nationwide they're not in every state
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yet but they're in most of the bigger
[83]
states and some of the smaller states as
[85]
well if you want to check them out feel
[87]
free to use my link in the description
[88]
below with my promo code logan l-o-g-a-n
[91]
and you'll get 50 off your first two
[93]
months with collective so that's a
[95]
pretty sweet deal all right now let's
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get into s-corp so for starters an
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s-corporation is not a legal entity it's
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a tax election you don't go to your se
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to your state secretary of state office
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and fail to form the secretary of state
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to form an s-corporation no
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what you do is you go to your secretary
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of state you form an lc or corporation
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with your state and then you make an
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election with the irs using foreign 2553
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election by a small business corporation
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to elect as corporation status for your
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lcd corporation within two months and 15
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days of forming that llc or corporation
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optionally if you have an llc you can
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prior to making your s-corp election use
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form 8832 that's the entity
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classification election to elect to be
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taxed at the corporation and then file
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form 25-53 there's obviously more detail
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than that for example most states accept
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the federal s corp election though some
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states have a separate state escort
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election that filed the state something
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else to know is that there is relief for
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you if you're filing your s corp
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election late i'll probably make a video
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on that in the future but that's the
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gist of setting up an s-corporation for
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a new business now moving on to the
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point of this video why would anyone
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elect as corporation status in the first
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place for their business well let me say
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this first and foremost
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for the most part setting up a business
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entity and electing s corporation status
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does not entitle you to more deductions
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in general okay it's not like oh if you
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have all these business expenses you
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can't deduct them if you don't have an
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llc or an llc tax as an s corp that's
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not the case you can still deduct all
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your business expenses on schedule c
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even if you're just a sole proprietor
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with no separate legal entities set up
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if it's just you and your dba but an s
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corp can save you on the social security
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tax and the medicare tax and this is
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really the major tax benefit of the s
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corporation so let me illustrate this
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with an example let's say that you are a
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sole proprietor for tax purposes so you
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do not have an escort you have no legal
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entity or maybe you have a single member
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llc that you haven't elected s corp
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status for and let's say in your
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business you net after expenses and
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everything let's say you had a hundred
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thousand dollars and let's say this is
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your only income for the year
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let's say you're single let's say you
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take the standard deduction
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let's say you don't have a deduction for
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health insurance you'd end up paying
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about 10 000
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in regular income taxes on this income
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assuming no other adjustments that don't
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have to do with your business right so
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we're assuming the only thing on your
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tax return is the 100 dollars in that
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business profit uh the the deduction for
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half of your self-employment tax which
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is uh self-employment tax uh deduction
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has rounded to seven thousand dollars
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here i'm rounding a lot of stuff in this
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video just for simplicity um you also
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get your standard deduction and you get
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your qbi deduction which i've likewise
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rounded
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this gives you a taxable income of a
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little over sixty four thousand dollars
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which would have a regular income tax
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liability of about ten thousand dollars
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and in addition to to your regular
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income tax you also pay self-employment
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taxes about fourteen thousand dollars
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you calculate that by taking the one
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hundred thousand dollar net profit in
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your business multiplying it by ninety
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two point three five percent and then
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multiplying that by fifteen point three
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percent uh that's twelve point four
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percent for social security and 2.9 for
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the medicare tax um so your total tax
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liability is about 24 000
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that's the scenario if you're a sole
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proprietor meaning you have no entity
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set up or you have a single member llc
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but you haven't elected it uh for it to
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be taxes and s corp now what if you do
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have an s corp setup what would your tax
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situation look like well in this case
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let's say that you net the same 100 000
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before paying yourself now one thing
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about s-corps is if you have your own
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s-corp you have to pay yourself a
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reasonable salary that's what the irs
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says so let's say you do this you
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determine or you pay someone to
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determine based on your industry and
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what you do for your business you
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determine that a reasonable compensation
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for you is an annual salary of forty
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thousand dollars per year okay there are
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services out there you can use
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that do a reasonable salary study to
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determine that figure but let's just say
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that 40 000 is reasonable here in this
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case you only pay that social security
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tax and that medicare tax on this 40 000
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we call that the payroll tax so 15.3
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percent times forty thousand dollars is
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about six thousand dollars three
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thousand dollars which is paid by you as
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the employee three thousand dollars of
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which is paid by your s corp as employer
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uh but obviously only the three thousand
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dollar employer piece affects the net s
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corps net income so you're not s corp
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income the income that's going to show
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up on your schedule k1 from your s
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corporation is 57 000 keep that in mind
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because now we're going to jump over to
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your form 1040 your individual tax
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return and take a look at what your
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individual tax situation would look like
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in the s corp scenario so on your 1040
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you would have the w-2 for 40 000 right
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this is your w-2 from your own s
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corporation you would have the 57 000
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from your s corporation k-1 okay so you
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take the 40 000 in wages you paid
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yourself plus a 57 000
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k1 gives you a 97 000 adjusted gross
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income you take this amount unless your
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12 thousand 550 standard deduction
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less your 11
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400 qbi deduction which is basically 20
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of the fifty seven thousand it gives you
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taxable income of seventy three thousand
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and fifty dollars and your regular
[385]
income tax on seventy three thousand
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fifty dollars is about twelve thousand
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dollars so the total tax in the s corp
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scenario is a twelve thousand dollar
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regular income tax plus the three
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thousand dollars in payroll taxes paid
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by your s corp plus the three thousand
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dollars is social security and medicare
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withholding taken out of your
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paycheck as an employee for a total
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combined tax liability to the federal
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government in the s corp scenario of 18
[407]
000
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you compare that to the sole proprietor
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scenario with this 24 000 liability with
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the s corp you could save six thousand
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dollars okay six thousand dollars you
[417]
can put into your business uh or invest
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or or what have you so you do lose a
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little qbi deduction with the s corp
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scenario because you don't take it on
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the forty thousand dollars in wages uh
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but you make uh you more than make up
[428]
for that um with a social security tax
[430]
and medicare tax savings so that's the
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escort tax strategy in a nutshell keep
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in mind however that you will likely
[435]
incur additional costs for having an s
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corp right payroll cost cost to find the
[438]
s corp tax return what if your state has
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an income tax on s corp you know for
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federal income tax purposes there's no
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income tax on s course but here in
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california for example s corps pay 1.5
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income tax and the minimum tax is eight
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hundred dollars so even if one point
[452]
five percent of your escort income is
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five hundred dollars you still pay 800
[455]
right so you have to weigh your escort
[457]
decision holistically weigh all the
[459]
costs and all the factors not just the
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taxes later in this video i'll do a
[462]
rundown of the advantages and
[464]
disadvantages of the vest corpse but for
[466]
now let me just pinpoint some situations
[468]
in which you may not want to be an
[469]
escort situation number one in which you
[471]
might not want to set up an s corp is if
[473]
it's for a side hustle but you also have
[475]
a well-paying day job so
[477]
as i showed you in my earlier example
[478]
the main way in s corporation can reduce
[480]
its owners taxes is by reducing their
[483]
self-employment tax liability with an s
[485]
corporation only the shareholder
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employees wages are sub to the social
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security and medicare taxes the other
[490]
earnings are not though they are still
[491]
sub trailer income tax on the
[493]
shareholder employees tax return the
[495]
self-employment tax rates are 12.4 for
[497]
the social security portion and 2.9 for
[499]
the medicare portion but taxpayers only
[501]
pay the social security tax on combined
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wages and self-employment income up to
[506]
an annually set social security wage
[508]
base which is 142 800 this year
[511]
wages and self-employment income in
[513]
excess of the social security wage base
[514]
amount are not subject to the social
[516]
security tax so if you make at least 142
[518]
800
[519]
in your w-2 drop your only
[521]
self-employment tax is a 2.9 medicare
[523]
portion in this scenario the tax savings
[525]
generated by electing s-corp status for
[526]
your business may not outweigh the
[528]
additional costs such as payroll payroll
[530]
processing fees the cost to pay a cpa to
[532]
prepare the corp tax return for you um
[535]
also your s corporation will have to
[536]
withhold both social security and
[537]
medicare from your wages paid out of the
[539]
s corp regardless of if your day job
[541]
wages exceed the social security wage
[543]
base um as an employee right you can get
[546]
a refund for the excess social security
[548]
taxes withheld for your paycheck we do
[550]
your form 1040 but you can't get back
[551]
the s-corps portion of social security
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withholding on your wages this is not
[556]
the case if you filed a sole proprietor
[558]
in which case you do not even have to
[559]
pay the social security tax on your net
[561]
business income in the first place if
[562]
your day job employment income exceeds
[564]
the social security wage base for the
[565]
year situation number two in which i
[567]
wouldn't recommend an s corporation in
[569]
general is if you want to take your
[571]
business public right if you want to
[572]
take your business public in the near
[574]
future an s corporation may not be the
[577]
right choice for you since an s
[578]
corporation cannot have more than 100
[580]
shareholders nor can they have
[581]
shareholders other than individuals
[583]
certain trusts and estates situation
[586]
number three in which i wouldn't
[586]
recommend an escort is if it doesn't
[588]
make sense in your state your state may
[590]
have different rules for s-corporations
[592]
than the irs does in fact your state may
[594]
prohibit individuals in your line of
[596]
work from electing as corporation status
[597]
for their business for example
[599]
real estate brokers here in california
[601]
cannot run their business as an s
[603]
corporation also your state may not
[605]
offer the same tax benefits to
[606]
s-corporations for state income tax
[608]
purposes that the federal government
[609]
does for federal income tax purposes for
[611]
example
[612]
new york city-based s corporations will
[614]
still be subject to the standard
[617]
uh eight point eight five percent
[618]
corporate income tax rate right that's
[621]
that's not good
[622]
situation number four which i wouldn't
[623]
recommend in s corp is that the qbi
[625]
deduction says otherwise the sole
[626]
proprietor all of your net business
[628]
income is eligible for the 20
[630]
qualified business income that's the qbi
[632]
deduction set up to certain limitations
[633]
with an s corp however only your net s
[636]
corporation income reported on your
[638]
schedule k1 is eligible for the qbi
[640]
deduction wages paid to you from your s
[642]
corp are not eligible for this deduction
[643]
that means that all else being equal
[645]
your qbi deduction will likely be higher
[647]
as a sole proprietor than as the owner
[648]
of an escort
[650]
and the higher regular income tax rate
[652]
the more valuable your qbi deduction is
[654]
and therefore the more this reduction in
[656]
the qbi deduction is a drawback
[658]
reflecting s corporation status for your
[660]
business in your particular situation
[662]
that doesn't necessarily mean that you
[663]
shouldn't elect us corporation status if
[665]
you're in a very high tax bracket it's
[666]
just something else that should be
[668]
considered when analyzing whether
[670]
electing ask corporation status for your
[671]
business makes sense or not all right
[674]
now let's talk about as corporation
[675]
advantages and disadvantages starting
[677]
with the advantages and you have to
[678]
weigh right advantages and disadvantages
[680]
against each other to decide if an
[682]
escort is right for you or uh you can
[684]
work with a professional to help you
[686]
make that decision in the description
[687]
below i have my link to collective
[689]
they're a firm that specializes in
[691]
s-corporations for one-person businesses
[693]
um now like i said earlier personally i
[695]
felt that the advantages of letting
[697]
s-corporation status for my llc outweigh
[699]
the disadvantages but my situation is
[701]
unique your situation is unique you
[703]
really have to think through all these
[705]
things to determine if an s corp is
[707]
right for you but here are the
[707]
advantages advantage number one like i
[710]
said a reduction in social security and
[712]
medicare tax liability i showed you
[714]
earlier in the video electing s
[715]
corporation status can reduce a business
[717]
owner's social security and medicare tax
[719]
liability advantage number two pass
[721]
through treatment unlike c corporations
[724]
which pay tax on their own taxable
[725]
income with the owner also paying taxes
[728]
on any dividends received from the
[729]
corporation as corporations do not pay
[732]
tax on their income for federal income
[733]
tax purposes as corporations rather pass
[736]
through their net income and other tax
[737]
attributes such as tax credits to their
[739]
shareholders and the shareholders the
[741]
shareholders report and pay tax on these
[743]
items on their own tax returns note that
[745]
some states just as california like i
[746]
said do impose an as corporation level
[748]
income tax so for state tax purposes
[750]
escort shareholders may be subject to
[752]
double
[753]
double taxation at the state level
[755]
advantage number three possible
[756]
reduction of audit risk as corporations
[758]
do statistically face lower irs audit
[760]
risk than sole proprietors reporting on
[762]
schedule c that said a popular s-corp
[764]
audit trigger is paying too low a salary
[767]
to the shareholder employee so make sure
[769]
that your salary paid out of your escort
[771]
would be considered reasonable by irs
[772]
standards all right now let's talk about
[774]
s-corporation disadvantages disadvantage
[776]
number one you got to determine that
[778]
reasonable compensation s-corps are
[780]
required to pay their shareholder
[781]
employees a reasonable salary
[783]
determining this amount can be a little
[785]
bit tricky though there are specialized
[786]
services out there to help you determine
[788]
your reasonable salary also putting
[790]
yourself on payroll means incurring
[791]
payroll costs to payroll processors like
[794]
augusto or an adp
[796]
this advantage number two additional tax
[798]
return filing your s corporation will
[800]
need to file its own tax return form
[801]
1120s hiring a cpa or other tax
[804]
professional to do this will cost you at
[805]
least 1200 1500 or so also your
[808]
individual tax situation may be more
[809]
complicated as well now that you have to
[811]
report that schedule k1 you received
[813]
from your s corp disadvantage number
[815]
three s corp is not available to certain
[817]
professionals in some states some states
[819]
have rules barring certain professionals
[820]
from running their business as an s
[822]
corporation for tax purposes for example
[824]
in several states real estate brokers
[825]
cannot run their business as an s
[827]
corporation disadvantage number four
[829]
possible double taxation for state tax
[831]
purposes most states do not impose
[833]
double taxation on s-corporations but
[835]
some states do like i mentioned earlier
[837]
in the video california imposes a 1.5
[839]
income tax on s-corporations with an 800
[842]
minimum tax and new york city-based s
[844]
corporations are subject to the standard
[846]
8.85
[847]
corporate income tax rate disadvantage
[849]
number five everything must be allocated
[851]
pro rata unlike partnerships which
[853]
permit specially allocating tax items to
[855]
their partners as corporations must
[857]
allocate all items of s corporation
[859]
income deductions and credits to their
[860]
shareholders exactly according to their
[862]
ownership percentage doing otherwise
[864]
could cause the irs to determine the s
[866]
corporation has more than one class of
[868]
stock
[869]
which would cause the s-corporation to
[870]
be involuntarily terminated so should
[873]
you form an s-corporation for your
[875]
business i can't tell you the answer to
[877]
that question in a youtube video you
[879]
have to crunch the numbers yourself you
[880]
have to weigh the advantages i talked
[882]
about with the tax savings and all that
[884]
versus the disadvantages the additional
[886]
costs and additional tax return payroll
[888]
costs and all that like i mentioned
[890]
previously you can check out collective
[892]
they specialize in s-corps and taxes for
[894]
s-corp owners they're basically a
[896]
one-stop tax and accounting shop for
[898]
s-corp owners they handle entity
[899]
formation so if you don't have an s-corp
[901]
yet so they can set up your llc elect as
[904]
corp status on it they handle accounting
[906]
and bookkeeping and payroll and taxes
[908]
your quarterly taxes right that gets a
[910]
lot of people behind
[912]
they handle your escort's tax return
[913]
your individual tax return a lot of
[915]
other things collective members saving
[916]
average nine thousand dollars per year
[918]
it is a subscription-based platform you
[920]
can use my link in the description below
[921]
with my promo code logan l-o-g-a-n to
[924]
check them out and you'll get 50 off
[926]
your first two months with collective if
[928]
you like this video there are some
[930]
similar videos related taxes over here
[932]
and over here on the left-hand side of
[934]
your screen
[935]
there's a video i made about llc's what
[936]
is nlc do lc save you on taxes as well
[939]
as a video on my thousand dollar and our
[941]
side hustle if you haven't seen those
[942]
videos yet be sure to check them out
[944]
i'll see you over there bye
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