馃攳
When NOT to have your LLC taxed as an S Corp | Sole Proprietor vs. S Corporation - YouTube
Channel: Navi Maraj, CPA
[0]
In this video i'm going to discuss four scenarios聽
in which you do not want your business to be taxed聽聽
[8]
as an s-corporation that's right you heard me聽
right i said not be taxed as an s-corporation聽聽
[13]
there's so many videos out there promoting the聽
s-corporation and why it's so great and it is it聽聽
[18]
can save you a lot of money in self-employment聽
taxes but you must also know what the drawbacks聽聽
[24]
are it doesn't fit every single business owner out聽
there so i'm going to touch on the following four聽聽
[30]
scenarios one is how much profit should you聽
be earning in your business before it makes聽聽
[36]
financial sense to have your business taxed as an聽
s corporation the second one would be how large聽聽
[43]
amounts of w income sorry w-2 income rather can聽
negate the tax savings of an s-corporation so by聽聽
[51]
w-2 income i mean you are employed by an employer聽
and actually like have a job that you earn money聽聽
[57]
at what happens when your state that you live in聽
does not recognize the s corporation or perhaps聽聽
[64]
they tax the s corporation and lastly why passive聽
income such as buy and hold rental real estate聽聽
[71]
should not be taxed as an s corporation so if this聽
is your first time watching my name is Navi Maraj聽聽
[77]
i'm a cpa who helps real estate professionals聽
that's real estate agents and realtors and brokers聽聽
[82]
across the country save thousands of dollars聽
in taxes but um that said if you are a regular聽聽
[89]
business owner and you don't deal with real estate聽
stick around because this bus this video is going聽聽
[93]
to apply to all small businesses um let me just聽
lay that lay the foundation for you a moment聽聽
[98]
uh we're talking about when the s corporation聽
may not make financial sense right and so聽聽
[105]
before watching this video some of you may want聽
to brush up on the different differences between聽聽
[110]
what a sole proprietor is an llc an s corp and a c聽
corporation and i have another video on that topic聽聽
[118]
so if you're not quite understanding what i mean聽
by an s corp or how an llc is taxed as an s corp聽聽
[126]
or a corporation a c corporation that is can聽
be taxed as an s corporation you might want to聽聽
[131]
watch those videos first and i'll link them聽
either in the description or somewhere else聽聽
[137]
depending on where you're watching this video as a聽
refresher though from some of those videos and me聽聽
[144]
diving deeper into the s corporation remember聽
that the profit from your business is subject聽聽
[149]
to two different types of tax right so the profit聽
from your business is subject to self-employment聽聽
[156]
taxes and it's subject to income taxes both聽
both at the federal and state level okay聽聽
[163]
self-employment taxes are another way of聽
saying social security and medicare taxes okay聽聽
[171]
the s corp strategy is all about saving money in聽
self-employment taxes it doesn't have anything to聽聽
[178]
do really with the federal income tax or the state聽
income tax so whenever you hear s-corp understand聽聽
[184]
that it's a strategy related to saving money in聽
self-employment taxes and not so much federal聽聽
[192]
income taxes or state income taxes recall that聽
self-employment taxes are paid at a rate of 15.3聽聽
[200]
percent on the profit of your business so let's聽
say you have a very profitable business that has a聽聽
[205]
hundred thousand dollars in profit you're gonna聽
pay self-employment taxes of fifteen thousand聽聽
[210]
three hundred dollars if you're taxed as a sole聽
proprietor and not taxed as an s corporation聽聽
[218]
okay so now that you have that knowledge or that聽
foundation let's talk about the reasons why you聽聽
[223]
should not be taxed as an s corporation so i'm聽
just going to hit the highlights here in this聽聽
[228]
video uh my plan is to create subsequent videos聽
that dive into these topics in greater detail聽聽
[236]
so be sure to subscribe so you don't miss those聽
videos because i think understanding the why is聽聽
[242]
just as important of understanding these聽
sort of statements that i'm making so聽聽
[247]
how much profit should you be earning in your聽
business before baking uh the s corp election聽聽
[254]
and in my view sort of the general is聽
40 000 and i'm defining profit here as聽聽
[261]
revenue minus your expenses right so some聽
of you earn your revenue by selling products聽聽
[268]
others of you earn revenue by selling services聽
right so either way i'm defining as profit as聽聽
[276]
the income that you earn the revenue that you聽
earn minus all your tax deductible expenses so um聽聽
[283]
the reason for the forty thousand聽
dollar figure and why i think that's聽聽
[286]
sort of the um generic amount of profit you should聽
make before making the s corp election is because聽聽
[292]
of the additional cost associated with an s聽
corporation so you're going to have uh tax聽聽
[298]
preparation fees because the s corporation is a聽
separate tax return than that of an individual聽聽
[305]
uh that's taxed as a sole proprietorship let me聽
say that one more time or a little bit differently聽聽
[310]
when you have an s corp you have to fill out or聽
file a s-corporation tax return which is different聽聽
[316]
than when you were perhaps an llc tax as a sole聽
proprietor or perhaps you didn't form an llc and聽聽
[323]
you're just tacked to the sole proprietor聽
there's now two separate tax documents that聽聽
[327]
need to be filed and so cpa is going to charge聽
you money to do that for you right also when聽聽
[332]
you're in s corp you're going to need to take聽
a quote-unquote reasonable salary per the irs聽聽
[337]
there's a lot of paperwork that has to deal聽
with paying yourself and so you'll likely聽聽
[344]
hire a payroll service to perform that for you聽
and also there's the annual maintenance of an s聽聽
[351]
corporation or perhaps the annual reporting of聽
an llc that's taxed as an s corporation or the聽聽
[358]
annual reporting of a c corporation that's聽
then taxed as an s corporation all of these聽聽
[362]
are fees involved in having an s corp right and so聽
basically you know it's cost benefit analysis so聽聽
[369]
you want to make sure that these fees don't聽
outweigh your tax savings and i have found聽聽
[374]
that it's usually around the 40 000 mark where聽
it makes sense to make that s corp election but聽聽
[381]
you know it's not a one-size-fits-all answer and聽
you should consult with your cpa or perhaps myself聽聽
[386]
to make sure that it's right for you the聽
second reason why you may not want to be聽聽
[392]
taxed as an s-corporation is when you have聽
high w-2 wages so if you are an employee聽聽
[398]
at a company and also have um a small business聽
right so you you work state of nine to five and聽聽
[405]
you also have a side hustle where you might sell聽
on amazon or you sell real estate on the side聽聽
[410]
if your rate if your wages already exceed聽
what's called the wage base which in 2020聽聽
[415]
is currently 137 700 that means your income has聽
already hit the cap for social security taxes so聽聽
[425]
the s corp strategy is not going to save you any聽
money as a matter of fact you'll actually lose聽聽
[430]
money if you elect the s corporation status for聽
that business because your s corp will pay for the聽聽
[436]
employer portion of social security and medicare聽
taxes unnecessarily because if you're taxed聽聽
[444]
as a sole proprietor you wouldn't have any of聽
those additional payroll costs associated with the聽聽
[451]
s corp and i i get it that you may not understand聽
the details of what i'm saying here the important聽聽
[456]
thing to note is that if your salary is a you know聽
137 000 at your day job or higher and you're also聽聽
[463]
have a side hustle you might not want to be an s聽
corp okay um again the details will be discussed聽聽
[468]
in another video um there's still an opportunity聽
for the s corp to make sense when your base wages聽聽
[474]
are that high but instead of a 40 000 profit聽
your s corporation profit may need to exceed聽聽
[480]
two hundred and fifty thousand dollars so you'd be聽
having a very profitable business on the side in聽聽
[486]
order for the s corp to make sense all right the聽
third reason is related to your state's uh tax聽聽
[492]
laws so some states do not recognize the federal聽
escort election or if they do um the state uh聽聽
[501]
taxes the profits of the s corporation so um some聽
states that come to minor or cities i should say聽聽
[508]
new york city uh tennessee uh and new聽
hampshire those kind of off the top of my head聽聽
[514]
uh don't assume that that's an exhaustive list聽
there might be a couple others that i'm just kind聽聽
[518]
of forgetting about at the moment but um what聽
happens in these states is they um they may tax聽聽
[524]
the revenue that you earn so not the profit they聽
actually might tax the revenue that you earn or um聽聽
[530]
they may tax the profit of your s corporation聽
at a pretty high tax rate and what happens is聽聽
[537]
uh they tax not just the profit but they also聽
tax the distributions when you as the s corp聽聽
[544]
owner uh take a distribution from the profit聽
of the s corp and as a result a lot of the s聽聽
[550]
corp tax savings are eaten up by these additional聽
taxes and the strategy just no longer makes sense聽聽
[557]
again another video i'll go into the details um聽
if you're in a state i just mentioned you might聽聽
[563]
want to consult with a cpa in that state or that聽
has knowledge about that state or that city's聽聽
[569]
tax laws to make sure you're getting the right聽
advice okay not all cpas and tax preparers聽聽
[576]
take the time to understand all of this so you聽
might have some tax payer preparers are just聽聽
[581]
like yeah you know everyone's an s corp you should聽
be in s corp too without even asking some of these聽聽
[586]
questions that they should be asking the fourth聽
and final reason and you know there's probably a聽聽
[591]
couple other reasons but these are the big ones聽
is passive income okay the irs classifies your聽聽
[597]
income as either active income or passive so what聽
do i mean by these things basically if you run an聽聽
[604]
operational business so let's say you're a realtor聽
or you're a physician or uh you run an e-commerce聽聽
[610]
store you are heavily involved in the day-to-day聽
to generate that revenue and as a result the聽聽
[617]
income you earn is considered active uh by the聽
irs which means that you'll pay self-employment聽聽
[624]
taxes and income taxes on your profits but when聽
you're involved in passive activities such as buy聽聽
[633]
and hold rental real estate right where you're the聽
landlord and you have a tenant paying you rental聽聽
[638]
income that passive activity profit is not subject聽
to self-employment taxes still subject to income聽聽
[647]
taxes but not self-employment taxes but for some聽
reason you know i can't really figure it out some聽聽
[654]
people have rental real estate in s-corporations聽
and as a result they are subjecting themselves to聽聽
[661]
self-employment taxes for no reason they shouldn't聽
be paying those to begin with right um so聽聽
[669]
i hear so many youtubers using the term passive聽
income incorrectly right and they're sort of聽聽
[674]
referring it to it as like hey you know once聽
up you once you set up this you know amazon聽聽
[679]
store or what have you and it's drop shipping and聽
they're ordering direct from the company yeah it's聽聽
[684]
sort of passive in the sense that like you're not聽
really doing a lot of work to earn that income but聽聽
[689]
it's that term is used incorrectly in the in the聽
eyes of the irs and from a tax perspective okay
[697]
make sure you use the term properly um when you're聽
talking about taxes especially when you talk to an聽聽
[704]
accountant or tax preparer um so again selling聽
on amazon via fba is not a passive activity聽聽
[711]
so i hope this helps i hope uh it at least聽
educates you on some of the scenarios where聽聽
[716]
you don't want to be taxed as an s corporation as聽
i mentioned earlier i'll be producing some videos聽聽
[722]
on sort of the why behind these four scenarios to聽
help you better understand this but make sure you聽聽
[728]
do subscribe so you can catch those as they are聽
released and you'll have a better understanding聽聽
[732]
of how all this works if you'd like to contact聽
me and you're watching on in youtube all of my聽聽
[738]
info is in the description below or you can visit聽
my website which is navimarajcpa.com if you're聽聽
[746]
watching on some other platform i'm sure if you聽
click on the link and visit my profile you'll find聽聽
[752]
my website there as always i appreciate all聽
the comments all the feedbacks many of you聽聽
[757]
are sort of reaching out to me and putting time聽
on my calendar and we're having great discussions聽聽
[762]
and i appreciate it like i said do subscribe聽
and i'll see you in the upcoming video
Most Recent Videos:
You can go back to the homepage right here: Homepage