@@NaviMarajCPAawesome content! Im am llc about to switch over to get taxed as an S Corp. I live in Los Angeles CA. Do you know if I pay myself a salary and try to get a home loan, would they base my loan off the total amount earned for the year or just the salary I pay myself. Im the only employ/shareholder of my company. Ex: let’s say I make $100k and pay myself $40k salary ,will I only qualify for a loan based off the $40k or the total $100k? Thanks 🙏🏽
Sir I think some calculations are wrong. Please correct me if am wrong. In first example when John is a sole proprietorship . Wouldn't he pay self employed taxes on 92.35% of 100,000 = 92,350. And when he pays 15.3% in total.he would also get a deduction on sch 1 as above the line deduction for half of the self employment taxes?? That means he"ll pay only. 7.65% of 92350 that is = 7,064?? As the employer share of 7.65 in total would be a deduction on sch 1 of 1040. Please correct me if I am wrong. Currently preparing for reg section 🙏🏻
Great video thank you. My s-corp net income is growing a lot more than I expected this year. To reduce my business income tax liability, should I increase my salary/payroll or take bigger draw? What if I want to leave funds in the business to grow it instead of taking money out (draws)? Thanks so much
Hi Ed - these are great questions but I can't answer them via TH-cam comments as I would have a follow-up question. I may make a video related to Reasonable Compensation and it may answer them. If not, you're welcome to visit my website and book a Q&A session and we could talk through it.
For the S corp, can you explain how you got the $15,000 for federal tax and $5,000 for state tax? Also, for the self employed, can you explain how you got that federal income tax rate at 15%? I just want to understand it.
As a sole proprietor, I can still deduct my health care premiums and my husbands, thus reducing my taxable income. I think you need to also include as a true offset the increase in tax preparation as well as the annual cost of maintaining your llc.
It is true that S-Corp status can potentially save on social security taxes but not on income taxes. The IRS rule is that if you pay yourself a reasonable salary, then the remainder of the company profit is not subject to social security tax. This could save several thousand dollars per year. However, there is another IRS ruling that says if you are the sole employee and are responsible for 100% of the services you provide then all of your earnings are subject to social security tax. The only way to circumvent this ruling is to claim that some of your earnings are not related to services but rather to return on capital invested. If the company has no infrastructure, this this argument is suspect. I fell you left this important fact out. I have been advised by my CPA that as an LLC business owner who provides 100% of the services with no company infrastructure I do not qualify to file as an S-Corp. Your thoughts on this please. Thank you in advance for your time.
Give this video a watch, it covers my thoughts on this: How Much To Pay Yourself | Reasonable Compensation Myths th-cam.com/video/8pDD-DzjF4Q/w-d-xo.html
Yes, here is the evidence: www.irs.gov/pub/irs-drop/n-05-08.pdf?fbclid=IwAR0gyZCACm0hdZcHPBaBoTd8BE5Qse1Bf5PjFSBngApsJFcBTYc6ryh79t8_aem_AZ2sbZqJdLG82MZe77oEZV9ysu7HX_hk4Do-GNVD5SCbaD4KgRoTlV7eB9XUg8V25xk
Navi, wouldn’t you need to add the health insurance premiums and HSA amounts to box 1 W-2 income? I guess you’re not showing this in your example because there would be a deduction in the 1040 for the self-employed health insurance and HSA?
i like that in your example john pays less social security taxes BUT will the amount of his social security benefits decrease because he's paying less to social security?
Yes, that is why it is important to use the tax savings to fund your own retirement. You can use an IRA, SEP IRA, or 401(k) as a business owner. There are other vehicles as well. I have a video on why social security sucks on my TH-cam channel that you can view to dive into the details.
Navi, great video , But An S corporation must pay employment taxes on employee pay only , the purple section , Federal and State taxes should only apply to the $40K salary John is making , not the entire $100K . so , $6K Federal , $2K State , no ?
Does the amount after deduction on scorp consider as earned income? I have payroll, so is the amount get added on top of my payroll income for my personal income tax?
Excellent video. In your example your employee gets paid much more in profit distributions than wages. Do you base that on "reasonable wages" according to the industry? I was under the impression that profit distributions have to be much less than wages paid. Do you write two separate checks; for wages and distributions or a lump sum? Thanks again.
The reasonable compensation has to be whatever is reasonable for that type of work. It's unrelated to the amount of the distributions. If you have an unusually profitable business, it can be reasonable that the reasonable compensation isn't huge, but the profit distribution could be.
Do you really need to incorporate the HSA and medical benefits in the payroll to save on FICA? Doesn’t that even out when you do your annual tax return?
Yes, if you are a 2% or greater owner of the S Corp you’re actually required to do it this way. It’s hard to explain here but I teach it in detail in my course. In short it’s a business expense but then, as you noted, is added as income to your pay. Then, it’s an adjustment to income on your individual return so after netting all that, it saves on income tax. Additionally, if run through payroll properly, it saves on FICA taxes as well.
Navi, on the flip side, wouldn’t paying higher reasonable salary (which equate to higher FICA) yield higher return when it comes to collecting social security? So if I pay myself lower reasonable salary, I pay less FICA. When it comes to collecting social security, I would collect less money. What is a good equilibrium if you know what I mean?
@@untilco, essentially SS is a legal pyramid scheme that we are extorted, by our government, to pay. But if we were to go set up the same pyramid scheme in the private sector, we would be committing a crime. Got to love big government...
Are you “not sure” or are you “sure” and just being polite? If you find any official guidance on this, feel free to share it with me. I’ve vetted it with quite a few tax professionals but I understand it’s not black and white. This fact sheet eludes to it: www.irs.gov/pub/irs-news/fs-08-25.pdf
@@NaviMarajCPA Wouldn't pre-tax HSA deductions need to go through the Section 125 Plan to avoid FICA, and that plan being a fringe benefit mean that owners couldn't participate in it?
No. In general, you typically can't deduct something as a business expense if you substantially personally benefit from it outside of the business. This is the same reason why you generally can't deduct things like haircuts or clothing in most cases.
Hi Navi, how do you classify health insurance premiums on quickbooks? I did it under personal healthcare premiums and its on the equity side of the balance sheet reducing equity. Is this right? If so, I will still be able to deduct these expenses come tax time?
This video is wrong. An S corp election has a pass-through tax structure, meaning the taxes pass-through to the business owners, and the company isn’t taxed at all. The main way that an S corp saves you from taxes is that you can set a fraction of business income as your own income and only pay taxes on that, and the rest you can pay in distributions, which is not FICA taxed at all.
…. But you are still taxed on the pass-through S Corp profit. So, pay your self a smaller salary increases the profit of the S Corp subject to income tax. These guys never show the full picture!
@@untilco thanks for the reply. I didn’t mean to imply your information is incorrect, which it isn’t. My point is just that as an individual business owner I am concerned about my total out of pocket cash for taxes; which is my personal 7.65% FICA + my S Corps 7.65% FICA + income tax on the remaining S Corp profit passed through to me via my K-1.
Why do these experts always leave off the fact that the S Corp still pays the other 7.65% FICA tax. Therefore, I, as the sole business owner, am still out the full 15% “self employment” tax cash impact.
Structuring as an s-corp is useful in reducing fica taxes since you only pay them on the portion you pay yourself as salary, and not on the remainder of profits you take as distributions. its still the full amount of fica tax percent, its just on a smaller portion of profits.
Not sure I understand your comment. If you have a question, please ask it and I'll try and respond. Generally, S Corp distributions are taxable. You pay federal and state income taxes on the amount you distribute. Even if you don't distribute the profits to yourself, you will still pay federal and state income tax on the profits of your S Corporation.
So your not really saving it, your spending it on health insurance. Also, to anyone reading this, HSA contributions must be spent on “qualified medical expenses” in order to be tax free. Also you cannot do that if your spouse is covered under a plan with their employer. There’s way more to go over than this guy is saying. It’s kind of dangerous to put out this info. Always consult with a professional before trying this.
@@J.WinstonCPA actually putting out click baity tax videos, even from a real professional, is turning the profession into a joke. I can’t tell you how many people I hear say, “well I heard it on youtube” as their taxes are completely screwed up
The question is whether you want to pay for insurance with pre tax dollars or post tax dollars , so if you need insurance is better to make it a write off, if you don’t then yeah , don’t get it and keep that money which will get eventually taxed
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How come you don't mention qbi? How does losing qbi on wages/distributions affect total taxes paid?
Love the quality of your videos and the value you're providing! Thank you very much for your hard work.
on the last example - You save 29% but you need to spend 17.3k in medical/hsa in order to save 29%. Does that break even? ty !
you're the best ...you are a blessing to others (priceless)
Great info for those of us who are LLC. Thank you!
Hey Skipper! Good to see you again. You’re welcome and hope all is well.
@@NaviMarajCPAawesome content! Im am llc about to switch over to get taxed as an S Corp. I live in Los Angeles CA. Do you know if I pay myself a salary and try to get a home loan, would they base my loan off the total amount earned for the year or just the salary I pay myself. Im the only employ/shareholder of my company. Ex: let’s say I make $100k and pay myself $40k salary ,will I only qualify for a loan based off the $40k or the total $100k? Thanks 🙏🏽
Wow, grear explanation. I am now an S Corp, so are my owners distributions taxed. Please do a video on owners distribution. Thanks!!
Great info! Thanks Navi, can you make a video of how to
Properly integrate your healthcare costs into officer payroll?
I think I explain it in this video: th-cam.com/video/GG6ChqbPk70/w-d-xo.html
Very well done and clear. No better way to explain then with numbers side by side in Excel.
This was incredible, I’ll definitely be watching your other videos.
Another question? Do you take clients for accounting? A medical practice that is LLC taxed as an S Corp
Depends on complexity…if you shoot me an email I can refer you to someone if I won’t be able to assist.
This might be a stupid question, but looking at the purple section, don’t you still have to pay FICA and Medicare for both employee and employer?
great video! Could you please make a video on S Corp tax savings with IRA or retirement accounts.
Which is better - having the company deduct the cost for HSA and healthcare premiums as a business expense or reducing taxable salary?
Sir I think some calculations are wrong. Please correct me if am wrong.
In first example when John is a sole proprietorship . Wouldn't he pay self employed taxes on 92.35% of 100,000 = 92,350.
And when he pays 15.3% in total.he would also get a deduction on sch 1 as above the line deduction for half of the self employment taxes??
That means he"ll pay only. 7.65% of 92350 that is = 7,064?? As the employer share of 7.65 in total would be a deduction on sch 1 of 1040.
Please correct me if I am wrong.
Currently preparing for reg section 🙏🏻
Great video thank you. My s-corp net income is growing a lot more than I expected this year. To reduce my business income tax liability, should I increase my salary/payroll or take bigger draw? What if I want to leave funds in the business to grow it instead of taking money out (draws)? Thanks so much
Hi Ed - these are great questions but I can't answer them via TH-cam comments as I would have a follow-up question. I may make a video related to Reasonable Compensation and it may answer them. If not, you're welcome to visit my website and book a Q&A session and we could talk through it.
For the S corp, can you explain how you got the $15,000 for federal tax and $5,000 for state tax?
Also, for the self employed, can you explain how you got that federal income tax rate at 15%? I just want to understand it.
As a sole proprietor, I can still deduct my health care premiums and my husbands, thus reducing my taxable income. I think you need to also include as a true offset the increase in tax preparation as well as the annual cost of maintaining your llc.
It is true that S-Corp status can potentially save on social security taxes but not on income taxes. The IRS rule is that if you pay yourself a reasonable salary, then the remainder of the company profit is not subject to social security tax. This could save several thousand dollars per year. However, there is another IRS ruling that says if you are the sole employee and are responsible for 100% of the services you provide then all of your earnings are subject to social security tax. The only way to circumvent this ruling is to claim that some of your earnings are not related to services but rather to return on capital invested. If the company has no infrastructure, this this argument is suspect. I fell you left this important fact out. I have been advised by my CPA that as an LLC business owner who provides 100% of the services with no company infrastructure I do not qualify to file as an S-Corp. Your thoughts on this please. Thank you in advance for your time.
Give this video a watch, it covers my thoughts on this: How Much To Pay Yourself | Reasonable Compensation Myths
th-cam.com/video/8pDD-DzjF4Q/w-d-xo.html
What if you don’t take a distribution as an SCorp? Like you had no profit or left your profit in the business for working capital
Scorp2 saves on tax but you lose 17k in health insurance you weren't paying in scorp1.... or am i missing something?
Can S corp owner make pre tax HSA contributions to avoid FICA? I am seeing videos by other CPAs claiming otherwise.
Yes, here is the evidence: www.irs.gov/pub/irs-drop/n-05-08.pdf?fbclid=IwAR0gyZCACm0hdZcHPBaBoTd8BE5Qse1Bf5PjFSBngApsJFcBTYc6ryh79t8_aem_AZ2sbZqJdLG82MZe77oEZV9ysu7HX_hk4Do-GNVD5SCbaD4KgRoTlV7eB9XUg8V25xk
Navi, wouldn’t you need to add the health insurance premiums and HSA amounts to box 1 W-2 income? I guess you’re not showing this in your example because there would be a deduction in the 1040 for the self-employed health insurance and HSA?
did you find answer yet?
Would you recommend studying for the CPA or CMA for tax advising for business?
Neither to be honest. Assuming you know the basics about accounting and tax, you can find books online to help you learn the tax strategies.
i like that in your example john pays less social security taxes BUT will the amount of his social security benefits decrease because he's paying less to social security?
Yes, that is why it is important to use the tax savings to fund your own retirement. You can use an IRA, SEP IRA, or 401(k) as a business owner. There are other vehicles as well. I have a video on why social security sucks on my TH-cam channel that you can view to dive into the details.
YUP
@@NaviMarajCPA interesting. yes i am
Navi, great video , But An S corporation must pay employment taxes on employee pay only , the purple section , Federal and State taxes should only apply to the $40K salary John is making , not the entire $100K . so , $6K Federal , $2K State , no ?
Does the amount after deduction on scorp consider as earned income? I have payroll, so is the amount get added on top of my payroll income for my personal income tax?
Excellent video. In your example your employee gets paid much more in profit distributions than wages. Do you base that on "reasonable wages" according to the industry? I was under the impression that profit distributions have to be much less than wages paid. Do you write two separate checks; for wages and distributions or a lump sum? Thanks again.
The reasonable compensation has to be whatever is reasonable for that type of work. It's unrelated to the amount of the distributions. If you have an unusually profitable business, it can be reasonable that the reasonable compensation isn't huge, but the profit distribution could be.
Do you really need to incorporate the HSA and medical benefits in the payroll to save on FICA? Doesn’t that even out when you do your annual tax return?
Yes, if you are a 2% or greater owner of the S Corp you’re actually required to do it this way. It’s hard to explain here but I teach it in detail in my course. In short it’s a business expense but then, as you noted, is added as income to your pay. Then, it’s an adjustment to income on your individual return so after netting all that, it saves on income tax. Additionally, if run through payroll properly, it saves on FICA taxes as well.
how do we file this via scheduled c self employed or 1120-S
Loved the way make this video🎉
Navi, on the flip side, wouldn’t paying higher reasonable salary (which equate to higher FICA) yield higher return when it comes to collecting social security? So if I pay myself lower reasonable salary, I pay less FICA. When it comes to collecting social security, I would collect less money. What is a good equilibrium if you know what I mean?
@@untilco, essentially SS is a legal pyramid scheme that we are extorted, by our government, to pay. But if we were to go set up the same pyramid scheme in the private sector, we would be committing a crime. Got to love big government...
can i get a copy of the spreadsheet?
I would love a copy too!
awesome education!!
Thanks for watching and for the feedback!
Not sure if those medical and HSA deductions reduce the FICA components subject to the tax.
Are you “not sure” or are you “sure” and just being polite? If you find any official guidance on this, feel free to share it with me. I’ve vetted it with quite a few tax professionals but I understand it’s not black and white. This fact sheet eludes to it: www.irs.gov/pub/irs-news/fs-08-25.pdf
@@NaviMarajCPA Wouldn't pre-tax HSA deductions need to go through the Section 125 Plan to avoid FICA, and that plan being a fringe benefit mean that owners couldn't participate in it?
Hi Navi, Can we claim lasik surgery cost as my business (Single Member LLC-Scorp) expenses?
No. In general, you typically can't deduct something as a business expense if you substantially personally benefit from it outside of the business. This is the same reason why you generally can't deduct things like haircuts or clothing in most cases.
There is a strategy around this....it's related to a Health Reimbursement Arrangement (HRA) and its very nuanced when you're taxed as an S Corp.
@@NaviMarajCPAThat's a good point. I think I missed that he said it was an S corp when I read it before.
Hi Navi, how do you classify health insurance premiums on quickbooks? I did it under personal healthcare premiums and its on the equity side of the balance sheet reducing equity. Is this right? If so, I will still be able to deduct these expenses come tax time?
My tax lady said put the health insurance in your business name . The business pays your health insurance.
Self employment taxes aren’t “avoided” in your S Corp, the other half just comes out of the companies wallet.
Am I missing something?
Thank you
You're welcome!
Thanks 🇲🇽 🚛 🇱🇷
Video start @5:25
This video is wrong. An S corp election has a pass-through tax structure, meaning the taxes pass-through to the business owners, and the company isn’t taxed at all. The main way that an S corp saves you from taxes is that you can set a fraction of business income as your own income and only pay taxes on that, and the rest you can pay in distributions, which is not FICA taxed at all.
…. But you are still taxed on the pass-through S Corp profit. So, pay your self a smaller salary increases the profit of the S Corp subject to income tax. These guys never show the full picture!
@@untilco thanks for the reply. I didn’t mean to imply your information is incorrect, which it isn’t. My point is just that as an individual business owner I am concerned about my total out of pocket cash for taxes; which is my personal 7.65% FICA + my S Corps 7.65% FICA + income tax on the remaining S Corp profit passed through to me via my K-1.
Why do these experts always leave off the fact that the S Corp still pays the other 7.65% FICA tax. Therefore, I, as the sole business owner, am still out the full 15% “self employment” tax cash impact.
Structuring as an s-corp is useful in reducing fica taxes since you only pay them on the portion you pay yourself as salary, and not on the remainder of profits you take as distributions. its still the full amount of fica tax percent, its just on a smaller portion of profits.
Wrong message. Never spoke about distribution tax
Not sure I understand your comment. If you have a question, please ask it and I'll try and respond. Generally, S Corp distributions are taxable. You pay federal and state income taxes on the amount you distribute. Even if you don't distribute the profits to yourself, you will still pay federal and state income tax on the profits of your S Corporation.
@@NaviMarajCPA is that because of quarterly taxes?
You don't pay 35k on 100k you're missing the 92.5% it's less
So your not really saving it, your spending it on health insurance. Also, to anyone reading this, HSA contributions must be spent on “qualified medical expenses” in order to be tax free. Also you cannot do that if your spouse is covered under a plan with their employer. There’s way more to go over than this guy is saying. It’s kind of dangerous to put out this info. Always consult with a professional before trying this.
There are 10 billion regulations to the tax code. Do you expect him to go over all of it in 10 minutes???
@@J.WinstonCPA actually putting out click baity tax videos, even from a real professional, is turning the profession into a joke. I can’t tell you how many people I hear say, “well I heard it on youtube” as their taxes are completely screwed up
You’re reducing your tax liability in exchange for insurance vs paying just taxes and getting nothing.
@@loungydocIs the amount you pay for that insurance equal to the amount of taxes you'd otherwise pay?
The question is whether you want to pay for insurance with pre tax dollars or post tax dollars , so if you need insurance is better to make it a write off, if you don’t then yeah , don’t get it and keep that money which will get eventually taxed
is the salary from SCorp self employment deduction eligible since your the only person in the LLC or no becasue "salary" is not self employment