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Blog: DIY Business Coaching 365
Hey there, fellow entrepreneur!
Do you enjoy being an entrepreneur but HATE the extra Self-Employment taxes you are paying with your 2023 tax return? Would you LOVE to maximize your tax savings through an easy tax planning idea that EVERY ENTRENEUR has access to. If so, it is time to consider the value of an S Corporation for your business.
In this blog post, we will break down the benefits of choosing an S Corporation structure and how it can help you save money, protect your assets, and achieve your business goals.
The Big Idea: Maximize Tax Savings Through a DIY S-Corporation Entity Status.
The DIY Instructions: As this one is a big one, I am going to lean into my tax CPA experiences. The most important DIY you can do regarding an S Corporation is to gain general knowledge on in. So here we go with a detailed breakdown in six steps to get you there:
1- What is an S Corporation?
Nerd Words: An S Corporation, also known as an S Corp, is a popular business structure that combines the limited liability protection of a corporation with the tax advantages of a partnership or sole proprietorship. Unlike a traditional C Corporation, which is subject to double taxation on corporate profits and shareholder dividends, an S Corporation allows profits and losses to pass through to the shareholders' personal tax returns.
DIY Real Talk: An S Corporation is the entity of choice for any entrepreneur that knows about them at all. It is the best of all the worlds.
2- What is Limited Liability Protection?
Nerd Words: Like a C Corporation, an S Corporation provides limited liability protection to its shareholders. This means that the personal assets of the shareholders are shielded from business liabilities and debts. In the event of a lawsuit or creditor claim, the shareholders' personal assets are protected from seizure to satisfy business obligations.
DIY Real Talk: If your business gets sued or creditors come after your business, your personal assets aka home, etc. cannot be taken.
3- What is Pass-Through Taxation?
Nerd Words: One of the most significant advantages of an S Corporation is its pass-through taxation feature. This means that business profits and losses are "passed through" to the shareholders' personal tax returns, where they are taxed at the individual income tax rates versus paying taxes twice as a company and individual much like a C Corporation.
DIY Real Talk: All dollars earned in your company end up on your personal tax return. You avoid double taxation, so this saves money on taxes and increases your take-home income.
4- What expenses can I deduct with an S Corporation?
Nerd Words: S Corporations offer several tax-saving opportunities and deductions for business owners. For example, shareholders can deduct business expenses, such as salaries, benefits, and operating costs, reducing their taxable income. Additionally, S Corporation shareholders may be eligible for the Qualified Business Income (QBI) deduction, which allows them to deduct up to 20% of their business income on their personal tax returns.
DIY Real Talk: You can deduct all the business expenses you always have when you were considered either an LLC or sole proprietor for taxes. Nothing really changes here😊.
5- What is the flexibility of an S Corporation?
Nerd Words: S Corporations provide flexibility in structuring ownership and management arrangements. They can have multiple classes of stock, allowing for diverse levels of ownership and voting rights. Additionally, S Corporations can easily add or remove shareholders, making them an attractive option for businesses seeking growth and expansion opportunities.
DIY Real Talk: There is TONS of flexibility. If you build your DREAM BUSINESS, an S Corporation can handle it!
6- What about that Self-Employment tax benefit?
Nerd Words: Shareholders of S Corporations that are also employees can be issued a Form W-2 in addition to distributions. Determining a reasonable salary based on industry standards, including payroll, and withholding tax is crucial. Additionally, complying with IRS rules and regulations regarding shareholder compensation is required.
DIY Real Talk: You can give yourself a W-2 at a reasonable amount for your business contributions as an employee. This piece takes out that 15.3% of self-employment taxes you HATE.
Example A: No S Corporation with Business Income = $50K per year, SE tax = $7,650
Example B: S Corporation with Business Income = $50K per year, Now W-2 $30K, SE tax = $3,060; *Savings with the S Corporation = $4,560 (each year)!!!
BUSINESS INSIGHTS
It is a fact that all entrepreneurs, small business owners, start-ups, etc., who make more than $400 during any given tax year must tack on a combination of Social Security and Medicare taxes of 15.3% for not only 2023 but 2024. Another fact, it feels like a gouge to the pocketbook.
DIY TIPS
Assess Your Business Needs: Evaluate your income, growth potential, and shareholder structure to determine if S Corporation status aligns with your goals. A business strategy is key to making this happen.
Seek Professional Advice: Consult with tax and legal experts to understand the tax implications and legal requirements of electing S Corporation status. Sounds expensive, nope! Many tax accountants, aka CPAs, will hold a complimentary meeting to learn about your needs. Also, it is very inexpensive for them to set up an S Corporation for you. So even in year one, you will keep more money, even after you pay the CPA.
DIY TOOLKIT
While an S Corporation offers many benefits for small businesses and entrepreneurs, it is essential to consider your specific business needs and circumstances before making the switch. If you are ready to take advantage of the tax savings, limited liability protection, and flexibility offered by an S Corporation, it is time to take the next DIY step for your business.
Consult with a trusted advisor to explore your options, navigate the legal requirements, and set up your S Corporation with confidence.
Overview of S Corporation status and its benefits (Done)
What do I need to talk to my trusted advisor aka CPA about?
The list of reasons this makes sense for me and my business.
The annual tax savings I can expect net of fees and charges for setup and payroll items.
Step-by-step instructions on how to elect S Corporation status for your business.
Considerations for eligibility and requirements.
Common mistakes to avoid when electing S Corporation status.
24x7 DIY Business Coaching Support: tom@livethemcvaygroup.com or carli@livethemcvaygroup.com
CALL TO ACTION
Choosing an S Corporation for your business can be a game-changer, providing significant tax benefits, asset protection, and growth opportunities. With the right knowledge and guidance, you can unlock the power of an S Corporation and take your business to new heights of success. So, for what are you waiting? Start exploring the possibilities today and embark on your journey towards entrepreneurial excellence!