|
|
|
Beating Taxes & Inflation
Beating Taxes & Inflation By William Cate More dollars that buy less means that you will go broke in the future. Most people with money have taken this investment path with part or all of their disposable income. Inflation, which has run about 6%...
Employment Taxes – What Are They?
If you have employees, you are responsible for paying a variety of taxes at the federal, state, and local levels. You must also withhold certain taxes from the paychecks of your employees. So, what are employment taxes? Employment taxes include the...
I Wanna Hold Your Hand: First Time Homebuyers
The Empowerment of Owning Your Own Home Purchasing a home is one of the most powerful and terrifying events of a person’s life. It is a challenge, but once this challenge is met with strategic planning, knowledge and excitement it becomes an...
Reducing Debt Before It's Too Late ... How To Avoid The Pitfalls Of Creeping Debt
Reducing debt usually isn't a high priority for people until they have already gotten into trouble with overspending. Using a few basic guidelines, and debt calculations, can help you see when your debt load is getting into the danger zone.
...
The 8 Biggest Mistakes When Designing Portfolios - and How To Avoid Them
Are you as good an investor as you think? Do you consider yourself a well-informed investor able to anticipate and avoid nearly all pitfalls associated with investing? Chances are, you are making one of the common errors that could cost you...
|
|
| |
|
|
|
|
|
|
How To Save Taxes With An S Corporation
Ever wondered why so many small businesses—more than 3,000,000 at last count—operate as an S corporation? Simple. An S corporation saves business owners big taxes in three separate ways:
First, as compared to regular corporations (sometimes called C corporations), S corporation owners can use the business’s losses incurred during the early lean years on the owner’s personal returns as deductions.
For example, suppose a new S corporation suffers a $20,000 loss its first year and that the corporation is equally owned by two shareholder-employees, Smith and Jones. Smith and Jones each get a $10,000 business deduction on their individual tax returns because of the S corporation loss. This $10,000 deduction might save them each as much as $4,000 in federal and state income taxes.
A second, big S corporation benefit: As compared to almost every other business form, S corporations can save their owners self-employment or Social Security/Medicare taxes.
Suppose, for example, that Adams, Brown and Cole independently each own businesses that make $90,000 a year in profits. Each business owner may pay $13,000 in income taxes. But, unfortunately, that’s not the only tax they pay. Each owner also pays self-employment or Social Security/Medicare taxes.
For example, Adams operates his business as an LLC and therefore pays 15.3%, or roughly $13,500, in self-employment taxes on his profits.
Brown operates his business as a C corporation which pays all of its profits to him as a salary. Accordingly, Brown (through his corporation) also pays 15.3%, or roughly $13,500, in Social Security and Medicare taxes.
Cole’s situation is different. Cole operates his business as an S corporation which means that Cole can split his $90,000 of profits into two payment amounts: salary and S corporation distributions.
Suppose that Cole says only $40,000 of his profits are salary and takes the other $50,000 as a “dividend” distrbution. In this case, Carter pays the 15.3% Social Security/Medicare tax only on the $40,000 in salary. Carter therefore pays roughly $6,000 in Social Security/Medicare taxes—and annually saves $7,000 in taxes as compared to Adams or Brown.
S corporations also, sometimes, provide a third form of tax savings because S corporations don’t pay corporate income taxes. This means that S corporations avoid the often-talked about “double-taxation” problem. However,
Associated Websites
the “no corporate income taxes” benefit often isn’t a savings for small corporations and their owners.
But let me explain. Suppose that two corporations each earn the same pretax profit of $100,000 and are owned by Ms. DaVinci who pays the highest federal income tax rate of 35%. One corporation is an S corporation and the other is a C corporation.
The S corporation can distribute the entire $100,000 in profits to DaVinci as dividends because there is no corporate income tax. DaVinci then pays $35,000 in personal income taxes on the S corporation profits, which means she nets $65,000 in after-tax profits from the S corporation.
In comparison, the C corporation can’t pay the entire $100,000 in profits to DaVinci. The C corporation first pays $22,250 in corporate income taxes. When the C corporation pays the remaining $77,750 to DaVinci as a dividend, DaVinci pays another $11,663 in 15% “dividend” taxes on the C corporation profits. This means that DaVinci nets roughly $66,000 in after-tax profits from the C corporation profits. In this case, DaVinci saves money with a C corporation in spite of having to pay the corporate income tax.
How to Get S Corporation Benefits
To create an S corporation and receive S corporation tax savings, you need to do two things: First, you must incorporate the business either as a regular corporation or as a limited liability company. Second, you need to make an election with the IRS to have the corporation or LLC treated as an S corporation.
The S election is made with form 2553, available from the http://www.irs.gov web site. Note that some states (such as New York) require a separate state S election.
A final tip: S corporations can save you thousands of dollars annually, but your tax savings can’t start until you elect S corporation status. If you’re interested is electing S status to save on taxes for next year, you may want to call your tax advisor or attorney right now!
About the Author: Redmond WA Tax CPA Stephen L. Nelson is the author of QuickBooks for Dummies and an adjunct tax professor for Golden Gate University’s graduate tax school. He can be reached at http://www.stephenlnelson.com.
Source: www.isnare.com
|
|
|
|
|
|