AboutRichard Fritzler Expertise I am in the business of tax planning for business owners. Our company helps business owners structure so that they can be reduce the taxes that they owe, making them far more profitable.
Experience Since 1986 I have been helping successful business owners reduce taxes, protect assets, and limit their liability. The company is Owelesstax, incorporated at www.owelesstax.com
Organizations National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association
The Business Owners Institute
Publications Contributing author to "The Corporate Standard Newsletter".
I am also a writer for an email newsletter about business
Googlegroups/Successfulbusiness
I am also an Expert in the areas of Tax Law, Retirement Planning, and Estate tax issues.
Expert: Richard Fritzler Date: 11/6/2007 Subject: S-Corp Benefits
Question I currently own a business and taxed as a sole proprietor. My profits are about $150,000 and my wife makes about $50,000. I am currently thinking of switching to an S-Corp for the tax year 2008 and would like to know if this would save me on taxes? I believe I could pay myself $50,000 and take the rest as distributions. Would and S-Corp be the right type of corporation and how often can I take distributions?
Answer Well, as you are now, the taxes are horrendous, that is true, and a Sub-S corporate structure would reduce the horrendous taxes to just terrible, which depending on your perspective is an improvement.
The meat of the issue is Self Employment taxes. Self Employment taxes are comprised of Social Security (12.4%) and Medicare (2.9%). These taxes are the only thing that would be affected by your change from sole prop to Sub-s. So let's look at the affect:
As you know you will need to "at least" reasonable salary based upon industry standards, so let's run with 50k to start. AS a sole Prop or Sub-s, You will pay all the SE taxes on that 50k ($7,650); on the next 47.5k as a Sole prop you will still pay all the SE tax; as a Sub-S you would NOT. That saved you $7267.50. The rest of the money is only taxes at medicare (2.9%) so the savings is only $1667.5
Now out of $65,000 in taxes, saving over $8500 is better but it is not "good".
Let's look a bit further:
In addition to reasonable salary as compared to industry standards the IRS also expects your payrolled salary to be a significant percentage of the total revenue. Previously the IRS has accepted 50% as a criteria, but they are aggressively pursuing a change to be about 80%.
Let's look at the 50%: out of the $150k the IRS will most likely expect you to "Earn" $75k. So the savings against Social Security is now only applied to $22,500 (not $47,500) so the tax savings is only $2790, and the rest 57,500, will still be subject to 1/2 of medicare, saving $880.
Total Savings just over $3500. Net spendable $89,000
Hmmm.
What if, you did your business as a Real Corporation, too $50k in salary, and left the rest in the corporation?
Well your 50k is still taxed just as it was in our first scenario, but the rest is not subject to ANY SE tax so that saves all the Social Security and Medicare. It is not subject to your Personal Income tax rates, that are already too high. In fact if all you did was leave the money in the corporation, the tax would be $22,250.
that would be far more money. Now we are getting to the "GOOD" range. If the corporation spend $50,000 on tax deductible business expenses that you can't take in the Sub-S. then the total tax is only $7500 for the corporation. We are heading toward Great at this moment.
Call me.
Richard Fritzler
www.owelesstax.com
phone 800 590-6612
