{"id":746,"date":"2013-04-15T10:00:28","date_gmt":"2013-04-15T15:00:28","guid":{"rendered":"https:\/\/www.foell.org\/justin\/?p=746"},"modified":"2013-04-15T09:59:06","modified_gmt":"2013-04-15T14:59:06","slug":"s-corp","status":"publish","type":"post","link":"https:\/\/www.foell.org\/justin\/s-corp\/","title":{"rendered":"The S in S-Corp is for Save"},"content":{"rendered":"

This article’s concepts should be considered independent from the layout of your business: whether it’s a sole-proprietorship, partnership, LLC, etc. We’re only talking about how you file your taxes. This article is also geared towards freelancers, subcontractors, and small companies.<\/p>\n

Schedule C<\/h2>\n

For most people getting started on their own, there is the “Schedule C.” You pay your 15.3% Medicare & Social Security, plus your income tax quarterly, and hope everything works out on tax day. This is a great way for anyone to feel the “pain” of how much you actually pay in taxes. It can hurt so much that you’ll wonder if there’s a better way, and there is. Enter the S-Corp.
\n<\/p>\n

S-Corp<\/h2>\n

It stands for “Subchapter S Corporations” and is commonly referred to as a “Sub S” or “S-Corp.” I believe the “S” actually stands for “Shareholder.” It is also known as the “Newt Gingrich\/John Edwards Loophole” as they helped bring it into law.<\/p>\n

As an S-Corp, instead of filing one return, each shareholder files two: a normal W-2 and profit-share filing called a K-1. You take your total profits for the year and split it into two categories for each of these forms: Wages & Earnings (respectively). It’s up to you how to split this: 25\/75, 35\/65, 50\/50 – and there-in lies the loophole.<\/p>\n

You can opt to pay yourself less than “reasonable compensation” for your W-2 and save more. The IRS knows this, so as soon as you send in the S-Corp election paperwork, they’ll send you an ominous letter like this:<\/p>\n

\"S-Corporation-Letter\"<\/a><\/p>\n

However, it’s not all doom-and-gloom. A good starting point to split wages & earnings is 50\/50 and you still stand to save some money.<\/p>\n

A Simple Comparison<\/h2>\n

This is an oversimplified example using a Minnesotan making $50,000 a year paying taxes at a 25% federal income tax rate and a 7.05% Minnesota income tax rate.<\/p>\n

Schedule C<\/h4>\n

Income: $50,000
\nLess Social Sec. \/ Medicare ($7650 @ 15.3%): $42,350
\nLess Fed. Income Tax ($10,587 @ 25%): $31763
\nLess MN Income Tax ($2,239 @ 7.05%): $29,254<\/p>\n

S-Corp<\/h4>\n

Income: $50,0000<\/p>\n

Earnings (K-1): $25,000
\nLess Fed. Income Tax ($6,250 @ 25%): $18,750
\nLess MN Income Tax ($1,321 @ 7.05%): $17,429<\/p>\n

Wages (W-2): $25,000
\nLess Social Sec. \/ Medicare ($3,825 @ 15.3%): $21,175
\nLess Unemployment Tax ($105 @ 0.5%): $21,070
\nLess Fed. Income Tax ($5,267 @ 25%): $15,803
\nLess MN Income Tax ($1,114 @ 7.05%): $14,869<\/p>\n

That leaves you with $32k rather than $29k. With tax preparation costs somewhere between $300-$700, it’s still worth it. My tax preparer, Randy Valtinson at Central Tax Service<\/a>, charges $400 to do my S-Corp filing. He’s a S-Corp evangelist if I’ve ever met one. I’m glad there are tax nerds like him out there fighting the good fight for us.<\/p>\n

Timing it Right<\/h2>\n

Another word of advice. If you’re currently filing a Schedule C – time the switch to an S-Corp wisely. I did mine in the middle of the year – not smart. I continued to pay my quarterly taxes at my Schedule C rate and added unemployment tax payments on top of that. It was a tough year that made me doubt that the S-Corp election was worth it. I didn’t feel any relief until a full tax year later.<\/p>\n

Learn from my mistake. Your Schedule C should cease on December 31st and your S-Corp should start on January 1st. It will make life much easier for you, your tax preparer, and your wallet.<\/p>\n

Send to Kindle<\/span><\/div>","protected":false},"excerpt":{"rendered":"

This article’s concepts should be considered independent from the layout of your business: whether it’s a sole-proprietorship, partnership, LLC, etc. We’re only talking about how you file your taxes. This article is also geared towards freelancers, subcontractors, and small companies. Schedule C For most people getting started on their own, there is the “Schedule C.”… Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[1,19],"tags":[82,81,79,78],"class_list":["post-746","post","type-post","status-publish","format-standard","hentry","category-business","category-working-from-home","tag-irs","tag-loophole","tag-s-corp","tag-taxes"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t