Self-Employment Tax Savings for an S-Corporation.
Here is an example of how you can save income taxes after the business entity has been created.
Robert is an owner of a courier service business which generates $100,000 in profits. After the comprehensive review it was decided to create the business formation as an S-corporation for Robert. After the creation of the S-Corporation for Robert the tax savings is phenomenal.
With continual tax planning we suggested that Robert will take a reasonable salary of $40,00 per year. The remaining $60,000 of the Robert’s business profits are passed through the S-Corporation and reported on his personal income tax return.
On the $40,00 Salary Robert and his corporation only pay a total of $6,120 in employment tax which is 15.3% times $40,000 equals $6,120. The remaining amount of $60,000 from Robert’s profits he will have to pay income taxes on that amount.
If a decision was made not to convert his sole proprietor operation to an s-corporation he would have to pay $15,300 in self-employment taxes on the total $100,000 profits.
Robert’s decision saves him $9,180 for the current year.
The positive point is that this savings continues year after year for the life of his business!
| Estimated Tax Savings | ||
|---|---|---|
| Business Structure | Sole Proprietor | S-Corp |
| Yearly net income for the business | $100,000 | $100,000 |
| Your reasonable salary | $40,000 | |
| Self-Employment Taxes | ||
| Social Security Tax (12.4%) | $12,400 | $4,960 |
| Medicare Tax (2.9%) | $2,900 | $1,160 |
| Total Tax | $15,300 | $6,120 |
| Total Savings! | $9,180 |
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