Save Big Tax Money; Go Sub S!



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rm 2553. There are, of course, restrictions. However most small businesses are eligible to do this. Let us use me as an example.

One of my first corporations was set up for my insurance business. It started out as a sole proprietorship. Then, my accountant told me about the benefits of a Sub S Corp. So, I formed The Banner Agency, Inc. and immediately filed for Sub S status with the IRS (you must do this by the 16th day of the third month of the forming of your corporation). Then I paid myself a salary (you must do this too). My accountant suggested I pay myself what it would cost to hire someone else to run my business in my place. Since my agency was young, I decided I could only pay myself $12,000 per year the first year. Although I realized this was small, and probably less than what I would hire someone for, I figured I was OK since my business was in its infancy and profits were not very predicable (the next year I paid myself $18,000). If you?ve been operating for a while and/or earning more money, you will want to pay yourself more.

After the first year, I had $12,000 in W2 income and my corporation earned another $25,000, for a total of $37,000. The approximately $2000+ per month in profits, I paid myself as an "owner dividend" each month. Social Security & Medicare taxes (as employer and employee) were due on the $12,000 W2 income. But, I saved the self employment taxes on the $25,000 as this was considered non earned dividend income. In other words, I saved almost $4000 ($25,000 X 15.3%) in taxes! The following year savings were even greater as my earnings were higher. The key here, is that all profits earned by your corporation are taxed as non earned income at your normal federal and state personal tax rates, but NOT by Social Security or Medicare!

What are the negatives? Besides the cost to set up your Sub S Corporation, there are the additional yearly filing expenses for a corporate tax return and annual report to your state. My accountant charges $500 per year for these services. When you do retire, assuming you are eligible, your retirement income (from Social Security) will be less, because you paid less into the system. However, this should be more than offset by the retirement windfall you will receive from all the tax savings you invested! Additionally, you could pay yourself more as you get close to retirement so as to increase your SS retirement benefits.


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