What Your CPA Wants You to Know
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What Your CPA Wants You to Know
63. The One For Those Making Over $50K in Profit From a Sole Proprietorship or Partnership: The S Corp Strategy
The S corp tax strategy. Have you heard of it?
This episode is a must-listen for those entrepreneurs whose businesses have crossed the threshold of $50,000 in profits after expenses. Get ready to equip yourself with the knowledge needed to determine if your business is a prime candidate for S corp status and understand the critical timeline for filing the forms that lead to significant tax savings.
We explain the additional responsibilities that come with an S-Corp structure, including owner payroll and separate business tax filings. With the March 15th deadline to file Form 2553 looming, we discuss the role of a seasoned CPA who can steer you through the transition seamlessly.
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So when Carson meets with a client and he says, oh, if we switch you to an S corp, this is going to save you $8,000. He doesn't just mean the first year that we make the switch, he means that it's going to save them $8,000 this year and likely more next year and the next and the next. So that is savings every single year. So even if it's a couple of thousand dollars, it certainly adds up over the course of time when you're running your business.
Speaker 2:Welcome to what your CPA wants you to know.
Speaker 1:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 2:I'm Carson Sands.
Speaker 1:And I'm Taryn Sands.
Speaker 2:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 1:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 2:We're here to share everything your CPA wants you to know.
Speaker 1:And a fun and easy to understand way.
Speaker 2:Let's get started.
Speaker 1:Let's do it. Today, we're sharing about one of the top tax savings strategies that we use in our CPA firm, and that's the S corp tax strategy. If you follow us on Instagram or listen to this podcast, you've absolutely heard about it already, but today we want to break it down for everyone. What is it, why does it work, how do you use it and we'll share all the fine details, because if you want to be an S corp for 2024, you do have to file that paperwork very soon.
Speaker 2:First off, this strategy is for businesses making over $50,000 in profit on their tax return. So if you aren't there yet, just skip this episode and save it for later. But if you're getting close, this is the perfect time to learn about the strategy.
Speaker 1:Now that does often present some confusion for the $50,000. So that is profit, not your revenue. So if you've made $50,000 in sales, that's not the same thing as having $50,000 in profit on your tax return. So the easiest way to look at that would be to look at your past tax return.
Speaker 2:Right, and that factors in all expenses. So if you're going to make over $50,000 this year, except you're buying a $30,000 welder, then okay, that will get you back down to $20,000. So let's wait one more year. No reason to do it yet.
Speaker 1:Yes, and a lot of people ask the question is this for my business, whenever some years I make over $50,000 in profit and some years I don't, because it really just depends on workload? If you're balancing that line every year and you're going to stay there, we would recommend that you don't convert to an S-Corp. And the reason is there are so many working parts of this and extra expenses to you. It's not really worth it if you're just right there on the line and you're not planning to grow. So we will talk a little bit more about the details in this episode. But this is for businesses that are getting started and ramping up their profit and will continue to be above and beyond that $50,000 in profit mark. So if you're building a business and you just hit it, but you know next year you're going to double and then the next year you're going to double after that, this tax strategy is definitely for you.
Speaker 2:And the best part about this tax strategy is that it saves you money every single year, and the more money you make, the more money it saves you.
Speaker 1:So when Carson meets with a client and he says oh, if we switch you to an S-Corp, this is going to save you $8,000. He doesn't just mean the first year that we make the switch, he means that it's going to save them $8,000 this year and likely more next year and the next and the next. So that is savings every single year. So even if it's a couple of thousand dollars, it certainly adds up over the course of time when you're running your business.
Speaker 2:So if you're making that $8,000 tax savings every single year and you're in business for 30 years, then our strategy has saved you just under a quarter of a million dollars in taxes.
Speaker 1:And that's why we love this tax strategy so much. It's not illegal by any means. It's a tax strategy that Everyone uses and loves. Just sometimes people don't know about it, and we think that's because there is a lot of working details and there can be a lot of upfront work in that first year just getting to know about it, educating yourself about the switch and doing the paperwork. And CPA sometimes are just lazy and they don't want to hold your hand through that. Because, as we've seen, whenever we convert someone to an S corp that first year we do get a lot of follow-up emails and phone calls because they just want to understand exactly all of their requirements and responsibilities moving forward. And it does take somebody with a teaching heart to make sure that you know what you're doing. So a lot of people just don't want to do it. They may just say, oh yeah, that would save you a little bit, but it's not worth it.
Speaker 2:But here at our firm, as soon as a new client walks in the door and we review their tax return and we see a schedule C business on their personal tax return showing over $50,000 a profit and sometimes it's $200,000. And I say, okay, you should have already been an S corp, but let's not stress about what could have been. Let's just decide right now from now on forward, you're an S corp and that's what we're going to do and you're going to save a lot of money.
Speaker 1:Exactly so. First and foremost, who is this for? We've touched on that a little bit, but it's for businesses that are growing that are currently a schedule C, sole proprietorship or a partnership. So that is who this strategy is for.
Speaker 2:Or even if you are done growing, but that growth that you've had in the previous years has put you over the $50,000 profit mark and you're going to stay there.
Speaker 1:Yes, if you're filing a schedule C business with, let's say, $200,000 worth of profit every single year, even if you're not planning to grow that anymore, you should still be an S corp. The next question about this strategy is why? And that is simply to reduce your taxes, and it's not going to change anything else with your business, just your filing requirements and the taxes that you pay. So don't get confused. If you have an LLC, you will still have an LLC. That LLC will just be taxed as an S corp. So that's a very simple question. Why do we do this? To save money.
Speaker 2:Right. The next question is how? So it's very simple. If you're already a single member LLC, all you have to do is file a form it's form 2553 and that will convert your business to an S corp. From then on, you just have to file an additional tax return every year for your S corp. Your CPA or tax professional can handle that, and you do have to add yourself to payroll.
Speaker 1:Now, the reason we're doing this episode right now in March, is because if you want to file that form 2553, like Carson was talking about, it is due by March 15th. It's a pretty simple form and you do mail it or fax it into the IRS. So that's why we're doing this episode now, because that deadline is approaching soon. So you want to make sure if you want to be taxed as an S corp in 2024, you're filing that by March 15th, which will make you tax as an S corp all of the year and moving forward. Then, as Karstima has mentioned, here are some of the fine details. You do have to be a corporation. You will have to have payroll. Even if you're a single member S-Corp, you will have to set up payroll for yourself. And then the third thing is you will file a business tax return every single year and that does add an additional expense every single year for your business. So that's why we say the $50,000 in profit mark.
Speaker 2:Right. Those fine details are the reason that we have the $50,000 cutoff, because once you're over that amount then any competent and fair CPA will be able to file your payroll taxes and your S-Corp tax return for less than the amount that you're saving in taxes. So it's well worth it. When you're under that you are kind of on the fence on whether you're going to spend as much on accounting fees as you're saving in taxes, so it might not be worth the extra trouble.
Speaker 1:Right. We don't want you to be paying your CPA an extra $2,500 to file all of these extra filings when you're only saving $2,500. That doesn't make any sense.
Speaker 2:Now we'd way rather you give us the money than the IRS, but there's a lot of extra work for you too, so we don't want to create extra work for no reason.
Speaker 1:Exactly so. That's why the $50,000 in profit mark and that's some of the working details. And we do have a episode coming up if you need to start payroll. So just keep in mind, if you convert your business to an S-Corp for 2024, you don't have to start payroll right away. You do have to start payroll sometime in 2024. So that would be a great episode for you to look out for if you need to start payroll for yourself.
Speaker 2:The big question everybody will have is how does this help? Why does this save taxes? So it's really simple.
Speaker 2:Whenever you have a partnership return or a schedule C business return, you pay self-employment tax on all of the profit that you make in the business. That's in addition to the income tax that you're already paying on that income. So that self-employment tax is 15.3% and S-Corp is not subject to self-employment tax. So whenever you factor in the tax savings from not paying self-employment taxes, you can save $7,000, $8,000, sometimes even $20,000 in a year just by converting to the S-Corp. The small catch is, yes, you do have to put yourself on payroll and your payroll will be subject to payroll taxes, which are also 15.3%. But the big savings comes from the fact that a big chunk of your profit will not be running through payroll and it won't be running through self-employment tax. So all of the rest of the money the S-Corp makes that you can take out as distributions or reinvest back into your business. Whatever you want to do with it, that money is not subject to self-employment or payroll taxes. So that whole chunk of your income saves 15.3%.
Speaker 1:Now I know it sounds kind of complicated, but the very simple answer is that you're eliminating an extra tax that they charge that S-Corp don't have and that's a self-employment tax. So we're eliminating that 15.3% when you switch to the S-Corp.
Speaker 2:Yes, and it is a bit complicated, but we are not recommending that you do this on your own. If you've been a DIY person, even with the Schedule C business up to this point, that's great and you've done a really good job, because the IRS does not make it easy to do things yourself like that. But it's time to stop. If it's time to convert to an S-Corp, you need to get a tax professional. It can be an enrolled agent or it can be a CPA, but you need someone in your corner to make sure you follow all the rules and don't get yourself in a predicament.
Speaker 1:And we always say if you have an easy tax return, it's completely fine to do it yourself you should but this will mean that you have a business tax return and you need to get someone to help you file that business tax return. So you will need a CPA or a tax preparer moving forward, if you don't already.
Speaker 2:But the amount of taxes that you'll save from this strategy will be a lot more than the amount that you pay the CPA.
Speaker 1:As long as you wait to the $50,000 profit mark.
Speaker 2:Ah, you took the words out of my mouth.
Speaker 1:Exactly Because this is such a huge tax saving strategy for businesses and that's primarily who we work with in our firm we created an S-Corp guide to help other people that we can't help understand and use this strategy.
Speaker 1:So, like we said earlier, this takes a lot of training for us.
Speaker 1:We have to have meetings with clients and walk them through how to set up payroll, how this saves them money, what their new filing requirements will be, and it's a lot of work up front. But you absolutely need all of that information and you do have to educate yourself a little bit on this tax strategy to use it. But it is worth it to save thousands of dollars in taxes every year and after the first year it is definitely not complicated. It's just that first getting it up and running. So our S-Corp guide is available for anyone and it's priced for less than one meeting with your CPA. So this is perfect if you have a CPA that you know and love and you want to tell them hey, this year I want to file to be taxed as an S-Corp, but you don't want to set up like extra meetings. This S-Corp guide that we've created is perfect for you because you can purchase that and you can really train yourself on all of the things that you need to know, even if you're having your CPA file this paperwork for you.
Speaker 2:Or even if you already have a CPA that understands the S-Corp strategy and will implement that for you. Sometimes you just don't really know what they're talking about, about distributions and what's taxable, what's not taxable. So this S-Corp guide will give you all of the information you need so that you can understand what they're talking about.
Speaker 1:Yeah, I think a lot of people come in office and have a meeting with us and then they think they understand it then and maybe they do, but they forget a lot that was said or they need further clarification. That's what's perfect about a guide is that you have it forever and you can refer back to it and read it over again if something just didn't quite set well with you. If you go in office with your CPA, you just have that one meeting and if you took notes, I guess that's really all that you have. So this is Price for Less Than One meeting with your CPA and you'll have it forever. It explains to you how the payroll works, where you can start payroll, what's a good salary all of the things that you absolutely need to know if you're going to be using this tax strategy.
Speaker 1:Just for being a podcast listener, we do have a discount code for you. If you go to our website, which is in the show notes, you can use code podcast for a discount. And if you found this very helpful and you know other business owners, why don't you just share that with them? Like, don't you want all of your friends to save money too?
Speaker 2:Yeah, I do.
Speaker 1:Yeah, I do too.
Speaker 2:Well, that's all we have for you today, so until next time. Thank you for listening to.
Speaker 1:What your CPA Wants you to Know Podcast. This podcast is intended to provide accounting and tax information for educational purposes only.
Speaker 2:All tax situations are unique and should be handled with the assistance of a tax professional.