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
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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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S Corp Tax Savings Strategy Guide
Speaker 1So 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 2Welcome to what your CPA wants you to know .
Speaker 1Tax 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 2I'm Carson Sands .
Speaker 1And I'm Taryn Sands .
Speaker 2I'm a CPA with over 10 years of experience helping people start and grow their businesses .
Speaker 1And 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 2We're here to share everything your CPA wants you to know .
Speaker 1And a fun and easy to understand way .
Speaker 2Let's get started .
Speaker 1Let'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 2First 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 1Now 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 2Right , 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 .
Tax Saving Strategy for Small Businesses
Speaker 1Yes , 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 2And 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 1So 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 2So 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 1And 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 2But 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 1Exactly 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 2Or 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 1Yes , 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 2Right . 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 1Now , 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 2Right . 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 1Right . 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 2Now 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 1Exactly 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 2The big question everybody will have is how does this help ? Why does this save taxes ? So it's really simple .
Speaker 2Whenever 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 1Now 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 2Yes , 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 1And 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 2But 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 1As long as you wait to the $50,000 profit mark .
Speaker 2Ah , you took the words out of my mouth .
Speaker 1Exactly 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 1So , like we said earlier , this takes a lot of training for us .
Speaker 1We 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 2Or 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 1Yeah , 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 1Just 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 2Yeah , I do .
Speaker 1Yeah , I do too .
Speaker 2Well , that's all we have for you today , so until next time . Thank you for listening to .
Speaker 1What your CPA Wants you to Know Podcast . This podcast is intended to provide accounting and tax information for educational purposes only .
Speaker 2All tax situations are unique and should be handled with the assistance of a tax professional .