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The 12 Tax Days of Christmas
Rather than your accurate adulation sending you a partridge in a pear tree, wouldn’t you acknowledge some money-saving tax tips? For my year-ending 12 Tax Days of Christmas series, I’ll dig aback into the athenaeum of antecedent contemporary columns to reiterate understandable, astute and accustomed tax strategies that you charge to apparatus now in adjustment to accept a abundant abate tax bill appear April 15.
For the aboriginal tax day of Christmas, your accurate adulation is actually activity to accelerate you the anniversary of an S association (S Corp). For those business owners that accept an operated as an S corp, you apperceive the accent of dialing in your bacon akin afore year-end. If you abort to do so, you could be abrogation big money on the table and alike accessible up yourself for an audit.
I am assertive that the S corp is one of the best able abiding tax strategies for entrepreneurs to body upon. The tax benefits, assay aegis and foundation for added tax deductions are actually amazing.
Related: A Breakdown of the Tax Implications of an S Corporation
The complete anniversary borderline that’s important for S corp owners is not setting up the S corp itself, but that of allotment the able bulk level. What the business buyer wants to do is peg their claimed bacon from the S corp that covers their compensation for the complete year. Although it’s an important convenance to affirmation bulk as an buyer anniversary throughout the year, one can accomplish some final adjustments afore anniversary to hit the appropriate bulk they should affirmation as a W-2.
As an aside, agenda that you can’t accoutrement a new S corp for 2019 at the end of the year and achievement to booty advantage of its allowances for the complete year. In added words, you can’t backdate the accoutrement of an S corp. If you are already missing out on this strategy, accomplish abiding you are accessible to go for abutting year (more on that in our added tax day of Christmas).
In sum, there are at atomic six reasons or issues to accede back processing bulk for yourself, and if you don’t accept this sorted afore you affair that W-2 in aboriginal January, it can be actual cher and alarming from an assay angle to try and fix. Causeless to say, accept wisely.
The primary anniversary of an S corp is that it allows you to abbreviate the dreaded self-employment tax. Back application an S corp, your ultimate allotment of pass-through of profit, or the company’s net income, will not be accountable to self-employment (SE) tax. (SE tax is a aggregate of Social Security and Medicare taxes additionally referred to as FICA.)
However, the IRS requires that the buyer booty a “reasonable salary” for their share of accomplishment from the company. This is a abstract analysis, and causeless to say, there are a lot of factors to consider. You will appetite to allocution with your tax adviser about the bulk of “draws” you took from the company, how abundant you larboard in the business to grow, how abounding hours you formed in the business, the commensurable bacon of addition you would appoint to backpack out your role, the amicableness of the aggregation name and a accomplished host of factors.
The bulk of taxes at pale is significant. In 2019, the tax is 15.3 percent on the aboriginal $132,900 of net assets (this bulk is adapted for aggrandizement annually), again 2.9 percent on aggregate aloft that. Moreover, at $200,000 distinct and $250,000 affiliated filing accordingly (adjusted gross assets or AGI), the Affordable Care Act (ACA) bliss it up addition .9 percent, for a whopping complete of 3.8 percent for advantageous earners.
So the action is about to booty the everyman reasonable bacon accessible (as a W-2) and the best accessible bulk of pass-through income (as a K-1). Over the years, afterwards filing bags of S corp tax allotment and bulk reports, reviewing every accessible tax cloister case on actor salaries and alone discussing the issues with accustomed and anatomy IRS agents, we created a diagram I accredit to as the “Kohler Bulk Matrix”.
Keep in mind, this cast is aloof a starting point, an analogy of options, and every aborigine is different. However, it can be a advantageous beheld adviser in free the able bacon akin in your S corp from year to year. It’s important to agenda that this is additionally an adapted version, based on the casual of the Tax Cuts and Jobs Act able in 2018.
You will see that I activate the diagram with $50,000 of net assets and a 50 percent bulk allocation at that level. As such, back demography the operational costs of advancement an S corp into account, it about doesn’t accomplish faculty to advance the S corp unless you’re authoritative a net assets of at atomic $40,000. Best importantly, agenda that free the able bulk for a business buyer is not an complete science, and I accept begin these boundaries to be abundantly reasonable in discussions with audience and IRS assembly over the years.
This is a answer aloof for you, the small-business owner. Big corporations (essentially C corps) got a new and abiding 21 percent tax rate, but we the small-business buyer accept a 20 percent answer off our basal line. So, artlessly stated, if your business makes $100,000 in net profit, you get a 20 percent answer or (in this example) a $20,000 deduction. The result: You alone pay assets taxes on $80,000. If you are in a 25 percent tax bracket (let’s accept accumulated federal and state), that agency you aloof adored $5,000. Not too bad.
The botheration is that it’s not that simple. If a business owner’s “taxable income” is aloft $157,500 if single, or $315,000 affiliated filing jointly, again their blazon of business, accomplishment paid and business-property bulk can abate and/or annihilate the 199A pass-through deduction. Thus, there are a few key issues you appetite to be acquainted of back you do your planning and accede the 199A deduction. I altercate this abundant added in-depth in my newest book, The Tax and Legal Playbook: Second Edition.
However, it’s important to agenda the purposes of this commodity and demography advantage of the 199A answer — that accomplishment paid are a big deal. Thankfully, accomplishment are authentic as any and all W-2 accomplishment paid by the pass-through business, including any W-2 accomplishment paid by the business to you.
Thus, you may appetite to access your salary, as a lower allowance could backlash for IRS requirements AND the 199A deduction. Actuality are three accustomed rules of thumb:
Related: Afore You Anatomy an S Corp, Accede These Points
When a business buyer is accommodating and able to put abroad $15,000 or more, the ability of the 401(k) is unsurpassed. In fact, the appearance in contempo years of the Solo 401(k) for the small-business buyer is actually amazing. While abounding S corp owners seek to abbreviate their W-2 bacon for self-employment tax purposes, you charge additionally anxiously accede your anniversary planned 401(k) contributions. In added words, if you cut your bacon too low, you won’t be able to accord the best bulk to your 401(k).
On the added hand, in adjustment to accomplish a ample addition to the 401(k), you may charge to booty an unnecessarily aerial W-2 bacon from the S corp. This may not accomplish faculty for SE tax planning. (There is a candied atom and antithesis to this.) Nevertheless, you’ll still be able to accomplish accomplished anniversary contributions compared to those of an IRA.
In short, as continued as the business buyer meets the “reasonable wage” level, based on their situation, the bulk bulk can be adapted to acquisition the absolute answer beneath the 401(k). Moreover, the adorableness of the new Solo 401(k) belvedere is that you can accept both acceptable and Roth accounts aural the aforementioned plan and accomplish contributions to both or either anniversary from one year to the abutting depending on your taxable assets and situation.
In 2019, the cessation absolute is $19,000 or 100 percent of your W-2, whichever is less. Thus, if you accept at atomic $21,000 (approximately) of bulk assets from the S corp, afterwards FICA withholdings, you can accord $19,000 to your 401(k) account. If you are 50 or older, you can accomplish an added $6,000 anniversary addition if you access your payroll.
As mentioned above, addition anniversary of the 401(k) is the non-elective cessation of 25 percent of the payroll, contrarily referred to as the aggregation match. Accumulated with the bulk deferral, in the archetype above, the complete addition in 2019 on about $21,000 of bulk would be $24,000 ($19,000 plus $5,000 and add addition $6,000 if age 50 or over). In fact, depending on the bulk level, the complete addition with analogous can now be as aerial as $56,000. Remember, if you accomplish Roth contributions, you don’t get a tax answer because you pay the tax on the cessation bulk as it’s contributed. However, the aggregation bout will be deductible.
Now, actuality is the rub: Don’t get bedeviled on accidental the best bulk of $56,000. Based on the addition equations, in adjustment to accord the best of $56,000, you charge a W-2 bacon from the S corp of $148,000. Also, accumulate in apperception that if you accept advisers added than yourself or your spouse, you are appropriate to apparatus an accustomed “matching” affairs of some sort.
You can additionally self-direct a 401(k). The plan has its own coffer anniversary and is accustomed to advance in all the aforementioned types of investments as a self-directed IRA and beneath the aforementioned banned transaction rules. For added advice on the 401(k) accoutrement that can be self-directed, appointment here.
In sum, accomplish abiding the 401(k) altercation is on the table when free your salary, and antithesis the admiration to save on SE tax with the bulk you appetite to abstract and accord to your 401(k).
As an S corp, it’s appropriate and analytical that you address the acquittal of your bloom allowance in a specific manner. Your W-2 as a shareholder/employee needs to announce the bulk of bloom allowance paid by the aggregation in Box 14. If it doesn’t, the IRS can abjure the deduction. This is a huge anniversary for small-business owners that cannot be taken advantage of by average Americans. Bloom allowance is 100 percent deductible for a small-business owner, whether you awning your added advisers or not.
Most small-business owners and alike some tax preparers don’t apprehend that you can accomplish a attendant acclamation to accept an LLC burdened as an S corp for 2019. However, you can alone do this if you already accept been operating as an LLC all year long. As I declared earlier, one can’t retroactively set up an S corp. However, an LLC can retroactively “elect” to be an S corp.
Your CPA or tax adviser can advice you with the action and accomplish advertence to the able acquirement procedures to accommodate with your Anatomy 2553. Abounding accept there is a hard-and-fast, 75-day aphorism at the alpha of the year to accomplish this acclamation for all of 2019. This is not the case. Allocution to your CPA to chase the actual action to get a attendant acclamation accepted, and accept your bulk allocation completed afore year-end.
Bottom line, the S corp action works back it is acclimated appropriately and is not abused. If you are authoritative added than $40,000 (net) in your business, could use the asset aegis and are accessible to body accumulated acclaim or bigger legitimize your business, an S corp could be a absolute fit for you.
If your CPA is black this action or claiming that your bulk needs to be so aerial that the accumulation won’t be account it, the botheration isn’t the strategy; the botheration may be your CPA’s analogue of a reasonable salary. Get a added assessment if you are in this situation. You are the captain of your ship. Booty ascendancy of your business and your tax return.
Mark J. Kohler is a CPA, attorney, radio-show host and columnist of the new book, The Tax and Legal Playbook: Game-Changing Solutions for Your Small Business Questions and What Your CPA Isn’t Telling You: Life-Changing Tax Strategies. He is additionally a accomplice at the law close Kyler Kohler Ostermiller & Sorensen, LLP and the accounting close K&E CPAs, LLP. For added information, visit www.markjkohler.com.
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