John Hyre states if one uses an S corp, generates $80,000 net income and pays a reasonable salary - of $35,000, then s/he only pays soc. sec. tax on the $35,000.
Fine. But,
Q1. What is the remaining $45,000 considered?
Q2. Suppose the owner wants an additional $20, 000 out of that net profit. How does the owner legally get it out of the company, pay himself a bonus?
Q3. Since this is an S Corp, does the owner pay personal income tax on the remaining $45,000? – or only if it “leaves the 'business” (goes to the owner’s pocket)
Q4. If the cash stays in the business, does the business pay tax? (I think this is a No because this is an S corp, not a C. )
Its really best to discuss different corp entities with local CPA’s so they can assist you in finding what suits your needs, both financially and for protection. I have always noticed everyone handles their corp set up differently.
Also the state you live in, has a large impact on the type of corp you establish because of taxes…
For me personally, i live in Fl, so i use 2 LLC’s setup in NV (both no tax). One LLC is a buy/hold company and the other LLC (taxed as a C-Corp) just manages all my properties. None of my companies actually make money. Legally you can float the money from one company to another till it ends up being W-2 to yourself as income for working for the property management company of my properties…
One insight for everyone… Recently I found out Wyoming has become a gold mine to establish an LLC because it carries the all the same benifits of NV but in Wyoming if you tell the state you do not want to pay a claim that someone has won against your LLC, you do not have too…The state will back you and legal pressident has been established over the last 2 yrs… Plus using a complex system of using LLC, land trust and LP, you will have totally protection as it will take forever for the lawyers to figure out who you are and the fact you do not have to pay claims. Remember sueing my LLC in Wy and you need to pay the taxes on the money before you can file the claim on my LLC, who wants to pay taxes on unclaimed money…
you get a W-2 for $35k. You pay income tax and social security on this as with any other paycheck.
The remaining $45k will be income to the S-corp, and will be subject to income tax on the owner’s personal returns at their marginal rates. Since you earn a reasonable salary, this will not be subject to SE tax.
Contrast this with: if you didn’t receive the salary, the entire $80 would be taxed at the personal level PLUS subject to SE tax. This is where S-corps have a significant tax advantage.
Once profits have been taxed in an S-corp, the owners can receive a distribution (in their respective ownership %) without further tax liability. In this example, the S-corp writes the owners a check for $20k. That’s it.
already answered.
Already answered. All profits are taxed when earned, irrespective of whether or not a distribution of profits is made.
As mcwagner pointed out, the S-Corp saves the owner in this particular instance $6885 in SS / Medicare taxes for the same cash flow numbers.
This is the reason that I’ve argued that the S-Corp, from a tax perspective, makes more sense than an LLC for REI. I’ve had countless discussions here regarding this, quite a few have been very good. I have yet to see where a single case the LLC would be at a tax advantage over an S-Corp. The majority of scenariors are a wash for the LLC or S-Corp but as your portfolio grows, the S-Corp creates a significant advantage in tax savings.
P.S. also bear in mind than an S-Corp is a pass through entity — meaning that there are no retained earnings for the corporation at the end of the year. That type of accounting is one of the major differences between an S-Corp versus a C-Corp (without getting into the different classes of stock for C-Corps or varying investment entities allowed). So the remaining income above and beyond the salary HAS to pass through to the owner based on ownership percentage by law. In lay terms it is like a C-Corp issuing a dividend at the end of the year for all the money the company made to the shareholders.
once again, you CANNOT compare an LLC to an S-corp from a tax perspective. THERE IS NO TAX CODE FOR “LLC.”
If you want to compare an LLC, you must first state how the LLC is taxed. For example: you may compare an LLC taxed as a partnership to an S-corp. What you are really comparing is a partnership to an S-corp.
An LLC taxed as S-corp IS an S-corp to the IRS. period. One can’t “make more sense” than the other; they are one and the same.
There is a BIG difference between S- and C- corp distributions.
C-corp pays tax on income. When it makes dividend distributions, they are not deductible to the corp and are taxed again at the personal level. This is the “double taxation” issues with corporations; the same income is taxed twice.
S-corp passes income through to the shareholders who pay income tax personally. Distributions of this income are not taxed a second time, as explained in my previous post.
Once again, I’m referring to the fact that an LLC is defaulted to ‘disregarded entity’ status upon classifcation by the IRS. Only if form 2553 is completed will the entity be taxed as an S-Corp.
So, I can compare an LLC to an S-corp for the purposes of taxation because the defaulted classification is indeed different. Again, since the majority of LLC’s formed, as it pertains to this website, are formed as a single owner disregarded entity, there are indeed tax ramifications compared to filing as an S-Corp. Since there are numerous questions on this subject on this site as to whether an LLC or an S-Corp is the ‘better’ classification. You are correct that if what you’re really asking is a partnership better than an S-Corp, however without killing everyone with the ‘semantics’ of the question, I simply am referring to the LLC in the same fashion that they are asking, as a disregarded entitiy.
I did not state that the S-Corp income is taxed a second time. I know exactly how an S-Corp is taxed and I explained this pass through income in my previous post. I neither recommended or endorsed a C-Corporation in my previous post, because for this particular line of business investing does not benefit from retaining earnings within the corporation.
I know the differences between a C-Corp and an S-Corp quite well.
well, of course. Now that you specify exactly what taxing choice you are comparing, you can make the comparison. But it’s misleading to just compare “LLC”. There are four taxing methods possible for the LLC and the relative advantages and disadvantages of each must be weighed.
anyone taking the default position of disregarded entity is foolish.
It is the default position by IRS exactly because it generates the most tax revenue.
That foolishness is precisely what I’ve argued against. I think you and I are on the same page regarding this, we’re just approaching it from different perspectives.