S corporations can save their owners a significant amount of tax. This tax savings can exceed their entire annual CPA fee. The IRS is naturally monitoring for abuses in this area as the potential dollar savings are substantial. An ideal CPA to advise in this area is a financial expert that works primarily with real estate agents and other professionals utilizing S corporations so they have industry data and up to date knowledge of the acceptable standards.
To reduce your self-employment tax bill, you can create an S corporation and hire yourself as an employee. You pay the yourself who is classified as an employee a reasonable wage for your work. If there is profit left over at the end of the year, the partner which would also be yourself split the earnings. Self-employment tax is only paid on wages — not on the company profit which results in significant tax savings.
Tax planning and industry financial expertise is critical in this area. Setting your salary too low exposes you to risk of IRS examination which can result can be payment of unpaid employment taxes and hefty penalties and interest. Setting your salary too high leads overpaying taxes. Over the course of your business’ life the overpayments of tax and lost investment opportunities can cost you hundreds of thousands of dollars.
Clients at Camuso CPA PLLC receive an annual in depth analysis of reasonable compensation. Our team of CPA’s is constantly gathering support from every level of legislative and administrative tax authority. This is essential and should be offered by the CPA advising you. While there are other options, S-Corporation tax structure is an advanced tax planning strategy available to real estate agents and other self-employed professionals that can financially benefit.
A common question we receive from our clients is when should I form an S corporation to take advantage of the tax savings?
The answer to this question requires an analysis of the reasonable compensation that you will pay yourself, this will dictate the level of tax savings you can realize by avoiding self-employment tax when you distribute your remaining earnings to yourself. If your salary cannot be reasonably set significantly below your overall gross income you will not make a distribution large enough to receive a substantial tax benefit. After you have a reasonable estimate of the amount of tax savings you can capture by structuring as a S corporation you must consider whether the amount of tax savings will significantly exceed the additional compliance and administrative cost burden related to an S corporation.
The S corporation creates extra tax-related paperwork each time you take money (or any other asset) out of the corporation, because you must treat each withdrawal in one of three basic ways:
1. As a salary or bonus paid to you in your capacity as a corporate employee,
2. As a distribution of corporate earnings paid to you in your capacity as a corporate shareholder, or
3. As proceeds from a loan made by the corporation to you.
Additionally, you face the extra cost of tax returns and corporate compliance. Unlike the Form 1040 Schedule C of a proprietorship, the S corporation tax return includes a balance sheet in addition to the required Schedule K-1 pass-through information. You also must have a reasonable compensation study to substantiate the salary that you set for yourself to protect yourself from IRS scrutiny.
Reach out to our team regarding any questions about entity structuring or establishing a first-rate comprehensive tax strategy. We are the people to call for S Corporation tax services in Charlotte. For more information, please do not hesitate to give us a call at your earliest convenience.