Thank you for the info! It's been challenging finding tax information for high W2 earners with a side business. I'm in the process of looking for a tax consultant regarding S Corp election and now I have my answer. You explained it very well!
You’re welcome @Cindy Wen. Make sure you watch the other videos (if you haven’t already) around when not to have your business taxed as an S Corp to make sure it’s a good fit.
Very very helpful video. I am a physician on W2 with a 1099 side gig contract. I was about to elect my LLC to be taxes S-Corp. After watching this video, I realized that S-Corp election would actually cost me money(which I was never told by my CPAs who provided me consultations with a fee).
Hey man, Same here. I'm a doc and was planning to do locum on the side. My only question is, do we have to take salary from S-corp since we are already making enough on W2? If we don't have to take any salary from Scorp then it wouold probably be more beneficial?
Hi, I came across this while browsing for videos regarding S-corp. I am glad I clicked on it, and I wanted to thank you for explaining things in simple terms. That said, I have now subscribed to your channel and liked this video.
The answer is on 12:20 . Thank you Navi for explaining this. I did not realize that there is a SS cap for the employee, but not the employer. BIG thank you !
This is the best video ever to explain why NOT having S-Corp make sense! Very clear, up to the point and no BS. Just one question left unanswered: Why higher profit, e.g. $250k, will make sense again? @Navi, is there other video explaining that situation? Thanks!
Thank you for this Video. It helps a lot. I have a High W-2 and right now my Company is Not making much money. It is really making me think twice about electing for an S-Corp when it does make more Money.
Thank you. Can you kindly make a video on the scenario where one has a high W2 income but also a S corp profit beyond $250k or whatever amount that would justify having a S Corp.
Excellent explanation. I want to see you explain the use case for high salary in w2 with an LLC for rental property or S Corp. Explain the user case when LLC is profitable and loosing money.
Thank you for this video. This is exactly my situation and I could not find anyone to clearly answer the question. You did an excellent job explaining this concept for high earners!
thank you for sharing your knowledge. Question: I have a full-time w2 paying join and a business that has very irregular income. It's a service business. I am able to live off my w2 job (not my business) and I want any income from MY businesses to go back into the business - 100% for training, equipment, marketing, networking, etc. I am not planning on taking any draws for the next year. In this instance, would my business still be liable for quarterly SE filings and SE taxes if there are no profits at the end of the year because everything was re-invested into the business?
The exact thing I was looking for. I've always thought about how sad I am I never elected s-corp while having w2. I have maxed out my social security portion several times and now see why the self employment taxes aren't really a thing when you max that out. Also the savings from not having to have complicated taxes.
Best video on S corp. It is so helpful. Would you please do another video on the scenario as you mentioned in the video? If W2 is $140,000 and net profit from LLC is over $250,000, how S corp works better? thank you so much
Another big advantage of the s corp is the ability to hire a spouse and max out two 401Ks on the employee and employer side, this could be a major tax saving if you are now deducting 40-80k in 401K. Care to expand on this?
But when you have a high pay W2, chances are the 401k is already maxed out? Unless you are talking about a non-working spouse that hasn’t maxed out 401k through their employer?
This is great info. Thank you. Question: I have a high paying W2 job and I'm having to use my W2 income to get my LLC off the ground to avoid borrowing. How much of my W2 income can I write off?
Thank you, Navi. Lots of my questions get answered. First, I understood where self-employment tax 15.3% came from. Second, LLC works better with High paying W2. Would you suggest what other tax benefits one should look for with (high W2 + LLC)? Thank you!
thank you Navi! I'm an advanced practice nurse looking at 1099 work while also keeping my part time benefitted W2 job. I was thinking s corp would be the way to go, but now your video has cleared that up for me. Unless I'm going to work a lot of 1099, I don't necessarily need to incorporate. Also, from what I understand, LLC is not an option in CA.
How does a Single Member S CORP employee document income via W2 for compensation received from capital gains from trading as a business under a Single Member S CORP/ TTS status
Hi @writegarry. Honestly, I've never had to deal with that scenario before since my clients aren't active traders. That said, when "shopping" for a CPA/tax preparer, be sure to ask those specific questions and if they don't know the answer, they probably aren't the accountant for you. Thanks for watching - sorry I couldn't be more helpful on this occasion.
The high salary you are referring to, is that also applicable to two low incomes W2s (Spouses income adds up to 143K) when filing taxes together along with a side hustle income? I am debating between starting an LLC or an S-Corp.
Great to get this information! Difficult question coming up: If I am a high W2 earner and have a side hustle with an LLC as a sole proprietor, would I still have the ability to contribute employer profit sharing to a solo 401(k) attached to the LLC?
Navi, to me as a rule of thumb, it's roughly a wash. If you use round numbers for the sake of simplicity, let's say SS tax is 6% each side, and the medicare is 3% total. If you make 90k and keep it as a sole prop, you get taxed $2,700 for the medicare only (SS is maxed out). If you're an S Corp and pay yourself $30k, you pay the employer SS ($1,800) plus medicare ($900) for a total of $2,700. Aside from the round numbers I'm using, am I missing something significant?
Thanks for breaking this down in plain English...If I elected to change my LLC to an S Corp and my profits fluctuate from year to year and doesn't seem to be worth it, can I change back to an LLC?
Could you maybe do another video with emphasis on tax penalty or benefits from either short term vs. long term trading in the stock markets and whether or not it would make sense to file as an S Corp while having high earning from W2 income?
Thank you for the video suggestion/request. Honestly, I'm not sure I'll discuss that anytime soon - it is not really an area I specialize in but definitely a hot topic at the moment.
Occasional Trading for individual is considered buying and selling capital assets for yourself and the profit or loss is taxed at capital gain rates (more favorable unless it is a short-term cap gain which would be taxable as ordinary income in your tax bracket). You are considered to be a dealer if you actively trade securities to customers and in this case it would be your active ordinary income because you will provide services. Long-term cap gains are always taxed at reduced tax rates. Not sure about what kind of tax penalty you are referring to.
I understand that when you have multiple W-2 jobs, each individual employer would be unaware of when they no longer need to withhold FICA social security - but in your example, couldn't you just NOT withhold the employer side of the social security considering that you know you're beyond the wage base? That would mean you're not withholding any FICA social security on the S-Corp, so you don't even need to wait to get the employee portion refunded back and the employer portion isn't lost forever
In theory this sounds great but I don’t think you can actually execute this the way you are thinking. Very rarely is someone exempt from paying FICA tax.
@@NaviMarajCPA after reading through some less than thrilling IRS documentation, I agree. Unfortunately the US tax system's underlying assumption of 1 person = 1 job does not scale very well at all. In theory, I think the right judge or jury might look at my proposed strategy as following the spirit of the law, but it does indeed seem to venture outside of the letter even if you're withholding FICA up until the point that you reach the wage base.
Thanks for the vid. The primary reason people elect to file taxes as an S-Corp is to avoid paying employment taxes which max out at 21,840 in this example. If you have already paid those employment taxes via a W2 job then there is no advantage in filing your business taxes as an S-Corp. It's really no more complicated than that. Why don't you do a video on the financial benefits of moving to a state with zero income tax? Florida for example :). Now that is saving money!
I thought the wage based cap is you pay UP TO not zero. Why would the 8K SE tax for LLC be returned? Thought you would pay no more than that? Please clarify the wage based again. At the 13:59 point you say we will get those two large chunks back. Is that true?
Hi Navi, great video. This will be an important issue for my wife as she decides whether to have her SMLLC taxed as disregarded or S Corp. Question: could you point me to a link or somewhere in the tax code that verifies what you said about S corp owner-employees still owing the employer portion of Social Security (on reasonable compensation) even after they've reached the wage base from W2 income? I believe you, I just haven't been able to find anyone else talking about this. Thank you!
If my W2 income pays the maximum social security tax ($8853.60 with the employer paying the other half) then the only tax I would have to worry about for the 1099 would be the 2.9% Medicare tax, and then whatever my federal taxes are depending on which income taxes bracket I fall into. Am I understanding this correctly?
I fit into this scenario. Here’s what I have done At my W2 job my salary is 130K a year. So what I’ve done is have the 401K maxed out. My HSA maxed out. I’m over 50 years old so o have the catch up portion maxed out as well. Reducing my TAXABLE W2 income substantially.
the salary base is only for one person earner? what about marriage joint? cos me and my husband have almost 140,000 yearly together and have Multi-member LLC formed with just two of us. your reply is appreciated.
Thanks for the content. What if you ain't living the high life and are a low wage w-2 earner ($40k) and have an LLC where you earn about 12k profit. It seems like you are suggesting going the standard llc sole proprietor tax route is best?
Yes, based on that limited information - being taxed as a sole prop is likely best. Please keep in mind that this is not individualized tax advice. Thanks for watching!
Great videos, my question is what if you dont have w2 income over that much but you want to start a partnership llc. Im in NH so I understand the s-corp is not recognized.
Hi Navi, Thank you for making me understand how all this works. It took me four of your videos to finally understand how all works. Thanks for going extra step with color coding. It make so much sense now. Can you please make sure my understanding is correct below. Thank you again. If I have $100k in W2 and $100k in business income it would make more sense to open my business as LLC enity S-corp tax classification, correct? Because if I do sole proprietary I have to pay social security on $42k out of my $100k business income and multiply it by social security tax rate 6.2% and have to doubled it for employee and employer plus I have to add medicare tax on my 42k at 1.45% and then increase it to around 2% on rest 58k. But if I open S-corp and take 40% whick is 40k than I will only pay social security tax and medicare tax on 40k two times for employee and employer and then deduct the employee part when I do my taxes. Is this correct understanding?
after watching this, I understood that Social security tax from W2 side will be refunded, so we all should be earning more upto or over the salary base, right? otherwise, we wont get back at all.
@@NaviMarajCPA OK, but am I correct that that "same amount" is computed after deducting an amount corresponding to FICA tax? (I'm sure I've heard elsewhere something to that effect).
@@magnusbrzenk447 if Fica is business related, then yes. You will calculate income tax after you deduct this business deduction. I think this is what you mean.
Thank you for this amazing video. What is the best way of reimbursement the miles, tolls, gas, hotel and any other expensives to my employees or deduct them as company expenses?
This is the most clear video I saw on this topic. Thank you. One question though: how does QBID come into play here? Say I have 100k of profit as sole proprietor, I get 20% QBID so all my taxes (including state/fed income tax) will be based on 80k. If I elect S Corp and pay myself 60k, then I only get QBID on the 40k K1 profit, so my tax basis for state/fed income tax will be on the 90k (50k W2 + 40k K1) which could wipe out the savings on FICA tax, am I thinking about it right?
Hey Serena...you're on the right track. Using your numbers which one save you more money? ($40,000 K1 x 15.3% = $6,120) or an additional $12,000 tax deduction ($20,000 QBID with sole prop vs. $8,000 QBID with S Corp) based on your federal and state income tax rates. Note that there is a lot more to consider which it comes to the Section 199A deduction so I am just using your assumptions in the above response. Also, this is not individualized tax advice.
Great info, how does this change of my wife is the high W2 earner and I have my own business? Since we’re ful file jointly does this also applied to us?
Thank you for sharing! Looking for info but getting mixed answers. As a real estate agent in CA if I am getting paid with a W2, am I allowed to deduct business expenses?
If you're an employee receiving a W-2 then you cannot deduct any business expenses. These are referred as "unreimbursed employee expenses" and in the past, prior to the passing of the Tax Cuts and Job Act (TCJA) you could deduct a portion but that has been eliminated. This is probably why you are receiving mixed responses.
My salon is small business, only me working. I have a LLC, and have to pay for the payroll $100 a month, I also have W2 . I can’t get a PPP LOAN because I don’t have 1099. So what should I need to do?
Thank you Navi. Very informative and easy to follow. What about in a case where there is a high earning W-2 (around the 145k) in conjunction with a low income generating LLC (5-7k)? Does it still make sense to tax the llc as a partnership?
Hi Kan. Tough to answer without knowing the specific details but off the top of my head I can't think of many benefits to being an S Corp vs. being taxed as a sole prop if you have a loss.
Can we file an amendment for prior years? I made the mistake of getting my company treated as a scorp when w2 was above limits. I did file/run payroll returns
For S-Corp election, I think if you reduce the employee salary portion ($57k portion) while having the rest of the $142k as distributions (tax free as long as not exceed stock basis) then could you make the argument that you'll save more money than an LLC election?
So for LLC taxed as an S Corp, if you are wanting to max out a self directed solo 401k but you also have high w2 income, you would save more in taxes by making contributions as a sole proprietor instead of an LLC taxed as SCORP?
I have had an LLC s-corp but took a $150,000+ job. My business will do between $5k-$15 per year as I take on projects I want to work on. I’m in the process of closing out my payroll account with the company I’ve been using. Would I file paperwork to convert my LLC back to being taxed as a sole proprietor or am I safe to just take owner draws and not take a payroll?
what if you are an employee and married, reporting as dual income, is the combined salary or individual salary taken into account? Thank you for the informative video!
Hi, I've been trying to wrap my head around this, even hired an online tax advisor but am still not sure what's best. So I have a high. W2 ($120k) + ($100k revenue side gig), they are recommending an S-corp for the side gig but I think that's not what you are saying. You are recommending a sole proprietorship for a side business right?
Also when you say you get the social security portion back, you are saying that you have to pay it initially? Can you just not pay it at all since you know your W2 job will end up paying it the max?
Good question…I wasn’t very clear on that. If you’ll be taxed as a sole prop, then don’t pay into it to begin with. If taxed as an S Corp, you’ll pay it but receive a refund when you file your personal tax return. Hope that helps.
Enjoying your videos! Please address the situation where a married couple has a high earning W-2 employee and the spouse is self-employed. Is that the same as what you present in this video? I am unclear. Thanks!
Hi April…thanks for the feedback. The wage base I refer to in the video is per individual so if an individual has high W-2 income, and that same individual has a business, that is when the content of this video is relevant. If you have a small business and your spouse has high W-2 income, then the topic of this video won’t apply.
Hi, I have a question. If anyone can answer, it would be great. I have opened a single member LLC last year. I am planning to file the business taxes as s-corp for 2022. I have not payed myself a salary nor took a 'draw' before Dec 31st, 2022. Is it too late to pay myself a salary and take a draw and show it towards 2022 business taxes? Your response is greatly appreciated.
Hi there....your question may seem rather simple, but it is a quite complex answer. You should know that if you are an S Corporation, you are not required to take a salary aka reasonable compensation if you also didn't take any draws aka distributions from the company. If you want to learn more about this, please watch my most recent video on what to do if you didn't issue payroll - I think it will help you with your understanding.
hi, Navi, good stuff. For a high-wage earner, if the business is absentee-run, can he/she not do owner-draw, only take a distribution (the rightmost column)
Thank you for the info! Your all video is very informative. I have question on SSN Tax working on two W2(Full time) job. Keeping your example same, What if i have two W2 full time job with Salary $142,800 in each company. Both Company1 and Company2 withheld SSN tax. How much i will get refund after filing tax return? Is it 6.2%(employee) only or 6.2%(Employer) + 6.2%(Employee) of company2 ?
very good information, thanks! Quick question - if I make 142800 on w2 and take 57120 salary from my business then I will be paying FICA on both incomes but what about 85680 distribution? since that is also my income from business so I will only be paying FIT & SIT not FICA, correct?
Thank you for the info! It's been challenging finding tax information for high W2 earners with a side business. I'm in the process of looking for a tax consultant regarding S Corp election and now I have my answer. You explained it very well!
You’re welcome @Cindy Wen. Make sure you watch the other videos (if you haven’t already) around when not to have your business taxed as an S Corp to make sure it’s a good fit.
Yea sir I’m heading out now and will let him know that
Very very helpful video. I am a physician on W2 with a 1099 side gig contract. I was about to elect my LLC to be taxes S-Corp. After watching this video, I realized that S-Corp election would actually cost me money(which I was never told by my CPAs who provided me consultations with a fee).
Hey man, Same here. I'm a doc and was planning to do locum on the side. My only question is, do we have to take salary from S-corp since we are already making enough on W2? If we don't have to take any salary from Scorp then it wouold probably be more beneficial?
Omg FINALLY! A video that gets to the point about when you should convert and when you shouldn’t. THANK YOU!!
Hi, I came across this while browsing for videos regarding S-corp. I am glad I clicked on it, and I wanted to thank you for explaining things in simple terms. That said, I have now subscribed to your channel and liked this video.
The answer is on 12:20 . Thank you Navi for explaining this. I did not realize that there is a SS cap for the employee, but not the employer. BIG thank you !
This is the best video ever to explain why NOT having S-Corp make sense! Very clear, up to the point and no BS. Just one question left unanswered: Why higher profit, e.g. $250k, will make sense again? @Navi, is there other video explaining that situation? Thanks!
just discovered your channel and im already on my 3rd video. its like you have a video for all the questions I’ve had for YEARS
Finally someone covered my question!
Thank you for this excellent explanation. This is exactly what I needed to see .
You’re welcome @Scott Gier...glad you found it helpful!
Same
Thank you for these videos. These complex tax rules are very well explained and you answer all my questions.
Thank you for this Video. It helps a lot. I have a High W-2 and right now my Company is Not making much money. It is really making me think twice about electing for an S-Corp when it does make more Money.
Great - glad I could help!
great video made simple. I appreciate your time, thank you Navi.
Thanks Joseph - glad it was helpful for you.
Thank you Mr. Navi. Informed when I needed specifics.
You're welcome - thanks for the comment!
This video is full of answers to questions I had. Thank you for the detailed explanation! ☺
Keep seeking the truth and you’ll find all of your answers 😉...thanks for watching and happy to hear you are learning.
Exactly the info I was looking for (W2+1099 situation and when S corp is worth it)! Thank you for the video!
You did a wonderful job explaining this and breaking this down. I finally get it. Thank you!! 😊
That's so great to hear! I love when viewers are finally able to understand a concept.
Great job explaining a concept that can be quite confusing. Thank you - very helpful!
Thanks for the feedback Erez! Glad it was helpful for you.
Thank you. Can you kindly make a video on the scenario where one has a high W2 income but also a S corp profit beyond $250k or whatever amount that would justify having a S Corp.
Great information, thank you for taking the time provide this to us.
You’re welcome Alandy! Glad you found it helpful!
SO AWESOME and very easy to understand! Thanks.
You're welcome and thanks for the feedback!
Can you do videos on what if your spouse is a W-2 income earner and you are an S-Corp?
Excellent explanation. I want to see you explain the use case for high salary in w2 with an LLC for rental property or S Corp. Explain the user case when LLC is profitable and loosing money.
Excellent video with great information!! Thank you for sharing your knowledge, I needed this information before starting my LLC.
Great Video couldn't find it anywhere! Thank you so much
You’re welcome and thank you for the feedback. The drawbacks of an S Corp are rarely explained but are so important to know.
@@NaviMarajCPA May I know if my W2 is only $50k, but my small business income is $100k. Could I benefit from the tax deduction? Thanks
You should not run into the issues discussed in this video based on the income levels you noted above.
Thank you for the hard work. Keep it coming!!
You're welcome Sean! It takes a lot of time to put these together - you would be surprised!
Hey great info and very well explained! Thank you!
Very well explain brother
Jazakallah khair
This is amazing! Thank you for explaining things so simply with examples.
You're welcome...glad you enjoyed it!
Wonderful info! Thank you for explaining this is great detail, with visuals!
Thank you for this video. This is exactly my situation and I could not find anyone to clearly answer the question. You did an excellent job explaining this concept for high earners!
Thanks for the feedback Angela. Glad you found your answer.
thank you for sharing your knowledge. Question: I have a full-time w2 paying join and a business that has very irregular income. It's a service business. I am able to live off my w2 job (not my business) and I want any income from MY businesses to go back into the business - 100% for training, equipment, marketing, networking, etc. I am not planning on taking any draws for the next year. In this instance, would my business still be liable for quarterly SE filings and SE taxes if there are no profits at the end of the year because everything was re-invested into the business?
The exact thing I was looking for. I've always thought about how sad I am I never elected s-corp while having w2. I have maxed out my social security portion several times and now see why the self employment taxes aren't really a thing when you max that out. Also the savings from not having to have complicated taxes.
Best video on S corp. It is so helpful. Would you please do another video on the scenario as you mentioned in the video? If W2 is $140,000 and net profit from LLC is over $250,000, how S corp works better? thank you so much
This video saved me! Excellent info!!
As always, great video!
Another big advantage of the s corp is the ability to hire a spouse and max out two 401Ks on the employee and employer side, this could be a major tax saving if you are now deducting 40-80k in 401K. Care to expand on this?
But when you have a high pay W2, chances are the 401k is already maxed out? Unless you are talking about a non-working spouse that hasn’t maxed out 401k through their employer?
Thank you for the informative video. I really appreciate it.
This is great info. Thank you. Question: I have a high paying W2 job and I'm having to use my W2 income to get my LLC off the ground to avoid borrowing. How much of my W2 income can I write off?
Thank you, Navi. Lots of my questions get answered. First, I understood where self-employment tax 15.3% came from. Second, LLC works better with High paying W2. Would you suggest what other tax benefits one should look for with (high W2 + LLC)? Thank you!
Lost from 13:05-14:01. So if my W2 and my side business bring in X revenue, I’m NOT paying Employee & Employer FICA and SS?
Thank you so much, I never took into account the limit on OASDI is actually a cost saver than an S-Corp.
You’re welcome Tom…many people make this mistake. Glad it’s not you! 😉
Thank you so much for explaining. This is such good information.
This was a great video. Thanks 👏
You’re welcome Rich!
Thank you so much for creating this. I finally found an answer to my question.
Thank you. Great explanation!! Very helpful
thank you Navi! I'm an advanced practice nurse looking at 1099 work while also keeping my part time benefitted W2 job. I was thinking s corp would be the way to go, but now your video has cleared that up for me. Unless I'm going to work a lot of 1099, I don't necessarily need to incorporate. Also, from what I understand, LLC is not an option in CA.
How does a Single Member S CORP employee document income via W2 for compensation received from capital gains from trading as a business under a Single Member S CORP/ TTS status
Hi @writegarry. Honestly, I've never had to deal with that scenario before since my clients aren't active traders. That said, when "shopping" for a CPA/tax preparer, be sure to ask those specific questions and if they don't know the answer, they probably aren't the accountant for you. Thanks for watching - sorry I couldn't be more helpful on this occasion.
If you received compensation, it cannot be capital gain.
Excellent info, but perhaps consider reducing the 3 minute intro before beginning to answer the question you posed in the first few seconds.
I see YOU! Good phone chat about this and great vid
The high salary you are referring to, is that also applicable to two low incomes W2s (Spouses income adds up to 143K) when filing taxes together along with a side hustle income? I am debating between starting an LLC or an S-Corp.
Great to get this information! Difficult question coming up: If I am a high W2 earner and have a side hustle with an LLC as a sole proprietor, would I still have the ability to contribute employer profit sharing to a solo 401(k) attached to the LLC?
Navi, to me as a rule of thumb, it's roughly a wash. If you use round numbers for the sake of simplicity, let's say SS tax is 6% each side, and the medicare is 3% total. If you make 90k and keep it as a sole prop, you get taxed $2,700 for the medicare only (SS is maxed out). If you're an S Corp and pay yourself $30k, you pay the employer SS ($1,800) plus medicare ($900) for a total of $2,700. Aside from the round numbers I'm using, am I missing something significant?
Thanks for breaking this down in plain English...If I elected to change my LLC to an S Corp and my profits fluctuate from year to year and doesn't seem to be worth it, can I change back to an LLC?
Yes, but don't make a habit of switching back and forth. The IRS doesn't like it and it is a pain in the butt.
Best video I've ever watched
Best comment I ever received!
Great Video and breakdown.
Could you maybe do another video with emphasis on tax penalty or benefits from either short term vs. long term trading in the stock markets and whether or not it would make sense to file as an S Corp while having high earning from W2 income?
Thank you for the video suggestion/request. Honestly, I'm not sure I'll discuss that anytime soon - it is not really an area I specialize in but definitely a hot topic at the moment.
Occasional Trading for individual is considered buying and selling capital assets for yourself and the profit or loss is taxed at capital gain rates (more favorable unless it is a short-term cap gain which would be taxable as ordinary income in your tax bracket). You are considered to be a dealer if you actively trade securities to customers and in this case it would be your active ordinary income because you will provide services. Long-term cap gains are always taxed at reduced tax rates. Not sure about what kind of tax penalty you are referring to.
Very helpful information. Thank you!
I understand that when you have multiple W-2 jobs, each individual employer would be unaware of when they no longer need to withhold FICA social security - but in your example, couldn't you just NOT withhold the employer side of the social security considering that you know you're beyond the wage base? That would mean you're not withholding any FICA social security on the S-Corp, so you don't even need to wait to get the employee portion refunded back and the employer portion isn't lost forever
In theory this sounds great but I don’t think you can actually execute this the way you are thinking. Very rarely is someone exempt from paying FICA tax.
@@NaviMarajCPA after reading through some less than thrilling IRS documentation, I agree. Unfortunately the US tax system's underlying assumption of 1 person = 1 job does not scale very well at all. In theory, I think the right judge or jury might look at my proposed strategy as following the spirit of the law, but it does indeed seem to venture outside of the letter even if you're withholding FICA up until the point that you reach the wage base.
Thanks for the vid.
The primary reason people elect to file taxes as an S-Corp is to avoid paying employment taxes which max out at 21,840 in this example. If you have already paid those employment taxes via a W2 job then there is no advantage in filing your business taxes as an S-Corp. It's really no more complicated than that.
Why don't you do a video on the financial benefits of moving to a state with zero income tax? Florida for example :). Now that is saving money!
I thought the wage based cap is you pay UP TO not zero. Why would the 8K SE tax for LLC be returned? Thought you would pay no more than that? Please clarify the wage based again. At the 13:59 point you say we will get those two large chunks back. Is that true?
So you would have to make enough where the extra 5% of employer contribution would be greater than the employer contribution of fica taxes?
Hi Navi, great video. This will be an important issue for my wife as she decides whether to have her SMLLC taxed as disregarded or S Corp. Question: could you point me to a link or somewhere in the tax code that verifies what you said about S corp owner-employees still owing the employer portion of Social Security (on reasonable compensation) even after they've reached the wage base from W2 income? I believe you, I just haven't been able to find anyone else talking about this. Thank you!
If my W2 income pays the maximum social security tax ($8853.60 with the employer paying the other half) then the only tax I would have to worry about for the 1099 would be the 2.9% Medicare tax, and then whatever my federal taxes are depending on which income taxes bracket I fall into. Am I understanding this correctly?
You got it! 👍🏼
Very informative...thank you very much for sharing this content...you explained it well🤗💯
Thanks for the feedback @Mommy & Me Life! Glad you found it informative. Stay tuned as I plan on teaching more in 2021.
I fit into this scenario. Here’s what I have done
At my W2 job my salary is 130K a year. So what I’ve done is have the 401K maxed out. My HSA maxed out. I’m over 50 years old so o have the catch up portion maxed out as well. Reducing my TAXABLE W2 income substantially.
Thank you so much for breaking this down for me.
You're welcome La Tasha! Glad I could help!
the salary base is only for one person earner? what about marriage joint? cos me and my husband have almost 140,000 yearly together and have Multi-member LLC formed with just two of us. your reply is appreciated.
Thanks for the content. What if you ain't living the high life and are a low wage w-2 earner ($40k) and have an LLC where you earn about 12k profit. It seems like you are suggesting going the standard llc sole proprietor tax route is best?
Yes, based on that limited information - being taxed as a sole prop is likely best. Please keep in mind that this is not individualized tax advice. Thanks for watching!
Thanks! This was very helpful
I am paying an arm and a leg in taxes with a side job and LLC - sole p.
Great videos, my question is what if you dont have w2 income over that much but you want to start a partnership llc. Im in NH so I understand the s-corp is not recognized.
Thanks for the feedback! If that is the case then the contents of this video are likely not a concern for you.
What if I own multiple S-corps while having a w2 income which is fairly large? And the Scorps profit is near to 150k?
Hi Navi, Thank you for making me understand how all this works. It took me four of your videos to finally understand how all works. Thanks for going extra step with color coding. It make so much sense now. Can you please make sure my understanding is correct below. Thank you again.
If I have $100k in W2 and $100k in business income it would make more sense to open my business as LLC enity S-corp tax classification, correct? Because if I do sole proprietary I have to pay social security on $42k out of my $100k business income and multiply it by social security tax rate 6.2% and have to doubled it for employee and employer plus I have to add medicare tax on my 42k at 1.45% and then increase it to around 2% on rest 58k. But if I open S-corp and take 40% whick is 40k than I will only pay social security tax and medicare tax on 40k two times for employee and employer and then deduct the employee part when I do my taxes. Is this correct understanding?
Sounds like you’re understanding everything correctly! 👍🏼
after watching this, I understood that Social security tax from W2 side will be refunded, so we all should be earning more upto or over the salary base, right? otherwise, we wont get back at all.
Am I correct in saying that the Federal and State taxes are always calculated AFTER deducting for the FICA taxes?
Hi Magnus - great question. No, that is not correct. The income taxes and FICA taxes are both based off of the same amount.
@@NaviMarajCPA OK, but am I correct that that "same amount" is computed after deducting an amount corresponding to FICA tax? (I'm sure I've heard elsewhere something to that effect).
@@magnusbrzenk447 if Fica is business related, then yes. You will calculate income tax after you deduct this business deduction. I think this is what you mean.
Thank you for this amazing video. What is the best way of reimbursement the miles, tolls, gas, hotel and any other expensives to my employees or deduct them as company expenses?
This is the most clear video I saw on this topic. Thank you. One question though: how does QBID come into play here? Say I have 100k of profit as sole proprietor, I get 20% QBID so all my taxes (including state/fed income tax) will be based on 80k. If I elect S Corp and pay myself 60k, then I only get QBID on the 40k K1 profit, so my tax basis for state/fed income tax will be on the 90k (50k W2 + 40k K1) which could wipe out the savings on FICA tax, am I thinking about it right?
Hey Serena...you're on the right track. Using your numbers which one save you more money? ($40,000 K1 x 15.3% = $6,120) or an additional $12,000 tax deduction ($20,000 QBID with sole prop vs. $8,000 QBID with S Corp) based on your federal and state income tax rates.
Note that there is a lot more to consider which it comes to the Section 199A deduction so I am just using your assumptions in the above response. Also, this is not individualized tax advice.
Hey Serena!...this week's video being released on 08/27/21 @ 5PM EST will cover the QBI Deduction.
wait.. you didn't answer the question if high income W2+LLC make sense.. so if S-corp doesn't make sense are you saying LLC would be better?
So helpful, thanks!
Great info, how does this change of my wife is the high W2 earner and I have my own business? Since we’re ful file jointly does this also applied to us?
Each individual has their own "wage base" regardless if you file married filing jointly or not. Hope that helps answer your question.
2:00 did he say you should or shouldn’t have passive income in an s-corp?
Generally, you should not have passive income in an S-Corp. There is a separate video I created on this topic on my channel.
Thank you for sharing! Looking for info but getting mixed answers. As a real estate agent in CA if I am getting paid with a W2, am I allowed to deduct business expenses?
If you're an employee receiving a W-2 then you cannot deduct any business expenses. These are referred as "unreimbursed employee expenses" and in the past, prior to the passing of the Tax Cuts and Job Act (TCJA) you could deduct a portion but that has been eliminated. This is probably why you are receiving mixed responses.
@@NaviMarajCPA I see thank you, that makes total sense!
My salon is small business, only me working. I have a LLC, and have to pay for the payroll $100 a month, I also have W2 . I can’t get a PPP LOAN because I don’t have 1099. So what should I need to do?
Thank you Navi. Very informative and easy to follow. What about in a case where there is a high earning W-2 (around the 145k) in conjunction with a low income generating LLC (5-7k)? Does it still make sense to tax the llc as a partnership?
I’m that scenario there would be no reason to elect S Corp status for the LLC.
@@NaviMarajCPA thank you 😊
Thank you! This was a very helpful!
Thanks Navi! Very well explained.
Would it be worth filling for S corporation if the business is a loss with negative profit with high income W2?
Hi Kan. Tough to answer without knowing the specific details but off the top of my head I can't think of many benefits to being an S Corp vs. being taxed as a sole prop if you have a loss.
Thank you! Quick question...in this scenario...is the 142800 for each or is the W2 and Sole Prop be combined?
Can we file an amendment for prior years? I made the mistake of getting my company treated as a scorp when w2 was above limits. I did file/run payroll returns
Excellent info!!!
Thank you Candace!
For S-Corp election, I think if you reduce the employee salary portion ($57k portion) while having the rest of the $142k as distributions (tax free as long as not exceed stock basis) then could you make the argument that you'll save more money than an LLC election?
So for LLC taxed as an S Corp, if you are wanting to max out a self directed solo 401k but you also have high w2 income, you would save more in taxes by making contributions as a sole proprietor instead of an LLC taxed as SCORP?
I have had an LLC s-corp but took a $150,000+ job. My business will do between $5k-$15 per year as I take on projects I want to work on. I’m in the process of closing out my payroll account with the company I’ve been using. Would I file paperwork to convert my LLC back to being taxed as a sole proprietor or am I safe to just take owner draws and not take a payroll?
what if you are an employee and married, reporting as dual income, is the combined salary or individual salary taken into account? Thank you for the informative video!
Hi, I've been trying to wrap my head around this, even hired an online tax advisor but am still not sure what's best. So I have a high. W2 ($120k) + ($100k revenue side gig), they are recommending an S-corp for the side gig but I think that's not what you are saying. You are recommending a sole proprietorship for a side business right?
Also when you say you get the social security portion back, you are saying that you have to pay it initially? Can you just not pay it at all since you know your W2 job will end up paying it the max?
Good question…I wasn’t very clear on that. If you’ll be taxed as a sole prop, then don’t pay into it to begin with. If taxed as an S Corp, you’ll pay it but receive a refund when you file your personal tax return. Hope that helps.
Enjoying your videos! Please address the situation where a married couple has a high earning W-2 employee and the spouse is self-employed. Is that the same as what you present in this video? I am unclear. Thanks!
Hi April…thanks for the feedback. The wage base I refer to in the video is per individual so if an individual has high W-2 income, and that same individual has a business, that is when the content of this video is relevant. If you have a small business and your spouse has high W-2 income, then the topic of this video won’t apply.
@@NaviMarajCPAThank you, Navi for the clarification. I look forward to watching more of your videos to help me manage my real estate business better.
Hi, I have a question. If anyone can answer, it would be great.
I have opened a single member LLC last year. I am planning to file the business taxes as s-corp for 2022.
I have not payed myself a salary nor took a 'draw' before Dec 31st, 2022. Is it too late to pay myself a salary and take a draw and show it towards 2022 business taxes? Your response is greatly appreciated.
Hi there....your question may seem rather simple, but it is a quite complex answer. You should know that if you are an S Corporation, you are not required to take a salary aka reasonable compensation if you also didn't take any draws aka distributions from the company. If you want to learn more about this, please watch my most recent video on what to do if you didn't issue payroll - I think it will help you with your understanding.
@@NaviMarajCPA , thank you Navi. Exactly addressed my question in that video. Hats off...
hi, Navi, good stuff.
For a high-wage earner, if the business is absentee-run, can he/she not do owner-draw, only take a distribution (the rightmost column)
Thank you for the info! Your all video is very informative.
I have question on SSN Tax working on two W2(Full time) job. Keeping your example same, What if i have two W2 full time job with Salary $142,800 in each company. Both Company1 and Company2 withheld SSN tax. How much i will get refund after filing tax return? Is it 6.2%(employee) only or 6.2%(Employer) + 6.2%(Employee) of company2 ?
It would be 6.2% employee only.
What is the best booking software to make I am accounting for all transaction ?
very good information, thanks!
Quick question - if I make 142800 on w2 and take 57120 salary from my business then I will
be paying FICA on both incomes but what about 85680 distribution? since that is also my income from business so I will only be paying FIT & SIT not FICA, correct?
That's correct. You will pay FIT & SIT on your distributions...you will not pay FICA on the distributions.