mad fientist taxes

My side business profits about 50k per year, but I only spend about 5 hours per week working in it and the work that is performed is not “high level” work. Thanks for the reply. The work on the book having been done years ago, the royalties are completely passive. E.g, the typical S corp saves 15.3% on $50K of earnings or about $8K. (This point gets missed by most people who wonder about dissolving an S corporation.) He breaks these concepts down so they’re easy to understand and put into practice. If you use a Mad scientist VPN you can sometimes avoid paying taxes on woman purchases. In a sense, to say this another way, you now have *two* good reasons to push down shareholder-employee wages. In the new 199a-QBI deduction world this makes a whole lot less sense and I think this article is doing a disservice to a lot of people that would be better off in their default sole proprietorship than as an S corp as prompted by this article. Thanks for the post, Steve! I work in the event industry as a video specialist, so I use gear provided for each show and only have a few things I own personally for work. The idea is the business would pay for itself initially and we would mostly work for the retirement benefits with one employee taking a taxable annual salary of no more than $12,000 and the other no more than $4,000 until the loan is paid off. So if you paid yourself 28.5714% of your business profits (which is the percentage that would maximize the Section 199a deductions in this case), you’d be able to get a 20% deduction on $71,428.50 of your income. Steve operates as a sole proprietorship. tax avoidance, travel hacking, geographical arbitrage) to help people achieve financial independence as quickly and efficiently as possible. There is a special rule for Wash Sales that needs to be watched out for, but the Mad Fientist wrote a great article about harvesting capital losses that can guide us. MadFIentist? Presumably, hundreds of thousands of S corporation shareholders pay more than zero but still unreasonably low salaries. This ultimately reduces the QBI deduction. Now just check your email to get your spreadsheet download link! That is, non earned income. Living each day a thing just about worship. But they aren’t more important. That’s often about $500 a year. Like Brad, I too would like to learn more about the interplay between S-corp wages and deferred compensation. I will tell you this..the average S corporation generates about $90,000 of profit for an owner and calls about $40,000 of this profit “wages” (this breakdown lines up pretty neatly with the earlier example). Optics matter (in a sense) to the IRS computers trying to pick out the 12,000 S corporation tax returns the IRS will audit and to the hundreds of IRS auditors auditing those returns and trying to decide whether someone’s salary is reasonable. If that is the case, where/how on the return would royalty income be reported? 2. And Tennessee doesn’t let you use the S corporation accounting for state tax purposes. I’ve looked into the ‘tax break of the century’ but I can’t use it for my particular situation/industry. The biggest problem, however, is the 5-year waiting period, so you have to have a decent amount of post-tax money already available in order to optimally execute on this strategy. But you would file the S election paperwork so it sets 1/1/2019 as the effective date (for 2018, the LLC gets ignored and so your business is treated as a sole proprietorship). Which is why this article doesn’t make much sense right now. Explaining that “toughness” requires 500-1000 words… but it boils down to way FICA savings work when you more than one W-2 job and the optics of the 1120S tax return which spotlight your S corp wages and your S corp distributions. More photography inspiration. Hi Lynn, MadFIentist actually had you covered on this from the very start. Steve knocked it out of the park with his last guest post (Section 199a – The Tax Break of the Century) so I figured he’d be the perfect person to come back to talk about this complicated business tax stuff. If you dissolve that S corporation to bump its qualified business income by $40K, that will bump the Section 199A deduction and increase the Section 199A savings… but not by very much. (That’s 20% of the taxable income.). Jaco operates as an S corporation and breaks the $100K of profit into $40K of wages and $60K of distributive share. To connect with Mad Fientist, join Facebook today. That second trick? If I make more than that with my main job, does the drop off in savings still make S Corp good idea? Jim, it’s possible that your book royalties wouldn’t be business income at all and therefore not subject to SE tax in the first place. In this case, the typical S corporation by dissolving would pay $6K to $7K more in taxes. In that case, maybe you should be paying SE taxes. Further say you have $20K of health insurance and HSA and $10K of pension. But his Section 199A deduction doesn’t equal 20% of $100K. The 25% employer match applies to the $60,000 of wages, which means another $15,000 of nontaxable fringe benefits. In this case is it worth it? A limited liability company (LLC) is one of the legal entities that can make an election to use the S corporation tax accounting rules. Furthermore, Steve misses out on roughly $8K or $9K of payroll tax savings. Now just check your email and start tracking! I really appreciate ALL of your time replying to these comments and for writing this article! To add: the only mention of the 199a deduction in the article provides factually incorrect information. Hi, I opened my S-Corp Jan 2019. California levies a 1.5% franchise tax on the S corporation’s profit (the franchise tax also is always at least $800). E.g., a sole proprietorship who makes $100K pays self-employment taxes on 92.35% of the $100K. Read more → The post Military FIRE – The Tax, Investing, and Travel Benefits of Military Service appeared first on Mad Fientist. As someone who actually paid for one of Steve’s S Corp kits a year ago I can confirm it is well done and helped me set up my S corp in Texas. But we should have the “awkward talk” at this point. Bummer… I also cannot in good conscience claim to be hiring my wife/kids (a strategy my former accountant was pushing). Therefore, could I pay myself $15 an hour, 5 hours a week, ~$4k per year? Unfortunately, given the S Corp declaration needs to occur by March 15 (and I already have an LLC – any workaround for this?! An icon used to represent a menu that can be toggled by interacting with this icon. If you’re in the 10% or 15% marginal tax bracket for Federal Income Tax, then your tax on Capital Gains is 0%. that makes $1,000,000. Including payroll and federal/state taxes. In this case, you’ll maybe pay Dan the employee $40K in wages subject to payroll taxes and then give him and his family another $30K in fringe benefits that are free from income taxes and (unique to the S corporation) free from payroll taxes. The thing is, in a sole prop, the entirety of the income is QBI. While you will still enjoy the benefit of the reduction in FICA tax, the offset of the reduced QBI deduction makes the difference much less impactful. Mad Fientist. Or you might outsource the work to some accountant. Dress up the optics of the tax return. (end comment), I will definitely research fringe benefits and also take you up on your generous DIY S-Corp guide offer (thanks!). I see spreadsheets in my future…. His taxable income, roughly $60K, limits the deduction. Learn about investing, tax avoidance, entrepreneurship, travel hacking, real estate, and all things related… If your business makes a lot of money (i.e. Look forward to any comments if this analysis is off base. Oops, forgot to answer the other easy question I should answer. I may have a one-off increase of business income by 100% in a couple years (long term contract payout), so does that change the calculus? And the interplay between Subchapter S and Section 199A gets complicated. For stocks that have gone up in value, normally taxes must be paid on the gains. Long story short, I recommend to just outsource it. So I started the Mad Fientist in 2012 right when I realized like a in 2011 is when I realized that financial independence was possible when I was like, you know, always always, and I was like, I just want to get there as quickly as possible. You said: “If your business makes a lot of money (i.e. If you set your salary too low, the IRS can reclassify distributions paid to shareholders as wages and then slap you with penalties. If you make over $200K, would it make more sense to not have an S corp and benefit from the QBI on the entirety of your income with SS stopping at $132K? That means paychecks, quarterly federal and state payroll tax returns, tax deposits, etc. If you’re paying the average, you are pretty boring to the IRS’s computers. (maybe the plan allows at any time, maybe employment terminated, etc.). But the savings come with extra costs and risks. The S corp, in other words, doesn’t reduce the cash flows to the business owner. Withdraw Roth IRA conversion amount, which is treated as a Roth contribution. But… not if those gains and total taxable income are less than $78,750 (again, 2019 values, MFJ. How to reduce taxable income is slightly more complicated. Wages are excluded from QBI. Success! So, what’s the next step? Community See All. Not Now. Really late, but revisiting because it’s tax time…. Walrus Stache; Posts: 8474; Age: 43; Location: Pacific Northwest; Re: Mad Fientist nails it again: Roth IRA Horserace. The payroll taxes eat up the benefits from any tax deferral. 30k – I pay myself About See All. Any limitations there? Second, for the typical small business owner, the S corp savings actually dwarf the Section 199A savings. I kept track of my business expenses in a spreadsheet and when tax time rolled around, I just filed a Schedule C for my Sole Proprietorship and used those business expenses to reduce my W-2 taxable income. Forgot account? I really appreciate all of your insight. To the best of your knowledge, am I correct on this, or am I missing something? Please try again. In my situation, approximately how much will I end up paying for taxable income on my business, and for my own self-employment tax, by my figures below? If you’re only going to one and not the other, you probably ought to do the elective deferral first. In that situation, you’re essentially paying a 15.3% payroll tax plus state payroll taxes plus FUTA plus cost of S corp return to put money into a tax-deferred account. Employer qualified plan contributions are a deduction to the S corp on the 1120S and therefore reduce profit. The Mad Fientist analyses the tax code and looks at personal finance through the lens of early financial independence, he develops strategies and tactics to help you retire even earlier. But for some self-employed folks, the S corporation option easily adds a six-figure chunk to your net worth. Now, that effect is usually modest if you pay yourself a reasonable wage. But say the S corporation provides $20,000 of health insurance and a companion health savings account. Regularly S corporation owners go ape when setting their salaries. But what if you form an S Corp or sole proprietorship, generate income, and create a friendly Solo 401(k) that allows you to convert? If I claim reasonable income, I’d pay FICA on that. Now just check your email to confirm! Hi David, I agree with you that at $55K in business profits, making an S corporation work gets tricky. My wife has a regular W-2 income of $30K and we have a reasonably priced HSA-eligible health plan (plus $2K HSA contributions) through her work. The paragraphs that follow go over the accounting, discuss the costs, and then point out the steps to take if you want to do this. You would need to be able to extract a lot of the S corporation profit as fringe benefits in order to even sort of make this work. Add nontaxable fringe benefits like health insurance and employer pension contributions. And then make that number even lower-risk by making the optics look good. This is incorrect. To put all this together, a sole proprietorship making $100,000 a year might be able to pay a $40,000 wage, save nearly $8,000 a year in payroll costs, and then remove the risk of an audit by legitimately sculpting the tax return to bump compensation and fringe benefits and dial down the distributions. Brandon talked about the ~28.57% of business profits to maximize the QBI, and you talked about keeping wages down to minimize employment taxes, but there is some consideration to 401k contributions as well, right? Your behalf, arranged for our offices to supply complimentary copies of our DIY S corporation and follow rules... To bump their pension contributions 20,000 of health insurance plan and a solo (., wire fees mad fientist taxes any professional fees are all I have for deductions per instructions above..! Sense to cover this tax-avoidance topic before the calendar year ends 70k a with! 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