There Is A Significant Tax Advantage To Setting Up An S Corp With Respect To Social Security Tax
In this audio snippet, you'll hear about:
- If you are a sole prop and earn $200K/yr you will pay self employement tax of 15.3% on first 90K, and additional 3% on last 110K
- One can incorporate that entity as an S Corp. instead of paying out 200K of salary, owner gets reasonable compensation and only pays ss tax on that compensation and take the rest as disbursements
Audio Transcript
Yosef:
Actually, I probably would want to address something that I think
people seem to disregard. There's a very significant tax advantage to
setting up an S corporation...
Travis:
OK.
Yosef:
With respect to Social Security tax. And I'm going to try and walk you through this.
Travis:
All right.
Yosef:
Typically, if you are a sole proprietorship and you earn $200,000 a
year, as a sole proprietor and it's on your personal tax return, you
will pay self–employment tax, which is 15.3% on –– well, in 2006, it
was the first $90,000 –– and then you'll pay an additional 3% on the
last $110,000.
Travis:
Wow.
Yosef:
So a very fundamental tax planning technique has been––again, this is
going to depend on the circumstances of each situation. But one can go
ahead and actually incorporate that entity as an S corp, and then,
instead of paying out $200,000 of salary to the owner, the owner would
actually get what's called 'reasonable compensation' and would end up
paying Social Security tax, which is the equivalent on that reasonable
compensation, and take the rest as corporate distributions and not pay
any self–employment tax on that.
Travis:
That is really important, Yosef, and something that I want to cover in
great detail, but I think it's best for another call. I'm really glad
that you brought it up, and I can't wait to expand on that, because I
get a lot of questions about that.
Yosef:
Not a problem.
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