One of the nicest things S-corporations offers is tax-free dividends. Unlike, partnerships, regular corporations, and sole proprietorships, distribution/dividends paid out of profits above wages are not subject to self-employment or FICA taxes.
Example: XYZ is an S-corporation with two shareholders/owners and five additional employees. XYZ has $150,000 in profit before shareholders/owners are paid. Each shareholder/owner is paid a $50,000 wage, plus a $25,000 distribution/dividend. The wage is handled like any other employee wage. The dividend is only subject to ordinary tax, no FICA or self-employment tax; about a 15% savings, or $7,500 per owner.
When I tax plan with S-corp clients I sometimes have a hard time convincing them to pay a dividend rather than all wages. The IRS says S-corps must pay a reasonable wage before dividends are paid. Reasonable is a wide road and requires careful consideration. Once your S-corp pays you a reasonable wage, it is time for dividend distributions of additional funds. The savings can be significant.
Don’t overpay your taxes because you don’t understand the value of the S-corp. Invest time with your friendly accountant and build a plan for the greatest tax savings. The rules are many when it comes to S-corps and the opportunities are equally great. You don’t need to understand basis, debt basis, flow-through income, etc. to take advantage of the benefits. You need a good accountant that lays out what is available to you and how to accomplish the goal.
I encourage you to take this post to your accountant if you have an S-corp. Allow him/her to explain what I outlined above as it relates to you.
Showing posts with label corporations. Show all posts
Showing posts with label corporations. Show all posts
Thursday, December 10, 2009
Tuesday, September 15, 2009
Giving Back or Paying It Forward
I worked late last night with a new client. We started talking about corporate responsibility and giving back to the community. So I ask you: What is a company's responsibility to the community?
I fund several projects locally, focusing on CommunityFest. I doubt I get much in the way of new clients for the money I invest. Maybe a few of my regular clients get a warm and fussy when they see their tax guy sponsoring events.
A company lives in the community and owes its existence to the people therein. There is a duty, responsibility, and debt businesses must acknowledge. My business lives because the people spend their hard earned dollars with me. It is not an obligation, but a sincere desire to give back that motivates me. I try to place my money where the younger generation benefits, my way of paying-it-forward.
Here is the hard part. I receive about 250 requests per year from non-profit or community events. Giving $100 to each would set me back 25k, no chump change. Sometimes I get chewed out for not giving at least a little to (fill in the blank) charity. "It's for the kids, police, or fireman," I am told. I know. Still, I chose who I donate to. I tend to give larger amounts to fewer organizations. That is my choice.
A business that has the ability to help the community should consider helping at a level the owners feel comfortable with. It is not a requirement, but a nice thank you gesture to the community.
Don't berate me because I say no. Respect my decision and call again next year. Many of my choices to contribute are made before you even call, based on our previous contact. If you ride me, I remember. If you are rude I will never contribute. I want to give. I do give. A lot.
And thank you to all that made it possible.
I fund several projects locally, focusing on CommunityFest. I doubt I get much in the way of new clients for the money I invest. Maybe a few of my regular clients get a warm and fussy when they see their tax guy sponsoring events.
A company lives in the community and owes its existence to the people therein. There is a duty, responsibility, and debt businesses must acknowledge. My business lives because the people spend their hard earned dollars with me. It is not an obligation, but a sincere desire to give back that motivates me. I try to place my money where the younger generation benefits, my way of paying-it-forward.
Here is the hard part. I receive about 250 requests per year from non-profit or community events. Giving $100 to each would set me back 25k, no chump change. Sometimes I get chewed out for not giving at least a little to (fill in the blank) charity. "It's for the kids, police, or fireman," I am told. I know. Still, I chose who I donate to. I tend to give larger amounts to fewer organizations. That is my choice.
A business that has the ability to help the community should consider helping at a level the owners feel comfortable with. It is not a requirement, but a nice thank you gesture to the community.
Don't berate me because I say no. Respect my decision and call again next year. Many of my choices to contribute are made before you even call, based on our previous contact. If you ride me, I remember. If you are rude I will never contribute. I want to give. I do give. A lot.
And thank you to all that made it possible.
Thursday, September 10, 2009
The Rules Are Changing
Small business owners face a challenge as the tax climate shifts. What worked for over twenty years could be invalid soon.
Let me explain. In 1986, the tax code lowered the top individual tax rate below the highest corporate tax rate. Tax dollars were saved by organizing as an S-corp. As LLCs grew in popularity, many organized as an LLC, electing S-corp treatment for tax purposes.
Tax rates are going up. Previous tax cuts will expire at the end of 2010, bringing the top individual tax rate to 39.6% from today's 35%. Additional surtaxes proposed in Congress will bring the top rate to 45% or higher. This doesn't include state income taxes, just federal.
What does this mean for small business? It means regular corporations will provide better tax savings over the S-corp for some in the near future. It also means two levels of taxation. Even though this strategy will keep taxes lower, it will still be a tax increase.
More than ever, you need to work with your tax pro. Review your tax situation with consideration for the tax changes coming. It will be interesting the next few years.
Let me explain. In 1986, the tax code lowered the top individual tax rate below the highest corporate tax rate. Tax dollars were saved by organizing as an S-corp. As LLCs grew in popularity, many organized as an LLC, electing S-corp treatment for tax purposes.
Tax rates are going up. Previous tax cuts will expire at the end of 2010, bringing the top individual tax rate to 39.6% from today's 35%. Additional surtaxes proposed in Congress will bring the top rate to 45% or higher. This doesn't include state income taxes, just federal.
What does this mean for small business? It means regular corporations will provide better tax savings over the S-corp for some in the near future. It also means two levels of taxation. Even though this strategy will keep taxes lower, it will still be a tax increase.
More than ever, you need to work with your tax pro. Review your tax situation with consideration for the tax changes coming. It will be interesting the next few years.
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