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The Efficacy of the S Corporation Election

If you follow me you know that my Main Topic is saving small businesspersons thousands of dollars every year they’re in business.

If you make over $60,000 this year, and believe you’re on track to make that or more in future years, you’re a great candidate for the S Corp election.

You fill out a form to apply for it, and ideally have me fax it in for you. 

(The mail at the IRS has gotten a bit slow and unreliable in the past year).

Once they accept it, you are taxed as a corporation, but without the stand-alone taxation part.

Why do it? 

No more self-employment tax.  That’s why.

You DO pay yourself a reasonable salary, and help fund Social Security and Medicare from that like every wage-earner in America.

Just not on every net income dollar you make, any more. 

I’m writing on this topic again because despite my best efforts at singing the praises of this window in the system emitting rays of tax-saving sunshine…

…I found myself at a loss for words the other day explaining why one needs to pay the FICA and tax withholding payments that are required with a regular salary. 

For this person it feels like the same amount or even more than the previous year as a sole proprietor making estimated payments.

But that’s not the case. The numbers are hiding sneakily. 

Like enemy combatants hunkered down in the tall weeds.

Camo stick rubbed all over their treacherous little faces. 

Well, okay, maybe it’s not like that.

It sure feels that way, though. 

Want to know where they were hiding?

I would love to blame Page 2 of the Form 1040, and Schedule 2.

That’s the part where Schedule SE and the self-employment tax get dumped onto your tax liability.

Like a turd floating in a punchbowl. 

Nothing subtle about that. 

This number drives up the amount I suggest people withhold from net business income for ES taxes to between 25% to 30%.

Damn you, self-employment tax!!!

So, why was the hero of our story bemoaning the fate of similar tax costs on an ongoing basis?

Well, two things:

The first is – we set our hero up on monthly payroll.  So now the expense is monthly.

Hiding in the tall grass on that expense is federal and state wage withholding, by the way.

Reducing the amounts of estimated tax due all year, yes, but also cosmetically inflating the expense.

The second is a real doozy.

Ready for this?

Our hero came to us for our help in the first place early this year because of an anticipated scaling of the business.

They’re doing better.

About 150% of the previous year’s adjusted gross income. 

That’s jacking up the taxable income line (after standard deduction and QBID) to over double of the previous year, in this case!

More money owed in income tax, but with the dramatic reduction of SSA and Medicare it’s working out to just a little bit more tax.

The sneaky enemy number in this case was, at the end of the day, the lower amount of business income they had made in the previous year.

That’s the thing I love about accounting.

The Yin and Yang.

All is in balance in the end – you just have to know where to find the counterweights to get your scales level.

There is a lot of emotion wrapped up in money.

Plus the good ol’ Time-Money Continuum.

But that end of the day numbers don’t lie. 

And our hero will ride away into the sunset, confident in the knowledge that the S Corporation election is saving the business thousands of dollars in 2021. 

Who says accounting isn’t exciting, am I right?

So, as the sunset settles on the horizon of our tale I wonder…

Did you know I have created a video course that talks about all things S Corp?

For the small do-it-yourself-minded entrepreneur that has the time and bandwidth to tackle it.

But also, really, for the small business person that knows they need help, and just want to educate themselves on what it is, why do it, and how we do it.

It’s called Solopreneur S Corp Strategy.

Click here:    

See you on the inside!

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