Does an Sub-S corporation provide the best tax benefit?
An S-Corporation is a "Pass through entity"; that means it pays no tax itself but passes the entire tax liability onto the owners. The owners apply the profit or loss to their bottom line and they pay taxes.
The claimed benefit comes in converting a portion of earned income to passive income. Earned income is subject to Federal, State, and FICA (Social Security, and Medicare). Passive income is subject to Federal and state taxes only. FICA taxes are eliminated. But, only a portion of business profits can be converted, a reasonable percentage would be ½ of the total income. A quick calculation would mean that a Sub-S corporation saves 7.65% (12.4% Social Security, 2.9% Medicare times ½). However, we have to do more math. For 2007, only the first $97,500 dollars are subject to social security. For an easy example let’s use $200,000 of total income, the FICA tax on that amount if all is taken as earned income would be $17,890.00. If we convert ½ of that to passive income; the first half is still subject to FICA $14,990.20 and the other half is not subject to the tax. A savings of only $2,990.00 The percentage of savings is only 1.45%. All of the money is still taxed at personal rates and if we use a blended state and federal rate of only 38% on the example, an additional tax of $76,000 is taken out; leaving only $109,010 to spend. A Sub-S can save you from 1.45-7.65% of the earned income.
Now compare the savings of a C-Corporation.
A correctly structured Nevada C-Corporation pays no social security, no Medicare, no state taxes, and the federal tax rate is far less. Let’s give ½ of the money in the example above to the individual and pay all of the personal taxes. Then have the corporation pay all of its taxes on the other half.
$100,000 leaves $47,010 to spend personally. $100,000 taxed corporately leaves $77,250 to spend corporately. That is a total of $124,760 spendable using a correctly structured Nevada Corporation. A C-Corporation saved $18,650 and a Sub-S saved $2,990; a difference of over $15,000 with our help. Moreover, additional tax savings could arise considering that a C-Corporation has better write-offs. Is it worth finding out?
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