So here we are, halfway through the year. If you haven’t started your year-end tax planning yet, now is a good time to start.
Why? Because with all the changes in the tax laws for 2018, deductions for things that you deducted last year may be out the window this year, or you may be in a better position this year than in years past.
One of those things, especially for S-Corporations, has to do with owner payroll.
If your business is a S-corporation, you are required by law to pay yourself (the owner) a reasonable salary, with a few exceptions. And if you don’t, you get fined with penalties, yada yada yada. Same story there.
But the good news is with the way the tax brackets & standard deductions were restructured, you can pay yourself a bit more and pay less in taxes.
If you want to know what this year’s tax brackets are, see my other post here…
Here’s a quick example:
You pay yourself a W-2 Salary of $75,000 from your S-Corp business. Business gets to deduct your salary from their profits, and if you’re married, you’ll only pay 12% tax, which is only $6,120 in tax before any additional deductions, retirement savings, etc.
In 2017, your taxes would have been 25% tax and only a $12,700 standard deduction, resulting in you paying $13,706 tax before any additional deductions or retirement savings credits.
That’s a difference of $7,586!
So as you can see, some of the new tax reforms benefits a lot of people earning less than $100k a year.
Obviously, this is a super simple calculations and your situation may be different depending on if you’re married vs single, with or without kids, contributing to retirement savings, etc. Obviously, a lot of different factors go into how much tax you pay. Duh.
But this is where it gets interesting.
One of the things I’m always talking to my clients about is the need to read the tax code for yourself and have a basic understanding of accounting. It really isn’t scary – I promise!
THAT DOESN’T MEAN YOU DO YOUR OWN TAXES!
ALWAYS have a qualified accountant to do them for you, especially if you own a business.
My rule of thumb – if you have more than the basics – (2) W-2’s, mortgage and no business – then you need an accountant. If you and your spouse work regular jobs with a house and kid or two, then yes, you can use TurdTax or HR Blockhead. Those are easy returns that software or someone with 6 weeks of tax experience can do for you.
But if you have a business, then you need a qualified accountant to help you with your taxes. Depending on your industry, there are deductions that you can take that wouldn’t be available to Joe/Jane Employee.
Your accountant can also help you figure out how much you should pay yourself this year, how your distributions may be taxed, and if you should send the g-man some money in advance (estimated tax payments) so you don’t get penalized for drastic differences between how much you paid last year vs this year.
Want some help figuring out a rough estimate on how much you’ll pay this year? Book a consult!
That way, when it comes to tax time 2019, you’ll be ahead of the game and won’t get sticker shock. That is, unless you make 10x more sales than you were expecting – which is always a good thing.