Video instructions and help with filling out and completing When Form 1065 Schedule M 3 Compensation

Instructions and Help about When Form 1065 Schedule M 3 Compensation

Hi she took away the CPA with eight attacks and accounting and for this week we will be talking about LLC's and S corporations and it loves talking about this topic you know because my company concentrates on small business owners in pass-through entities so I love giving tax tips to help lower that tax bill for my clients S corporations and LLC's you know they're both great entities they both offer that legal protection operational advantages and the pass-through income to the income tax return but if we're talking about taxes LLC's do not save on taxes yep you've heard that right LLC's do not save on taxes LLC's are great for asset protection you know for long term but if your company makes more than thirty forty thousand a year you have to consider converting it to an S corporations why because the net profit in an LLC all of it passes through to the personal income tax return and all of it is subject to something called self-employment tax the self-employment tax that's your FICA taxes your Social Security your Medicare okay all of it is subject to self-employment tax versus an S corporation only the salary portion of the owner is subject to the self-employment tax but not the distribution which is great it's a huge tax saving for small business owners let's take a look at an example because I think if you see it it's better to really understand it so let's consider two entities we have an LLC here we have an S corporation here and for just simplicity reasons let's say that both of them have a net profit of a hundred thousand and we don't see that profit I'm talking about after you have paid your cost of goods sold your utility bill your telephone your office supplies and all of that so you have a net profit of a hundred thousand so now with an LLC when you come to prepare your personal income tax return all of the 100,000 will be subject to self-employment tax and that's at fifteen point three percent that's a lot this is fifteen thousand three hundred because now you're the employer and you that you're the employee you're paying both Social Security and Medicare as an employer and it's employee and so this is self-employment tax in the fall one hundred thousand and after that you have to pay federal income tax rate state income tax and local tax depending when you live where you live on the taxable income this is crazy now if you have converted your LLC to an S corporation which of course you can you just have to fill out the form and definitely consult a CPA or a legal adviser to help you with that you need to fill out form 2553 to convert your LLC into an S corporation and under the S corporation you're required to take a salary okay only the salary would be subject to self-employment tax the rest is distribution dividends owners draw whatever you want to call it and then it's not subject to self-employment tax only the salary is now you're supposed to take a reasonable salary under the IRS how much is reasonable fall fit depends I mean accountants and CPAs you know they vary with their opinion on this but we follow a matrix we try not to be too aggressive or too high try to be reasonable on the salary that we give you so you would then be questioned on an audit and if this we don't want you to be more self-employment tax than you should be paying so let's think 40 percent is a good number so 40,000 is your salary and only on that you would pay self-employment tax of fifteen point three percent and that is six thousand $120 look at the difference self-employment tax under LLC and self-employment tax under an S corporation that is a difference of nine thousand one hundred eighty right this is huge you can use that for your retirement for your advertisement to grow your business to whatever you want with it but this is a huge tax dealing so only the salary is subject to self-employment tax not the sixty thousand if you have any questions or would like to suggest the topic for next week please comment below and don't forget to give us a like and subscribe to our Channel we would love for you to give us your opinion visit us at eat the tax that come thank you