How To Maximize S Corp Tax Savings
Summary
TLDRIn this educational video, CPA Navi Mirage unveils a unique S Corp tax-saving strategy that can potentially save business owners an additional 29% in social security and medicare taxes. By integrating health insurance premiums and Health Savings Account (HSA) contributions into payroll, viewers learn to maximize tax savings beyond traditional S Corp benefits. Mirage's course offers a comprehensive guide to implementing these strategies for significant financial advantages.
Takeaways
- 😀 The video discusses a unique S Corp tax-saving strategy that can save an additional 29% in Social Security and Medicare taxes.
- 📚 Navi Mirage, a CPA, is the presenter who creates content to help people save on taxes through various platforms.
- 🔑 The key to maximizing S Corp tax savings is to incorporate health insurance premiums and Health Savings Account (HSA) contributions into the S Corp structure.
- 💼 As a sole proprietor, an individual is taxed on all profits and must pay Social Security, Medicare, federal income, and possibly state income taxes.
- 💡 Forming an LLC and electing S Corp status allows for tax savings by splitting profits into a salary (reasonable compensation) and distributions.
- 💰 The traditional S Corp strategy can save approximately $9,000 in Social Security and Medicare taxes compared to being a sole proprietor.
- 🏥 By including health insurance premiums and HSA contributions in the S Corp payroll, the taxable income for Social Security and Medicare taxes is reduced, leading to further savings.
- 📉 The additional savings from incorporating health insurance and HSA contributions into the S Corp strategy is about $11,826.90, which is a 34% tax savings over being a sole proprietor.
- 🤔 The video suggests that contributing to Social Security may not be as beneficial as investing in a solo 401k, especially considering the limitations of Social Security benefits.
- 📝 Navi Mirage offers a course on his website, navimuradcpa.com, which provides detailed instruction on implementing various tax-saving strategies, including the one discussed in the video.
- 👨🏫 The video concludes with a reminder that viewers should not only learn about tax-saving strategies but also understand how to implement them effectively.
Q & A
What is the main focus of the video by Navi Mirage?
-The video focuses on a strategy to maximize S Corp tax savings, which includes incorporating health insurance premiums and HSA (Health Savings Account) contributions into the S Corp structure to save additional money on taxes.
Who is Navi Mirage?
-Navi Mirage is a CPA who produces content across social media platforms to help people save thousands of dollars in taxes.
What is the potential tax savings from using the traditional S Corp strategy compared to being a sole proprietor?
-The traditional S Corp strategy can save approximately $9,000 in Social Security and Medicare taxes compared to being a sole proprietor, which represents a 26% tax savings.
How does the S Corp strategy work in terms of Social Security and Medicare taxes?
-In the S Corp strategy, the individual pays Social Security and Medicare taxes only on the 'reasonable compensation' portion of their income, rather than the entire profit, which is the case with a sole proprietorship.
What is the additional tax savings when incorporating health insurance premiums and HSA contributions into the S Corp strategy?
-By incorporating health insurance premiums and HSA contributions, the additional tax savings can be around $2,900, which is an additional 29% in tax savings over the regular S Corp strategy.
Why is it important to consider state income tax when calculating total tax liabilities?
-State income tax is important because it varies by state and can significantly affect the total tax liability. If a state has a flat tax rate, it must be included in the calculation to understand the full tax burden.
What is the role of 'reasonable compensation' in the S Corp tax strategy?
-'Reasonable compensation' is the salary portion of the S Corp owner's income on which they pay Social Security and Medicare taxes, as opposed to the entire profit which would be taxed if they were a sole proprietor.
How does the S Corp strategy impact federal income tax?
-The S Corp strategy does not change the federal income tax. The owner still has to pay federal income tax on their total income, but the strategy helps save on Social Security and Medicare taxes.
What is the significance of contributing to a Health Savings Account (HSA) in the context of the S Corp tax strategy?
-Contributing to an HSA allows the S Corp owner to save more money on federal and state income taxes, as these contributions are tax-deductible and the funds grow tax-free.
What are some additional resources provided by Navi Mirage for further understanding of tax-saving strategies?
-Navi Mirage provides a course on his website, navimuradcpa.com, which offers detailed instruction on implementing various tax-saving strategies, including bookkeeping, accounting, and specific strategies like hiring children, meals, travel, and healthcare premiums.
What is the potential total tax savings when using the advanced S Corp strategy with health insurance premiums and HSA contributions?
-The advanced S Corp strategy, including health insurance premiums and HSA contributions, can save approximately $11,826.90 in total taxes, which is a 34% tax savings over being a sole proprietor.
Outlines
📘 Introduction to S Corp Tax Saving Strategy
In the introductory paragraph, Navi Mirage, a CPA, presents a unique S Corp tax saving strategy that can potentially save an additional 29% in social security and medicare taxes beyond the standard savings. The speaker introduces themselves and their mission to help viewers save on taxes through their content across various social media platforms. The video aims to explain the traditional use of an S corporation for tax savings and then reveal the 'secret sauce' of incorporating health insurance premiums and Health Savings Account (HSA) contributions to maximize savings even further.
🔍 Transition from Sole Proprietorship to S Corporation
This paragraph delves into the comparison between the tax liabilities of a sole proprietorship and an S corporation. It uses the example of 'John,' who initially operates as a sole proprietor, making $100,000 in profit and facing a total tax burden of $35,300, including social security, medicare, federal, and state income taxes. The paragraph then illustrates the benefits of transitioning to an S corporation, where John can split his income into a salary and distribution, reducing his social security and medicare taxes to $6,120 and saving approximately $9,000, which represents a 26% tax savings compared to being a sole proprietor.
💰 Maximizing S Corp Tax Savings with Health Insurance and HSA
The final paragraph focuses on how to maximize S Corp tax savings by integrating health insurance premiums and HSA contributions into the payroll strategy. It explains that by doing so, John can reduce the amount on which he pays social security and medicare taxes to just $22,700, after subtracting health insurance premiums and HSA contributions from his salary. This results in a significantly lower tax burden of $3,473 for social security and medicare taxes, leading to a total tax saving of $11,826.90, which is a 34% tax savings over being a sole proprietor and an additional 29% savings over the regular S Corp strategy.
📚 Conclusion and Further Learning Opportunities
In the concluding paragraph, Navi Mirage summarizes the video's content and emphasizes the importance of understanding and implementing the discussed tax-saving strategies. They recommend viewers to explore additional resources and videos on their website and YouTube channel for a deeper understanding of S corporations, social security implications, and other related topics. Navi also introduces a course on their website designed to teach not only the concepts but also the practical implementation of these tax-saving strategies, highlighting its value by pointing out that the tax savings alone can more than cover the course's cost.
Mindmap
Keywords
💡S Corp Tax Saving Strategy
💡Social Security and Medicare Taxes
💡Sole Proprietorship
💡CPA (Certified Public Accountant)
💡Health Insurance Premiums
💡HSA (Health Savings Account)
💡Reasonable Compensation
💡Tax Distribution
💡Federal Income Tax
💡State Income Tax
💡Tax Savings
Highlights
Introduction to the S Corp tax saving strategy by Navi Mirage, a CPA who produces tax-saving content.
Explanation of how to maximize S Corp tax savings beyond traditional methods, potentially saving an additional $29 in Social Security and Medicare taxes.
Basic tax obligations for a sole proprietor, including Social Security, Medicare, federal, and state income taxes.
The concept of forming an LLC or corporation and electing S Corp status to save on taxes.
Traditional S Corp tax savings by splitting profit into salary and distribution, reducing Social Security and Medicare taxes.
The innovative strategy of incorporating health insurance premiums and HSA contributions into the S Corp to further maximize tax savings.
Calculation of tax savings when integrating health insurance and HSA contributions into S Corp payroll.
The importance of not just understanding but also implementing tax-saving strategies effectively.
Recommendation to watch additional videos for a comprehensive understanding of S Corp tax strategies.
Critique of Social Security's limitations, suggesting alternative retirement savings strategies for better returns and inheritance.
Advice on when to form an LLC and when to elect S Corp status for optimal tax benefits.
Introduction of Navi Mirage's course that teaches not only the concepts but also the implementation of tax-saving strategies.
Emphasis on the long-term benefits of the tax savings presented in the video, which far exceed the course cost.
Invitation to visit Navi Mirage's website for the course and additional resources on LLC formation and S Corp taxation.
Summary of the video's content, highlighting the potential for significant tax savings through strategic S Corp planning.
Closing remarks, encouraging viewers to apply the knowledge from the video for substantial financial benefits.
Transcripts
in this video i'm going to show you how
to maximize the s corp tax saving
strategy i don't think anyone else out
there is really talking about this and
it's pretty important so make sure you
pay attention because it can save you an
additional
29
in social security and medicare taxes so
that's 29
over and above
the sort of regular way that you would
use an s corporation to save money in
taxes and i'll explain what i mean by
that here in a moment but first if it's
your first time watching let me just
quickly introduce myself my name is navi
mirage i'm a cpa that produces content
all over social media to help you save
thousands of dollars in taxes so if you
get value out of this you learn
something in this video then please
consider subscribing or following
depending on what platform you may be
watching on so in order to explain this
and the topic that i'm going to be
talking about today let me transition to
my computer and share my screen with you
and if you're looking at this now you
know don't panic i'm going to walk you
through all of this um and so my goal is
this the subject of this video is how to
maximize the s corp tax saving strategy
right so what i'm first going to do is
walk you through what it's like to be
taxed as a sole proprietor so someone
who's not taxed as a s corporation then
what the s corporation is even all about
and if you use it in its traditional
sense how that it's very helpful it can
save you money in social security and
medicare taxes but what i'm going to
show you and teach you in this video is
how you can save money above and beyond
sort of the traditional sense right so
what's that sort of secret sauce that
i'm talking about here when i say can
save you almost you know another 30 in
taxes and that's going to be
incorporating health insurance premiums
and hsa that's health savings account
contributions into the s corporation
right if you do this properly you can
save a lot more money and taxes so let's
jump into it let me let me explain what
we've got going on here at any point in
time if you get overwhelmed just pause
your video player and um you know go
back and review what i said but what i
want to show you is let's say at this
point if you're watching this video
you've graduated beyond being an
employee working for someone else right
you now are running your own business so
in this situation i've got a person here
let's say his name is john and john's
operating as a sole proprietorship so he
may have formed an llc but he's he's
being taxed as a sole proprietorship
still or he may not form an entity at
all and so he's just out there doing his
business and he makes a hundred thousand
dollars in profit okay so i'm saying he
probably had revenues of let's say 120
000 and then to provide his service or
to sell his product he uh incurs costs
of let's say 20 grand so he lands at a
hundred thousand dollars of profit right
125 in revenue minus the 25 000 expenses
we landed a hundred thousand dollars in
profit so what taxes does john have to
pay as a sole proprietorship well
john's got to pay
basically three or four types of tax
he's got to pay social security taxes
medicare taxes
federal income tax on the hundred grand
and also if he lives in a state that has
state income tax he's got to pay state
income taxes so well so let's walk
through it a hundred thousand dollars in
profit
times
12.4 percent where is it 12.4 percent
that is the employer and employee
portion of social security all right
it's 6.2 and 6.2 so that's 12.4 so he's
going to pay about 12 400 in social
security taxes
medicare taxes well you can see the math
there it's the hundred thousand times
the two point nine percent because when
you're a sole proprietor you are acting
as both the employer and employee and
what you pay is something referred to as
self-employment taxes and
self-employment taxes that's just
another way of saying social security
and medicare taxes so you could do the
math on here it's about a hundred
thousand dollars times the 15.3 percent
is total of these two items which is
thousand three hundred dollars okay
in addition let's talk about those other
taxes i mentioned he's gotta pay federal
income tax so 100 grand let's say he's
in what's called an effective tax rate
of 15 percent that means he has to pay
15 000 in income tax and if he lives in
a state um you know let's say like a uh
utah or something like that that has
sort of usually like a flat tax of about
five percent um then he's gonna pay five
percent in uh state income tax right 100
grand times the five percent effective
tax rate is the five thousand dollars so
the total tax that john has to pay if he
makes a hundred grand in profit is
thirty five thousand three hundred
dollars and you can see the breakdown
there that's fifteen thousand three
hundred in social security and medicare
15 000 in federal income tax and 5 000
in state income tax if you live in a
state that doesn't have state income tax
then just get rid of this
entire row here it doesn't apply to you
okay
now so why do people form as
corporations and by the way you do that
by typically
forming an llc or a corporation at the
state level with your state that's the
state that you're doing business in
and then you elect to have that entity
taxed as an s corporation you make that
election with the irs so what happens
here in this scenario where john wises
up he forms an llc elects to have that
llc taxes and s corporation how much
taxes does john have to pay in this
scenario so here what's happening is
john's still running his business okay
and he is um making a hundred grand in
profit but he's splitting his profit
into
a salary bucket if you will that might
be called uh reasonable compensation or
officer compensation and he's gonna also
take the remaining uh profit in his
business as a distribution so that's
what the 60 000 is here it's the 40 000
in reasonable compensation and the 60
000 in a distribution as you can see
what happens here is john is now sort of
split into two john's s corp
is going to pay
social security and medicare taxes and
john the employee is going to pay social
security and medicare taxes but instead
of paying it on the full 100 grand like
in the sole proprietorship situation
he's only going to pay it on the 40 000
of reasonable compensation that he has
determined is
reasonable for him okay and so how much
tax does he have to pay between social
security and uh medicare taxes well it's
only six thousand one hundred and twenty
dollars if you add up these four numbers
you get six thousand one hundred and
twenty dollars okay he still
pays federal income tax and state income
tax i want to drive that point home a
moment here if you notice across these
rows
regardless you're still paying federal
and state income tax the s corporation
strategy is all about saving money in
social security and medicare taxes so as
you can see here how much tax did he
save well he's no longer paying fifteen
thousand three hundred he's paying that
six thousand one twenty so it's about
nine thousand dollars and tax savings
all right what is his percentage tax
savings over being a sole proprietorship
well it's 26 percent he's paying 26
percent less in uh taxes than if he was
a sole proprietor all right now the
topic of this video how do you maximize
the s corp uh tax saving strategy well
in this scenario i'm saying that
john
pays for his own medical insurance okay
so he doesn't have a spouse that has
medical insurance and he's not on that
plan i'm saying john
um or his spouse
pays for
health insurance right out of his pocket
okay he pays for it and so i'm just
gonna use what i think is a reasonable
number here ten thousand dollars a year
in um health insurance premiums i think
the math on that works out to a little
over 800 a month
in addition
he's going to use a health savings
account to save up more money in uh
federal and
usually state income tax as well okay so
he's going to maximize his hsa
contributions so he's going to
contribute
hundred dollars well
what happens when you do that well if
you do this and you do it properly
then you still gonna pay yourself the
reasonable compensation of forty
thousand dollars but you're gonna
integrate the health insurance premiums
and hsa contributions into the strategy
so you'll actually only pay
social security and medicare taxes on
the 22
700 where am i getting this number it's
the forty thousand minus the ten
thousand in annual health insurance
premiums and minus the seventy three
hundred dollars in hsa contributions
that's where the twenty two seven is
coming in so what happens in this
situation
john's actually only gonna pay
social security and medicare taxes on 22
700
times the 6.2 and the 1.5 like i showed
you before so john's s corp because the
employer
john's s corp is going to pay that
amount and john the employee is going to
pay the other half so what's the total
of these four numbers it's right here
it's 3
473
and uh 10 cents okay that's how much
social security and medicare taxes he's
going to pay now
again the federal and state income tax
are not um changed by this okay
actually to be honest with you because
you have the hsa you would pay a little
bit less in so sorry federal and state
income tax but i want to make sure we do
it at apples to apples comparison here
so how much is the s corp saving john
now well it's saving him 11
826
and 90 cents
what is that as a percentage of tax
savings over being a sole proprietorship
now that's 34
okay and then what is it as a percentage
of tax savings over if he just does this
sort of regular s corp strategy well
it's an additional 29
in tax savings over the uh um regular
sort of s corp strategy okay so that's
where i'm showing you where you know
that's great you have an s corp that's
awesome it's going to save you a ton of
money as we saw here nine thousand
dollars in social security and medicare
tax but make sure if you've got your own
health insurance when you've you know
you've got a hsa that you're going to
contribute to then make sure you know
how to properly incorporate
the um
those items the health insurance
premiums and the hsa contributions into
your payroll as the officer of the
company to save this additional
29 okay
so listen we covered a lot in this short
video um i don't expect you to be able
to navigate all of this on your own just
by watching this one video right i
recommend that you take some time and
watch some of the other videos that i've
touched on um or some of the other
concepts that i've touched on in this
video you can find those videos on my
website or on my youtube channel um some
of them that i would recommend you watch
is four reasons not to be taxed as an s
corporation make sure you watch that
before just jumping into and deciding
that you want to be an s corp um i also
created a video called why social
security sucks what i mean by that is
like hey if you're a sole proprietor um
and you want to pay 15 000 into social
security and medicare taxes that's great
but just keep in mind
you know when it's time to collect you
you're not going to collect much and
also too when you pass away you don't
leave any money to your ears all right
if you're if you have children you want
to leave some money to them you wouldn't
do that by by
you know contributing to social security
and then you pass that's it the money's
gone but if you take that same tax
savings the 11 000 almost 12 000 in tax
savings here and you contribute to let's
say a solo 401k a retirement account for
yourself then that money is going to
grow even more so than it would if you
were contributing to social security so
your benefit would be a much larger and
you could actually pass that wealth
create wealth and pass it on to uh the
next sort of generation all right i
would also recommend watching a video
called when to form your llc and when to
have a text as an s corporation those
are just some of the videos that i've
produced that expand on this topic all
right or i guess as i'll know lastly
i'll leave you with if you really want
to learn how to
not just learn the strategies but
implement the strategies you may want to
go to my website and check out the
course that i created for you
i don't just teach these concepts but i
actually teach you how to implement the
concept let me just show you uh my
website real quick i'll pull it up it's
navimuradcpa.com
here again besides the course is other
tools and resources where to form an llc
and have it taxes in s corp for
completely free you can check out these
companies you can schedule a q a session
with me if you have questions but the
course is here you can click on it it'll
load this page and you can just see how
much content is in this course how
detailed it is it teaches you
bookkeeping accounting
taxes all the various strategies how to
implement
and you can see them hiring your
children meals travel healthcare
premiums is what the topic of this video
is right business gifts and other
strategies for you to implement in your
business all right so check it out um
it'll pay for itself many times over i
believe the tax savings in this video
that i taught you is an additional
around 2 800
that's way more than the cost of the
course so check it out if you're
interested with that said i'll wrap up
and say thanks so much for watching and
i'll see you in the next video
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