How To Maximize S Corp Tax Savings

Summary

In 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

00:00

📘 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.

05:01

🔍 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.

10:01

💰 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.

Keywords

💡S Corp Tax Saving Strategy

The 'S Corp Tax Saving Strategy' refers to methods used by S corporations to minimize tax liabilities, particularly social security and medicare taxes. In the video, it is the central theme where the CPA Navi Mirage explains how to maximize tax savings beyond traditional S corporation benefits, incorporating health insurance premiums and HSA contributions into the strategy.

💡Social Security and Medicare Taxes

These are taxes that fund the Social Security and Medicare programs in the U.S., which provide retirement, survivor, disability insurance, and health insurance. In the script, Navi explains how much these taxes would be for a sole proprietor versus an S corporation owner and how incorporating certain expenses can further reduce this tax burden.

💡Sole Proprietorship

A 'Sole Proprietorship' is a type of business owned and run by one individual who is personally responsible for all aspects of the business. The script uses this as a starting point to compare tax liabilities with those of an S corporation, illustrating the potential savings of the latter.

💡CPA (Certified Public Accountant)

A 'Certified Public Accountant' is a licensed professional who provides accounting services to individuals, organizations, and other entities. Navi Mirage, the presenter in the video, is a CPA who specializes in creating content to help people save on taxes, emphasizing the expertise needed to navigate complex tax strategies.

💡Health Insurance Premiums

These are the periodic payments made by individuals or businesses to an insurance company for health coverage. In the script, Navi discusses how incorporating health insurance premiums into an S corporation's payroll can lead to additional tax savings.

💡HSA (Health Savings Account)

A 'Health Savings Account' is a tax-advantaged account that allows individuals to set aside money for qualified medical expenses. The video explains how HSA contributions can be factored into the S corporation tax strategy to reduce taxable income and save on taxes.

💡Reasonable Compensation

In the context of S corporations, 'Reasonable Compensation' is the salary paid to the owner for their work, which is subject to employment taxes. The script explains that determining an appropriate level of compensation is key to maximizing tax savings by reducing the amount of profit subject to self-employment taxes.

💡Tax Distribution

A 'Tax Distribution' in an S corporation refers to the portion of the company's profits that is distributed to the shareholders instead of being paid as salary. The script uses this concept to show how an S corporation owner can minimize self-employment taxes by taking a smaller salary and larger distributions.

💡Federal Income Tax

This is a tax imposed by the federal government on individuals' income. The script mentions that regardless of whether one is a sole proprietor or an S corporation owner, federal income tax must be paid, but the script focuses on reducing other types of taxes like social security and medicare.

💡State Income Tax

State Income Tax is a tax levied by individual states on income earned within their jurisdiction. The script provides an example of how state income tax would be calculated for a sole proprietor and an S corporation owner, noting that the strategy's main focus is on reducing social security and medicare taxes rather than income tax.

💡Tax Savings

The term 'Tax Savings' is used throughout the script to denote the reduction in the total tax burden achieved by implementing the S corporation tax strategy. Navi Mirage illustrates the substantial savings that can be achieved by comparing the tax liabilities of a sole proprietorship with those of an S corporation utilizing health insurance premiums and HSA contributions.

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