“Don’t move to S Corp, you will need to pay yourself a reasonable salary at or above social security wage base so it won’t help much”

“Don’t move to being an S Corp, you will need to pay yourself a reasonable salary at or above social security wage base so it won’t help much.”

Okay… so I am following up on last week's post with this one because I also see this said a lot.

Let’s look at an example.

Let’s say you are like one of the many business owners I work with and have a lot of profit, about $800k.

And let's also assume you are not an SSTB. An SSTB basically means a specified service business. Think consulting, financial planning, any service based role. This is huge to know because if you are an SSTB, then you get no qualified business income deduction once your income is above $483,900.

Then let’s also then assume you’re going to max out your solo 401(k) at $69,000.

Now... let's evaluate how this would look tax wise based on being an S Corp vs not.

If you are a single member LLC, you would pay self-employment taxes on this whole profit, the $800,000.

You would owe $42,322 in self-employment taxes

Then you would owe an additional $4,399 in additional medicare tax

This totals $46,721

Then for QBID, you would get $0 from the deduction.

Why?

When your taxable income is this high, the calculation for QBID is the lesser of 20% of business profits OR 50% of W2 wages.

Since no wages are paid, the lesser of the deduction is $0. This is really important.

Now… let’s look at an S Corp.

Let's say you set up a reasonable salary of $300,000.

You would owe around $29,600 of employment taxes on your wages.

Half of these employment taxes are paid through the S-Corp, the other half is withheld from you paychecks. 

Then you would owe another $450 in additional medicare tax. You owe .9% on wages above $250k.

Let’s again assume you’re going to max out your solo 401(k). This will reduce profit of the business by $46,000 and defer another $23,000 of your wages (This is not pre FICA taxes).

So, business profit would be $800,000 - $300,000 - $14,803 - $46,000 = $439,200.

Now we’ll take a look at how this impacts QBID.

You’ll take the lesser of 50% of wages or 20% of profit.

50% x $300,000 = $150,000

20% x $439,200 = $87,840

You’re allowed to deduct that $87,840

Note: If reasonable salary analysis shows it does not need to be that high, then you could decrease salary to get these closer to an equilibrium to maximize QBID.

This added QBID deduction is a big deal. You pay less in self employment taxes and you get another almost $88,000 deduction. In this scenario, the S Corp can really pay off. 

‍