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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15588
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I expect to make around $40,000 in net income from my business

Resolved Question:

I expect to make around $40,000 in net income from my business (selling s/w products) in the first couple of years. I am the only one working on this full time. I have a family of 3. My health insurance cost is about $600 per month and housing expense is $1350 (mortgage $1000 and tax $360) per month.

Given this information, I would like to know what type of business entity would be best for me so that I retain maximum about of my income.
For example, if I go with C-Corp, what would be the final after tax (corporate and personal) amount that I will be left with versus the final amount after tax if I go with S Corp.
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

Megan C :

Hello! I am a CPA here to assist you with your tax questions. My goal is to provide you with excellent service today.

Megan C :

What other income do you have besides the income from this business?

Megan C :

This will be pertinent information to calculate your S Corp tax liability

Megan C :

If you have a corporation and pay yourself $34,000 and pay $6,000 out in medical costs, then you will have no corporate income tax and you will be taxed on $34,000 at your tax rate.

Megan C :

Your optimal configuration will typically be the S Corp if you are a small business.

Megan C :

Your savings would be the savings of payroll taxes on $10,000 of income. In both cases you have $34,000 of income to be taxed, but under the S Corp only $24,000 of it is salary

Megan C :

So, you would save 15.3% of $10,000 or $1,530

Megan C :

I don't need your other income information, because your income tax would be the same under both scenarios. It's just what is your payroll tax liability overall that changes

Megan C :

Medical insurance is fully deductible by the C Corp, and is also deductible by the S Corp. But the S corp will include the amount as wages, but won't be subject to FICA /FUTA taxes.

Megan C :

You can read about S Corp issues, here: CLICK HERE

Customer:

1. So what should I go with C-Corp or S Corp?

Customer:

2. Or there is a better alternative/cobmination that can save more tax?

Megan C :

I would go with the S Corp

Megan C :

Your only other alternative would be to be a sole proprietor, and there you would pay self employment tax on 100% of your profits.

Megan C :

S Corp is a friendlier organization

Customer:

ok, so from purely a tax perspective (ignoring the hassle of paperwork involved with C corp), do you think S Corp will save more tax than any other combination?

Megan C :

Yes, I think S Corp will save more tax overall

Customer:

ok grt. thank you.

Megan C :

You're welcome. Is there anything else I can assist you with today? If not, please rate as "excellent" so that I may receive credit for assisting you today

Customer:

sorry, just one more question - in case of S Corp, if the corp pays $6K in medical insurance cost, and 24K in salary, would the federal and state income tax be on 24K or 30K or 40K?

Megan C :

$30,000 but no FICA taxes on it

Megan C :

so you're still saving about $1,500 overall between the two

Megan C :

that's your salary

Megan C :

then you would have the $10,000 profit that would be taxed as well

Megan C :

So $40,000 total

Customer:

no fica taxes on 6K of the 30K? or no fica tax on whole of 30K?

Megan C :

Just $6K

Megan C :

you will have FICA on $24K

Megan C :

Do you have any further questions?

Customer:

no, thank you. will rate now.

Megan C :

Thanks so much!

Megan C :

The rating feature is located at the bottom of your screen.

Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15588
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and other Tax Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
Thanks, Paula for your positive rating. Please come back and visit me any time you have a question that needs answered. It was a pleasure working with you today.

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Megan C
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Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level