Business Entities and Taxes | Episode 2

This episode is a deep dive (and I mean deep into the “exciting” world of lawyers and accountants) into the foundation of starting a business. I cover how to set up your business from a legal and tax perspective. As part of this episode you’ll hear straight from two experts I interview. Preston Koerner with Koerner Legal Advisors will go over the legal piece and Jason Grant with Trackin Assets will talk about different tax considerations.

What to Expect From Episode 2

In the intro Craig and I talk about partnerships and trying to determine if a partnership is right for your situation. You can download the free partnership questionnaire we refer to.

In the interview with Preston, we cover the differences between an LLC and a Corporation and the pros and cons of each.

In the segment with Jason we talk about double taxation (yuck), payroll taxes and different tax structures, including one of the most common, the Subchapter S Corporation, often referred to as an S-Corp. Hint, hint: there is a reason so many small businesses, including trucking companies, elect S-Corp status. The nice thing about an LLC is that you can be taxed as an S-Corp. Any tax professional should be able to help you make that tax election, if it is the right one for you.

In the summary at the end, Craig and I discuss an example that shows how you save paying some payroll taxes through an S-Corp. I’m a visual learner so we created visuals so you can see it, too. The numbers I am using here are a little different than the numbers I mention in the podcast, but the concept is the same. These are realistic numbers that I have seen from clients I’ve worked with.

Actual Sole-Proprietorship Numbers

Let’s look at Chris as a sole proprietor. Here is a quick, simplified version of a profit-and-loss statement for a trucking company owned by a sole proprietor.

With a sole proprietor, the IRS does not distinguish between the money Chris earns as a driver and as the business owner. After all operating expenses are paid, what is left over is all considered income/profit and Chris has to pay a 15.3% self-employment tax on all of it. In this example, that works out to be $15,300. Ouch.

Now let’s look at an example using the same numbers with some small tweaks the IRS allows with an S-Corp.

How Being an S-Corp Saves You Money

An S-Corp owner can also be an employee of the company and be paid as an employee. (FYI, how much you pay yourself as an employee is a very important discussion between you and your tax professional. Hint, you can’t work for free.)

You can see in the example above, there is an additional expense for the company, you paying yourself as an employee/driver, see the yellow highlighted rows. You will also notice because there is an “employee” the company has to pay half of the payroll/FICA tax (7.65%) as shown on the second highlighted line. You as the employee have to pay the same amount, see the second-to-last row. The total payroll tax paid is $7,115, half as much as a sole proprietor would have to pay.

This is one of the biggest reasons most self-employed small business owners use an S-Corp. That is a tax savings of $7,115 because the profit portion of the S-Corp is not taxed payroll/FICA taxes.

In summary, with the S-Corp in this example, the company pays $3,557 in payroll/FICA taxes because of Chris the driver’s $46,500 wage. Chris the driver also pays $3,557 in payroll/FICA taxes, but Chris the owner doesn’t pay payroll/FICA taxes on the $49,943 in profit. The S-Corp just saved you $7,115 in taxes that a sole proprietor or partnership would have had to pay. God Bless America!

I think we should all pay our share of taxes, but not a penny more than we legally have to.

Listen to the Full Episode

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Frank Savarese

What about a c corporate entity? Benefits? Tax savings strategies for c Corp? How To work out the double taxation of a C Corp.?

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Jared D Dollen

So I guess the problem that I have with your numbers is 46k for a driver? If I wanted to get paid 46k I would work for a mega carrier. Most people go to be a owner op so they can get paid 75k or better can you please explain why you think 46k is appropriate?

Derrick Freels

Ok so I’m confused in this episode you said s-corp is clearly the way to go but from looking at the notes it looks like you are operating as a sole proprietor? If this is true why did you go with sole proprietor when you said s-corp is a better way to go as far as taxes go?