Tax Differences Between Business Structures

Introduction

• Speaker: Na’Vi Marage, CPA
• Objective: Explain tax differences between sole proprietorships, LLCs, multi-member LLCs, partnerships, S corporations, and C corporations.
• Visualization Tool: To be used for teaching types and amounts of taxes.
• Focus: Social Security, Medicare, federal income tax, state income tax based on $100,000 business profit.
• Course Mentioned: More comprehensive tax-saving strategies available on the speaker’s website.

Tax Classifications Covered

1. Sole Proprietorship
2. S Corporation
3. Partnership
4. C Corporation

Sole Proprietorship

• Business Revenue: $125,000
• Business Expenses: $25,000
• Business Profit: $100,000
• Taxes:
  • Social Security + Medicare Tax: 12.4% (6.2% employee + 6.2% employer) + 2.9% (1.45% employee + 1.45% employer) = $15,300
  • Federal Income Tax: Progressive system, estimated at $10,064
  • State Income Tax: Simplified fixed rate of 5% = $5,000
  • Total Taxes: $30,364

S Corporation

• Business Scenario:
  • Revenue: $125,000
  • Expenses: $25,000
  • Profit: $100,000
• Strategy: Split profit into two buckets—reasonable compensation and remaining profit.
• Reasonable Compensation: $40,000
• Taxes:
  • Social Security + Medicare Tax: 6.2% employee + 6.2% employer on $40,000 = $6,150
  • Federal Income Tax: Higher than sole proprietorship ($10,790)
  • State Income Tax: $5,000
  • Total Taxes: $22,746
• Tax Savings: About $7,618 compared to sole proprietorship due to lower Social Security and Medicare tax.

Partnership

• Business Scenario:
  • Revenue: $250,000
  • Expenses: $50,000
  • Profit: $200,000
• Assumption: Two equal partners
• Tax Calculation:
  • Each partner’s share: $100,000
  • Social Security + Medicare Tax: 12.4% + 2.9% on $100,000 = $15,300
  • Federal Income Tax: $10,064 (same as sole proprietorship)
  • State Income Tax: $5,000
  • Total Taxes: $30,364 per partner (same as sole proprietorship).

C Corporation

• Business Scenario:
  • Revenue: $125,000
  • Expenses: $25,000
  • Profit: $100,000
• Strategy: Reasonable compensation = $40,000
• Taxes:
  • Social Security + Medicare Tax: $6,120 (similar to S corporation)
  • Corporate Income Tax: Profit $60,000 taxed at a flat rate of 21% = $12,600
  • Federal Income Tax: On $40,000 salary, much lower than other entities.
  • Dividend Tax (Capital Gains): On $60,000 dividend, rates vary (blended rate example at 15% = $6,230)
  • State Income Tax: $5,000
  • Total Taxes: $32,870, higher due to double taxation.

Additional Points

• Tool: Calculators available for personalized scenarios.
• State Income Tax Variations: Fixed vs. progressive rates; state-dependent.
• Note: Sole proprietor and partnership examples may have minor tax deductions reducing self-employment tax.

Resources

• Helpful Links: Tax Foundation, capital gain rates, and other calculators available.
• Course Promotion: In-depth tax-saving strategies covering additional topics such as health insurance, retirement accounts, home office deductions, etc.

Conclusion

• Interactive Element: Encouragement to comment with questions.
• Engagement Tip: Like, share, and check out the course for more detailed tax strategies.