I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
The Least Known Benefit of a S-Corp - Penalty and Interest Relief
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A tale as old as time - S-Corp owner gets to December, sits down with their CPA to do tax planning, and tells them they ignored all estimated tax payments. "So how much in penalty and interest am I looking at?" Real ones know there's a way to get out of all of it - a large W2 withholding in the last payroll in the year. Before you come at me with "that's scammy and not the way it works" I present to you President Joe Biden's tax return from 2020: Giacoppa Corp is the former First Lady's S-Corp and paid her a salary of $200k and withheld to the IRS $115k of that. She only showed $90k of additional profit from that S-Corp, so that's a pretty steep compensation with only one explanation: penalty and interest avoidance. I'll explain π How Estimated Taxes WorkThe IRS wants you to make quarterly tax payments rather than saving it all up and paying at once. W2 employees get this done for them - and that withholding has to go to the IRS within days of being withheld. So the IRS is happy with that. But business owners - especially pass-through owners - don't all get paid through W2, so they need to make payments on their own quarterly. And when you don't do that, you're subject to penalty and interest for underpayment - currently somewhere around 8-9% per annum. How W2 Withholding WorksThe IRS counts any withholding payments made via W2 as being made evenly throughout the tax year - even if made unevenly. That's the alpha. It makes sense for large bonus payments to W2 employees. The IRS just counts that income as earned evenly throughout the year and withholding the same. Otherwise those taxpayers would have to manually adjust their penalty and interest calculation using 2210-AI - which is a little more sophisticated than most taxpayers can handle. But S-Corp owners can use this same little hack to true-up their tax payments as well. S-Corp Owners HackMany of my clients like to pay as they go - looking at you, engineers. But a handful of them are a little looser - ahem, real estate brokers - and would rather wait to see what the year shapes up like. So we can sit down in December and calculate how much tax they should have paid to meet their safe harbor to avoid penalty and interest and include that in Federal withholding. As the First Lady did above, sometimes it looks like a $200k salary, with $115k going to the Fed and $30k to the state (states vary on allowing this). It winds up with less cash coming back to the client from the paycheck - but you owed that cash anyway. And 8-9% on $145k saves $8-$10k (accruing over the year) - often times offsetting our fees. All the while the clients have gotten to use that cash to earn a safe return (safe return emphasized). The TakeawayCombine this tactic with the increase in QBI you can get from running a right-sized salary, and it makes having a S-Corp all the more valuable for business owners. As always, work with your tax pro for your unique situation - and when in doubt make those estimated tax payments. π«‘ Group Chat Worthy Posts π₯π²
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I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
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