FMA, C.P.A. has helped hundreds of business owners reduce their taxes, manage their numbers, and maximize their profits. We provide indispensable business advisory services that go beyond basic business tax services in Clearwater.
One of these clients is a long-time friend of our managing partner. He had been doing his own taxes for years. When he came to us, he was having an amazing year. He had multiple closings and had earned hundreds of thousands of dollars in commissions.
As his income increased, he realized his tax bill was going to increase significantly as well, so he sought out our business advisory services.
How did we help a commercial realtor save more than $10,000 in taxes?
- Set up an LLC.
To start, we set up an LCC for the realtor to protect him and his business. An LLC provides following benefits:
- Protection of personal assets from business losses and lawsuits
- Tax flexibility
- Separation of business and personal expenses
- Higher professional credibility
- Lower audit risk
- Elected to have the LCC taxed as an S Corporation.
One significant benefit of being an LLC is tax flexibility. An LLC can opt to be taxed like a sole proprietorship, a partnership, a C corporation or an S corporation (if it qualifies).
Up until that point, as a sole proprietorship every dollar of income the realtor earned was subject to Social Security and Medicare taxes. When taxed as an S corporation, the realtor now has the option to pay himself a lower salary (still subject to Social Security and Medicare taxes) and a “distribution” of profits which is not subject to Social Security and Medicare taxes.
Keep in mind that sole proprietorships pay both the employer and employee shares of the Social Security and Medicare taxes, which totals 15.3%. Therefore, taking $100,000 as a distribution rather than paying it as salary can save an individual $15,300 in Social Security and Medicate taxes.
- Taught our client how to maintain his tax status.
The IRS has guidelines for S corporation distributions. Taking a distribution that’s too high and a salary that’s too low, can get you in trouble with the IRS. On the other hand, taking a distribution that’s too low and a salary that’s too high will result in paying more taxes than necessary.
This is why we do not abandon our clients after establishing their LCC and setting up their tax options. We teach them how to manage things moving forward.
In this case, we taught our realtor-client the wages and distribution the IRS considers reasonable. And of course, we’re available to answer any questions the client as his business situation changes.
If you’ve been doing your own taxes or haven’t been getting the kind of forward-thinking guidance from your CPA, contact FMA, C.P.A. for a free business advisor services consultation.