Many times the news I report can be rather depressing. It’s almost as if I’m constantly telling people what not to do, and the problems that can occur if they do.
We’re going to break that mold today and talk about a client success story. In doing so, we’ll talk about the problem the client had when they came to us, the solution we put into place, and how it changed their professional and personal future.
In order to explain, let’s use an example…
Joanne B. Owner owns a small medical practice that she has operated for the past 23 years. She grosses about $275K annually. After paying her expenses and a full time medical assistant, she takes home about $160K every year.
The business reports its income on her personal income tax return as Schedule C / Sole Proprietorship Income. As such, she has paid income and self employment taxes on her net income for the past 23 years.
Self Employment Tax is nothing more than Social Security and Medicare by another name. In the year she brought us this job, those taxes totaled $22,607 before the applicable Federal and State Income Tax.
We see this type of return all the time. Whether the client is a Single Member LLC or a true Sole Proprietor, it’s always the same problem.
After itemizing her return and the Qualified Income Business Deduction her Federal Tax Bill was just over $48K per year. To say the least, her tax burdens were keeping her poor.
We immediately suggested putting her business into an S Corp Structure.
To be clear, S Corps don’t save a dime in income tax. We save income taxes by increasing deductions.
But an S Corp will never turn age 65 asking for Social Security and Medicare Benefits. As such, they aren’t required to pay Self Employment Tax on their profits or distributions.
If we switched her to an S Corp, we could reduce her salary to $40K per year and take a $110K distribution. This would save her the 15% Self Employment Tax on $120K or a total of $18,000 per year that could go into her retirement accounts.
When you’re only taking home $160K per year, saving $18,000 on your taxes isn’t nothing.
Let me leave you with this…
Joanne was immediately concerned about her ultimate Social Security Benefit. If we reduced her deposits by such a large amount, how could it not be reflected in her monthly benefit when she retires?
Social Security Benefits are based on the 20 consecutive years or 80 consecutive quarters during your entire working career, where you pay in at the maximum amount. If you graduate from college at age 22 and pay in at the Social Security Maximum until age 42, then whether you pay in another dime or not, your monthly benefit upon retirement will not change.
And this pretty much, was the case with Joanne. For 23 years, she’d paid in at or near the upper limit. Continuing to pay into the system was a simple waste of money.
If she saved the 18K annually and put it into a retirement account for the next twelve years until age 65, assuming a rate of return of 5%, when she retires she’ll have accumulated another $295K for retirement.
By doing some relatively simple tax planning, we provided her with an option that would significantly increase her retirement nest egg.
I can’t tell you how many times in the past 36 years of practice that I’ve done this for clients. It’s a big number.
I find it difficult to believe that I still see cases like this routinely. The difference we make in these client’s lives is huge.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.