Transcription
Welcome back, everybody. Today, I'm going to break down how you can use an S corporation to skyrocket your wealth past $100,000 or more. Now, I'm a registered CPA, attorney, best-selling author, and own multiple companies in the tax and legal industry. And I kid you not, we help thousands of clients around the country every year squeeze far more profit out of their company because of the S corporation strategy. Unfortunately, too many people either misuse the S corporation or don't understand the full range of investment opportunities and strategy that they can take advantage of with the S corporation. Well, today we're going to solve this. I'm going to walk you through three ways or reasons why the S corporation should be a part of your business structure.
Now, let's dive into it. What is an S corporation? An S corporation is simply a way of doing business. So many people understand the LLC, or limited liability company. Well, you can take an LLC and tax it as an S corporation. You could have an Inc, or a corporation, taxed as an S corporation. It's a way of doing business.
Now, the way I've been explaining this for years, and it just makes so much sense, a picture says a thousand words. Let's look at the trifecta. This is a way I've used to explain a business owner's overall operations to build wealth and bring it all together. On the left, we want to put operations; on the right, we want to put assets; and down at the bottom is your trust or your 1040 tax return. So, when you're doing business or operations, you could be just a plain old sole proprietorship; you could be an LLC; or you could be an ES Corporation. And again, the ES Corp could be an LLC taxed as an ES Corp, or it could be an INC. Now, if I'm going to be over here on the asset side and buy rental properties or invest in crypto or investments, I might have an LLC over here. And this is the trifecta: assets on the right, operations on the left, all flowing downhill. However, we're not worried about the asset side; the S corporation lives over here. This is where we want to talk about the S corporation. It's a way of doing business.
So let's use an example here. Let's say that you are a landscaper. Everybody can get their head around that. As a kid, I would mow lawns and sometimes get paid for it—at least I tried to. Now, if I'm a landscaper, I really have three different ways I could operate. I could just start going out and talking to people and say, "Let me mow your lawn." That's called a sole proprietorship. Or I could form an LLC, limited liability company—Best Landscaper in Town, LLC; We Mow Your Lawns, LLC; whatever. And then over here, I could actually be an ES Corp. And again, it could be an LLC taxed as an ES Corp. Don't worry about that. Now, if I'm a sole proprietorship, I'm going to file on a Schedule C tax return. If I'm an LLC, I'm going to file on a Schedule C tax return. But an S corporation files its own corporate tax return. Again, it's a way of doing business.
Now let's compare these for a moment. Let's say I'm out there, and I bring in 100 grand. I go out, and I work my buns off, and I bring in $88,000 a month mowing lawns, doing sprinkler systems, and I spend $25,000 in expenses: marketing, auto, fuel, equipment, supply, cell phone, and I net $75,000. Okay, that's cool. Well, you're going to pay self-employment tax right out of the gate of 15.3%. Well, if I do an LLC, do I get to save on that tax? Nope. You pay the same tax: 15.3%. I brought in the same 100 grand; I spent 25 in expenses; I net 75, and I'm going to pay 10 grand—10 grand. Then I might pay fed tax, state tax. So, people, this is an important point: LLCs do not save tax. Let me repeat that: LLCs do not save tax. So, I have my first way of doing business is this sole proprietorship; my second way of business is just doing an LLC, but it really hasn't moved the needle. I'm still a landscaper paying way too much in tax. So what's this S corporation all about? Well, let's start to unpack it, and this unleashes strategy number one.
Okay, with an S corporation, I make the same 100 grand; I have the same $25,000 in expenses; and I have the same net income. You could even have the same business account. And again, you could be an LLC, but you've made a special election to be an ES Corp. By the way, let me just set this concern aside: it is super expensive to become an S corporation. We charge $250. That was a joke because I want to let you know how easy it is. It is not that hard to become an S corporation. So all right, so I'm an S corporation; I'm making the same 100 grand, the same 25 grand in expenses; I net 75. Oh, oh, oh, but check this out: no self-employment tax, no corporate tax, what, and no Obamacare, which is called ACA, Affordable Care Act tax. Well, this is pretty cool. So I can avoid all these taxes by becoming a US Corporation. Well, for those of you that have already heard about the strategy, there's one catch: you've got to take a salary, a reasonable salary, and then everything else flows out the bottom. Now, in this example, I might do a salary of 25 grand, and the rest is flows out the bottom, 50 grand. Now, for you accountants out there, that are—some of you already freaking out—I get it. Now, by the way, I'm a CPA; I'm a tax attorney; I teach classes on reasonable comp; I've read every case on reasonable comp. Do not freak out on this. I have a payroll matrix that helps us define what this salary needs to be. This is just an example for a moment, but I'll tell you, when I have a client making $5,000 or more, I might be in a 50/50 allocation, and it's not the end of the world. I have never, ever, ever had a client audited for taking too low of a salary in the last 25 years, ever. And I've even interviewed prior IRS agents on my show working in the S corporation Chicago office. People, this is okay, so get over it and just hear me out. Somebody like Man Mark, you kind of unleashed there. Well, that's because I talk to a lot of accountants that get stressed out about this reasonable salary issue, and this is how S corporations are misunderstood or misused.
So what was strategy number one? Strategy number one is that I don't want to pay all of this F—this is a big deal because the more money you make, the more you pay of the F-word, F-word, F. I hate FICA. I don't want to pay FICA on every dollar. So we convert to an ES Corp. I got to tell you, every dentist, doctor, engineer, landscaper, restaurant owner, CPA, attorney, independent consultant—we're all S corporations because once you make $50,000 or more, I want to split this income. I want to call some of it salary and some of it pass through. This is the strategy. So one of the best ways to unlock your business potential and make more money is to use this form of doing business and create a salary that's reasonable and push out all this profit. And when you start saving this money, we're going to start deploying it in some very powerful ways. That, my friends, is strategy number one.
Now let's unpack that a little bit. Some people say, "Well, Mark, that sounds super complicated, and I can't take a paycheck; my income's up and down." I got it; I got you. Don't worry. First of all, it is not that complicated. Let me put your concerns aside. You're going to hire a payroll company to do a payroll report for you quarterly. You're not going to get a paycheck. I'm not going to worry about your cash flow. We're going to look at your income in a rearview mirror every 3 months. We're going to look back and go, "Hey, how much money did you take out? How was your profitability? Let's claim a little bit of salary, do the report, gone, done." At the end of the year, all those reports add up, and we've got your savings calculated. It's clean; it's easy. Next, some of you may be fighting an uphill battle with accountants that have already freaked you out on the S corporation. They're like, "Oh my gosh, the S Corp doesn't work for you because you got to take such a big salary and reasonable comp, and blah, blah, blah, blah." Please get a second opinion. I beg of you. And I talk to accountants all around the country, teaching that reasonable comp is not the scary evil monster many of you have been taught to believe. It can be very simple.
Okay, now let's move to strategy number two because, as I indicated, when you save on that F and that self-employment tax and set up that little salary strategy, you're unlocking more profits. Well, I don't want you to go out and get a better lease on a BMW or a Range Rover. I want to use those profits to build wealth exponentially—super powerful. And when my clients catch the vision of this, it is unbelievable. They're sending me thank-you cards and Christmas gifts for years. I'll send you my address later. Now, and remember, it's easier to save money than make money. Trust me. So let's look at our trifecta here. We go over on the left side; we're now going to have an SC Corporation—get it, again, your little LLC taxed as an ES Corp. The sales from your business are going to come in; your expenses are going to go out; you're going to take a W2; and you're going to get what's called a K1—that's your profit—and we're saving taxes, and that profit that you're making and those taxes you're saving, we're going to fund a solo 401K. Do you know you can have a 401k at your day job? Your spouse can have a 401k; you can have a 401k, but you can also have a solo 401k in your business. Frankly, I want to tell you, you can have as many 401ks as you want, but we need to fund them. So we're going to set up this solo 401k and start to plow money into it. And this year, it could be as high as $30,000 that can go deferred and come out of your W2, saving you more in taxes and fund your solo 401k. And then the company can match that contribution up to a certain amount. So this deferral, in combination with your match, starts to build a bucket of wealth. And this wealth is what entrepreneurs start to build and grow on the side. And notice what you're doing is you're diversifying. You've got wealth you're building over here with the operations of your business, and you're building a bucket of wealth with your 401k. And you can invest in what you know best. You can invest in crypto; you could invest it in real estate; you could invest it in notes or even buy your stocks, bonds, and mutual funds. So this 401k, you get to drive the car; you get to be the trustee of this. And now, in step number two, you've taken the savings that you're generating here, and you're plowing it into additional deductions and write-offs and tax-deferred growth inside a solo 401k. Now, again, some of you may go, "Mark, that sounds super complicated." Guess what? It really isn't. Again, it's understanding that your company can design a retirement account for its owner—it's employee, which is you. Our fee at our law firm is $1,000—that's it. $11,000 to meet with a real attorney anywhere in the country and design a 401k tailored to your business. You may have your spouse on the payroll; you might have kids on the payroll; you might be the only one on the payroll—who knows. We're going to tailor it to your situation. But when you start to design the payroll portion in combination with the 401k, you find a sweet spot, and you start building wealth with more tax deductions and less tax. That synergy is almost uncalculating—a solo 401k.
Now, strategy number three, and this is one of my favorites, and it's simple and easy, and you're going to love it. People, remember, business is family, and family is business. So let's take our S corporation and do what all the big companies do: build a board of directors. We're going to build a board, and we're going to put my mom and dad on the board; we're going to put my best friend on the board; we're going to put my spouse on the board; my teenage kids on the board—whoever I hang out with, whoever I travel with, I want to collaborate with, I want to meet with, I want to talk about the business, I want to explain what I'm doing, and grow the business with their advice, support, and insights. So, with an S corporation—I'll even just diagram it 'cause I love a picture—here's my S corporation, and I'm going to adopt a board of directors, and this board of directors is going to support the operations to increase sales, increase profitability, and help me design a system to build wealth. Now, the beauty of the board is that whenever you travel, you get a tax deduction together; whenever you have meals together, you're going to be talking business; you may be providing laptops; you might be providing iPads; you might be providing cell phones because this board is supporting the operations of your business. The S corporation unlocks that strategy and unlocks number three, and that is bringing together the people of your life into your business, and those tax deductions need to be justified. I want to write off your travel, your cell phones, your travel—I mean, this is—I want to create these write-offs. Let me give you a fun example: every one of my kids now are 18 or older; every one of them is on my board. Well, we're going to have an annual company retreat. Each one of them has a little duty; they help me out throughout the year. It might be marketing; it might be administrative. Well, guess what? I got to be able to get a hold of them, and so if I'm helping them out with a laptop or a computer or a cell phone, I'm going to take a tax deduction for that; I'm going to take a write-off for that. I may even give them a $10.99 at the end of the year in their Christmas stocking for some money I may have helped them out throughout the year. So now I'm generating more write-offs inside my S corporation, legitimately audit-protected, to create more profit, to fund more wealth, and to save more taxes. It's like it—it's like an equation; it's like a recipe for success; it's so powerful. Now, is it complicated? No, not really. You can hold a board meeting tomorrow. For those of you that already have an LLC or a corporation, you can say, "This weekend we're going to go on a weekend retreat, and we're going to go to this hotel, or we're going to go to this resort, or we're going to just go somewhere and sit down and talk about the business," and you're going to pull out a sheet of paper and go, "Here's the minutes of our meeting, and here's what we're doing, and I love you guys, and I need you on the board, and oh, by the way, this trip was tax-deductible because you're all a part of the business now," and you slide those minutes into your corporate book because your corporate book is your asset protection. You've maybe heard it in my other videos: asset protection is maintaining that company, doing the minutes, maintaining the records and the structure. This is the beauty of the corporation is that it unlocks all these other strategies. And you know what's interesting? Your chances of an audit with the IRS by using an ES Corp go down by 1,500%. Statistics every year show that over 15 times less chance of an audit with an S corporation compared to an LLC. I'm giving you a strategy that saves you more in taxes, and it's less chance of getting audited. That's how crazy it is. But people don't understand it; they don't take the time to apply them. And that's why I want to say thank you for watching this video. You're—it's like I'm preaching to the choir; you're—you're there already learning the principles of being a smart business owner, and I want to say thank—thank you for being here. These three strategies may have caught you a little off guard. You're like, "Oh my gosh, I better get a second opinion; I got to do that." Well, that's the beauty of being a business owner is that when you take time to work on your business, the exponential growth on the back end—it's—we can't even measure it; it's so, so exciting.
Now, one last suggestion for some of you that are busy in your business, and you're like, "Oh my gosh, I need to take care of this; I need to get on top of this." Several things: first of all, if you're not an S corporation yet, if you know that there could be some savings here, and I'm already maybe making some sense, please schedule a consultation with one of my tax lawyers. You can just pay hourly, or our cost again to set up an entire new entity, maybe less than $1,200, and you can meet with an attorney on a Zoom call anywhere in the country. Now, for those of you that already have an entity and you need to do your company maintenance—you haven't done those minutes in a few years, your books are maybe a little dusty, or there's one sheet of paper in a drawer somewhere—our annual company maintenance program is 200 bucks. $200. We send you a list of 25 questions to take to your board meeting that you used to fill out, and you send them back to us; we file your company with FinCEN, that new BOI report, and also if there's a form that needs to be filed with your state, we send that in for you: $200. Now, if there's a fee with the state, we'll pass that on to you, but it's that simple, that affordable. So you can delegate that process if you want, or you can pull out that sheet of paper at the next resort and do it yourself. But the point is, we've got to do it; we've got to take advantage of these strategies because it really, really will bless your life. Now that you know how to set up your ES Corp properly, you can begin to take action to scale your wealth quickly. However, if you're still unsure, you're not doing enough to manage your taxes, please take a look at this next video where I walk you through a tax and legal playbook to beat the IRS.