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Gio

S Corp and Controlling Debt Payments

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I have a question about S Corps in regards to personal income taxes. I am thinking about starting up an S Corp and running a rental property business through that S Corp. I currently work a 9-5 and would keep working at it until I feel like I’m making enough from a new business. I understand that with an S Corp you aren’t require to pay yourself a salary. Could I use this as a method to report income only from my 9-5 job and therefore keep income based payments on debt down until a later date? Does the S Corp in any way affect my taxes if I don’t receive a salary in a given year?

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56 minutes ago, Gio said:

Could I use this as a method to report income only from my 9-5 job and therefore keep income based payments on debt down until a later date?

 

Huh?  What "income based payments on debt" are you talking about?

 

 

56 minutes ago, Gio said:

Does the S Corp in any way affect my taxes if I don’t receive a salary in a given year?

 

Yes.  If you're the sole owner of the S corporation, it would be disregarded for tax purposes.

 

I strongly encourage you to consult with a local attorney for advice before doing something you don't understand.

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I am on an income based repayment plan for student loans. I will be done in 9.5 years. If I generate more income then my payment arrangement would change so that I pay more monthly which is what I’d be trying to avoid by not taking a salary. At least in the beginning. If I don’t take a salary from the S Corp business would I then continue to only report income from my regular 9-5 therefore avoiding the higher payment rate or will my taxes be affected to show that income despite not taking a salary? I wasn’t referring to debt incurred through the business, but instead personal debt that could be affected by income generated through the business.

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5 hours ago, Gio said:

I have a question about S Corps in regards to personal income taxes. I am thinking about starting up an S Corp and running a rental property business through that S Corp. I currently work a 9-5 and would keep working at it until I feel like I’m making enough from a new business. I understand that with an S Corp you aren’t require to pay yourself a salary. Could I use this as a method to report income only from my 9-5 job and therefore keep income based payments on debt down until a later date? Does the S Corp in any way affect my taxes if I don’t receive a salary in a given year?

 

The way an S-corporation is taxed is very much like how partnerships are taxed. The S-corporation or partnership is not itself taxed on its own income. Rather, the net income/loss flows up to the owners of the S-corporation or partnership and the owners report that income/loss on their individual income tax returns. These entities file information returns with the IRS (Form 1120-S for the S-corp and Form 1065 for the partnership) to tell the IRS the details of its income and expenses for the year, and they then provide to their owners Schedules K-1 that summarize for each partner his/her share of the business income/loss. That K-1 information is then used by the shareholder or partner in preparing his/her return.

 

As a result, you don't save income tax with a S-corporation by not paying yourself a salary. Let's suppose that you have the rental business as a S-corporation and you are the sole shareholder. The S-corporation has next income of $80,000 for the year (not taking into account your pay for the work you did). Let's say that you didn't have to expend a whole lot of time working on it, so a reasonable salary for your work done for the corporation for the year is $30,000. If you pay yourself the $30,000 then the corporation deducts the $30,000 from income, leaving a final net income of $50,000 that it reports to you on the K-1. You report that $50,000 as income on Schedule E of your return. And, of course, the corporation gives you a Form W-2 reporting the $30,000 of wages/salary it paid you for the year. This gets included on your return as $30,000 of wages received. So your total income is the $50,000 in S-corporation profits received plus $30,000 wages = $80,000 in total income from the business. If the S-corporation does not pay you any salary during the year, the entire $80,000 of net income of the S-corporation goes on the K-1 and you have $80,000 in Schedule E income. So while the reporting is a bit different depending on which way you do it, the ultimate outcome is the same: you pay income tax on $80,000.

 

But where the S-corporation is different from a sole proprietorship or partnership is in how the FICA (Social Security and Medicare) taxes are handled. With a sole proprietorship the entire profit of the business is subject to FICA taxes in the year it is earned. With a partnership, each partner who actively participates in the business has his/her share of the profits are subject to FICA taxes in the year that income is earned, too. In both cases, the owner or partner completes Schedule SE to compute his/her self employment (SE) tax, which is how self employed people pay their FICA taxes.

 

However, with S-corporations the owners only pay FICA taxes on the wages/salaries that the S-corporation pays them. This has two advantages over the sole proprietorship or partnership in some businesses. First, it means that the entire profit of the business is not automatically subject to FICA tax as it is with a sole proprietorship/most partnerships. Second, the FICA taxes are only paid when the salary is actually paid, which can be different than the year in which the work was done and the income earned. But to avoid abuse of these advantages, the courts have imposed a rule that says that anything that the S-corporation shareholder receives from the S-corporation will first be treated as a wages/salary to the shareholder up to the point that the shareholder has received reasonable compensation for all work ever done for the corporation. So the shareholder cannot get around paying FICA taxes by simply paying out distributions that he calls dividends rather than salary. If he wants to take out any money/property from the corporation for himself then he's first got to account for what he should have been paid for all the work he's done for the corporation so far.

 

The bottom line is as follows. With the S-corporation you can save some FICA tax with businesses where  some part of the profit comes from something other than the personal work of the owners. Even there, however, the benefit is pretty limited if you already pay the max Social Security tax on other wages/salaries you have. Also with the S-corporation the FICA tax that you will have  to pay you can determine the timing of when it must be paid. So while you cannot avoid it altogether, you can time it for when it is better for you. Delaying that is not always a good thing overall, but that's a more involved topic than I have room to discuss here. But using the S-corporation is not going to save you any income tax over simply operating as a sole proprietor or partnership. The benefit is just with the FICA taxes.

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The poster's question involved whether he could avoid increasing his student loan annual payment obligation.  The answer to that is "No".  If your annual or monthly repayment obligation is based on your income, any income, assuming there is any, gets counted for determining your repayment plan.

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5 hours ago, Gio said:

I am on an income based repayment plan for student loans. I will be done in 9.5 years. If I generate more income then my payment arrangement would change so that I pay more monthly which is what I’d be trying to avoid by not taking a salary. At least in the beginning. If I don’t take a salary from the S Corp business would I then continue to only report income from my regular 9-5 therefore avoiding the higher payment rate or will my taxes be affected to show that income despite not taking a salary?

 

The only way to answer this intelligently would be to read the contract that contains the "income based repayment plan."  Since I have no ability to do that, I'll simply point out that the term "income" is much broader than "salary."

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This is slightly off-topic.  This thread triggers my memory of some clients who thought they were getting away with something by not reporting and paying taxes on under-the-table cash income.  I would ask them what they intended to do when they reach 65 years of age and find they are not getting social security.  From my current perspective, as a very senior citizen, I look back and feel sorry for the short sightness of youth.  There is always a price for gaming the system.

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There is absolutely no intention of doing anything that isn’t legal. People make business and personal decisions based on how it affects their finances and I was inquiring to see if there is any benefit in establishing an S Corp and delay paying myself which clearly there is little to no benefit.

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