Paying shareholders through payroll and filing a corporate tax return costs money- but with a potential 8% to 10% savings of net income, the benefits will exceed the costs especially if the net business income after expenses exceeds $30,000. This is net income after expenses- not gross. So many business owners think in terms of gross income- we don’t care about gross income and the IRS doesn’t care about gross income when it comes to taxable income, and the sensibility of an S Corp election.
Since the cost of payroll services and corporate tax return preparation is relatively fixed, the more profit you earn the more you’ll save. Something to discuss and consider.
Quick Numbers: Let’s say $100,000 in net income saves you $9,000. The Watson CPA Group charges $2,940 ($245 per month) for corporate and personal tax returns, payroll and estimated taxes, income tax modeling and planning, and unlimited business consultation. Therefore, a $100,000 S corporation saves you close to $6,000 after our fee, and we do all the work (and give you wonderful tax planning, the forgotten art of most accountants).
If you already have a partnership or multi-member LLC, and you file a partnership tax return your break-even point is about half, or $20,000. If you also run payroll within your business because you have a staff, then the annual cost of having an S Corp should be zero. So now your $100,000 actually puts $8,000ish in your pocket (there are some other expenses like unemployment taxes, keep reading).
In other words, a large chunk of the $2,940 is business tax return preparation and payroll (about $1,800). Therefore, if you already pay for these services within your business then they are considered sunk costs when contemplating the S Corp election. Consideration of sunk costs should be removed from decision making. One and done costs, like business formation and set up fees should be amortized over the projected life of the business.
If you break-even on the fees as compared to your savings, keep in mind the additional benefits. With our package you are getting individual tax return preparation plus unlimited tax planning and consultation. There is value there, so if you break-even in terms of cost-benefit analysis, you might actually be ahead.
We are not considering the huge benefits from pass-through qualified business income tax deductions as outlined in Section 199A of the Tax Cuts & Jobs Act of 2017. At this point, in this chapter, one of our primary focuses is the delta between a non-S Corp and an S Corp. Real numbers and real examples are coming up in a later chapter. Be patient…
Taxpayer's Comprehensive Guide to LLCs and S Corps : 2019 Edition