Are you an entrepreneur making less than 100,000? Well, today I’ll be talking about tax strategies you can use in your 2018 taxes to help you save money.
Let us talk about your 2018 tax planning. It’s almost end of the year. It’s time for you to start thinking about this. This episode right here is just dedicated to entrepreneurs making less than $100,000. So, if you’re making more than that they’ll be other episodes for you.
And in this episode, I just focus on your tax structure. Because as an entrepreneur at that size, that’s the biggest place you save money. In this episode. There are three main tax structures I talk about which is the sole proprietorship, the partnership and the corporation. We will see how the structure of either this can save you or cost you money.
Now looking at the three different tax structures as mentioned earlier, the Schedule C also known as sole proprietor, the 100k S-Corp and the 100k C-Corp. We see that the S-Corp has the lowest liability at $11,894.34. This is after paying wages of $35,000. Now as a S-Corp you do have to pay wages.
But the C-Corp it’s lower than the Schedule C. And we can see the tax liability is $15,569 as compared to the $24,313 for the Schedule C. Now this is due to the fact, the reason why this is happening, is because of the new tax rate. The lower tax rate for corporations which is at 21%. So, we can’t really see this, really this change taking effect at higher income levels. Like income levels are above the 21% tax rate. That’s where you see the most savings.
So, now let’s talk about the, about the new business deduction called QBI. You’ve probably heard a lot about this in the media. What is that? The qualified business income deduction is 20% of your QBI income. For most people, it’ll probably be like their net income. But sometimes the penalty cap on your type of business, some adjustments are needing to be made.
If you’re below a $157,500 since I’m talking to entrepreneurs will make $100,000 or less. There are no limitations or no specifications that really apply to you. But, as you begin to go above that level you will see how little changes you make, changes your amount of QBI deduction.
So, let’s take a look at how this looks now for comparison. Let’s look for the QBI deduction which should be for your taxable income. So here we can see the QBI deduction for the Schedule C was $16,187. where the S-Corp was $12,380. Now, the S-Corp has lower QBI, the C-Corp does not have any QBI deduction at all because as a C-Corp you ready get the lower tax rate because the QBI was, intentionally QBI was to make up for the 21%. The lower rate that the C-Corps get. So that deduction was given to pass through entities, so they can level the playing field. Now even though the S-Corp has a lower QBI and that’s because he has low, lower business income. It still has lower tax, tax liability. So, when you’re looking at QBI, I know this is new, this is big and pretty much everywhere you go they’re talking about this. You don’t want to look at it in isolation. You don’t want to be like, “Oh, I’m going to do this because that will give me the biggest QBI deduction”. Well no, because you might get the biggest QBI deduction, but it might cost you in something else.
So, when you’re doing tax planning it’s best to do a comprehensive to see how one change affects the other. And just a mention here, as a S-Corp you do have to pay yourself wages. So, do not think that you can skip paying wages to get the higher QBI deduction. That would be very, very frowned upon by the IRS.
Now let’s take a look at a business owner still making less than $100k or less but yet has two children. So, it’s probably head of household. Now you can see as a Schedule C the tax liability is $16,666. As a S-Corp paying $35k wages, the taxes become $6,660. The reason it’s split like this is because $3,982 is liability on the tax return and this $2,677.50 is the extra taxes he is going to pay on his payroll taxes. So, because that payroll tax has been paid out we do have to take a consideration. And then C-Corp, the taxes will be $8,086.53 and that’s based on the 21% tax rate.
Now there’s something very interesting here. If we scroll down, we will see that the actual, that the C-Corp actually has a refund on the personal side of $4,913. So, the personal tax return doesn’t get a refund of $4,913, but they’ll pay $12,999 for the corporate taxes. So, by the time it nets, they still end up more as a S-Corp. But, I thought it was pretty interesting, so you can see that, even though they’re getting a refund on one side they’re paying the higher taxes on the other side.
Now, for a person with children, it’s important to note the Child Tax Credit. The Child Tax Credit has been increased $2,000 per each qualifying child. And this credit is reserved for those who are below 17 years. Now, if you have a child who’s above 17 years, 17 years or you have other pendants. Then you can also get an additional nonrefundable, which means if you don’t want taxes you don’t get it. $500 per dependent. So, this is big, that’s new for 2018. This right here kind of makes up for the fact that in 2018 the personal exemption has been lost.
Another change that will affect the small business owners or people in general with children more is a change in personal and standard deduction change. As you can see the standard deduction went up. There’s a $5,500 raise per single, $11,000 raised for married filing jointly, $5,500 raised for married and separately and $8,450 raise for head of household. However, you’ve lost the personal exemption. So, in this case our business owner has three exemptions. Him or herself and two children, so that is three exemptions. So, in the old system this entrepreneur would have gotten $21,700 in personal slash standard deduction. In the new system, they’re only going to get $18,000, so they are actually losing $3,700.
So, let’s take a look at how this deduction looks on the comprehensive side of a tax return. So, here we can see the wages were $35,000. So we scroll down. We see a deduction of $18,000. So, that’s the higher standard deduction with no personal exemptions. And then we see this family has a credit for child care. There’s not really much change there. And then they also get the earned income credit and refundable Child Tax Credit. Which is why they got their refund the $4,913.
It is important to note here that in all of these calculations; the assumption is no estimate taxes were paid or no federal income tax were withheld. Now federal income tax withheld comes from your W-2 and estimate taxes are what you pay quarterly. In the United States we have a pay as you go system. So what you actually pay at the end of the year is not really your tax liability. That’s just the balance of what was not paid during the year. So, if you paid $1,000 that’s not your total tax liability. If you’re not sure what this amount is, take a look at your 2017 tax return.
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