How does an S- Corp work?

[Fire]

So in the above example of grossing $300 k and netting $180k after expenses . Why would you not take Dividend payouts on the whole $180 k of net income for no ss taxes ?What’s the purpose of W-2 income ? The 20% deduction from Trumps tax law can be taken wether an individual or corporation.

 

[sshafran]

So are you getting a 1099 from the insurance CO’s yearly in the s Corp name ? The only advantage I can see with a s Corp is you can take a lot if your money out in dividends which is a lower tax rate and no ss taxes . Let’s say you made $300 k in 2021 . Your exp ‘s were $120 k and your w-2 salary $50 k . That’s leaves $130 k left in the S Corp for the yr . Do you have to take a $130 k dividend out for that yr ? You said you can’t “ leave” money in it .

You do not have to take all money out *of the business bank* in distributions - it can be left in the bank of the business if that's what you mean.

"Profit" still goes on your K1. But you can certainly leave money in the business bank for the following year's expenses.

I guess someone could earn a bunch one year, not distribute, then over-distribute the excess the next year.

From a tax standpoint though it's pass through.

I wouldn't underestimate the value of not having all $ run through traditional payroll. Being able to take distributions after a "reasonable" salary is a great tax saver.

My salary is "too high" according to some of my friends who also have s-corps and I still get a bunch distributed.

 

[sshafran]

What’s the purpose of W-2 income ?

The purpose? It's the law for the S-Corp. You have to take a salary.

 

[Yagents]

Trying to get 100% tax free income? Nice try.

Pay your "fair share", Medicare and soc sec are going bankrupt.

 

[Fire]

Are there any rules on what % must be taken as salary or is it just “ reasonable “ ? If there wasn’t a tax advantage nobody would do a S Corp I’ve paid a ton of taxes over the yrs . I was always told paying some ss is a good tax as you’ll get it back many many times over . Why a S Corp over a llc? Being able to take dividends ?

 

[Yagents]

If you're an LLC, you pay ss and mc taxes up to first $142k.

If s corp, any salary less then that 142k amount, saves you taxes on ss and mc

Social Security Tax Limit Hits Higher Incomes in 2021

 

[Tahoe Ray]

Yes, you determine your salary (w2) but it needs to be "reasonable."

Are there any rules on what % must be taken as salary or is it just “ reasonable “ ?

The good news is the average insurance agent makes dirt so "reasonable" can be pretty flexible.

My accountant may be overly conservative like @sshafran is as well but we try to stick to a 1/3 w2 and a 2/3 K-1/1120S

 

[Yagents]

The median annual wage for insurance agents was $48,150. The highest paid 10% of insurance agents earned more than $116,940 annually. The lowest paid 10% of insurance agents earned less than $26,120 annually.

I wonder what level the top 1% make?

 

[marindependent]

If there wasn’t a tax advantage nobody would do a S Corp

Do not agree. Incorporation brings other beneifts than potential just taxation benefits.

Some businesses incorporate for the "liablity protection" reason but this is not as helfpul for insurance agents/agencies as numerous other businesses.

 

[adjusterjack]

Some businesses incorporate for the "liablity protection" reason but this is not as helfpul for insurance agents/agencies as numerous other businesses.

True. The agent is the face of his business. That's who the customer knows and that's the first name at the top of the Defendants list were a lawsuit to occur. Not hard to "pierce the corporate veil." That's why the agent buys E&O insurance.