Posted on September 24, 2016 by Jan Roberg

Filing as a Surviving Spouse: Five Things You Need to Know

The death of a spouse can create tax confusion.

Losing a spouse is difficult enough. You don’t need your taxes to be overly complicated.

One of the worst things I have to do in my job is to help people whose husband or wife has died file their tax returns. There’s nothing I can say or do to make the situation any better. If you should find yourself in this situation, first, I am sorry for your loss. Here are my tips to help you get through the filing process.

One: You are still considered married for the full year that your spouse died. That means you may file as married filing jointly, even though your spouse has died. (Had you divorced instead of being widowed, you would be considered single. Different rules for different situations.)

Two: For most couples, married filing jointly is the best filing status to use in the year of death. But there may be situations where you will want to file as married filing separately. If you have any concerns about your spouse’s tax liabilities, you should consult with a tax professional just to be safe.

Three: When you are signing the MFJ return, you will sign your name on your line, and write “filing as surviving spouse” on your spouse’s signature line. If you are paper filing your return, you’ll want to write “Deceased” across the top of the tax form. If you are e-filing, you’ll complete the box that shows the date of death. I always put “deceased” in the occupation box.

Four: If you still have children at home, you may claim the Qualifying Widow(er) status for two more years after your spouse died. Normally, a single person with children at home would claim the head of household filing status. Qualifying Widow(er) is a better tax rate so you want to use it if you can. You may not claim Qualifying Widow(er) if you do not have children at home. That’s a very common mistake. If you have no children remaining at home, then your filing status will become Single, not Qualifying Widow(er).

Five: If you get married again before the year ends (it does happen) you would file as Married Filing Jointly with your new spouse, and you would file a return for your deceased spouse as Married Filing Separately. (You could, if you choose to, file your own return as Married Filing Separately as well. Usually it is not the best filing status to claim.)

Posted on August 21, 2016 by Jan Roberg

Earn Cash Blowing the Whistle on Tax Cheaters!

Report tax fraud to the IRS using form 211 to earn an informant award.

Blowing the whistle on tax cheats could earn you cash, but it could also cause you a lot of trouble.

You’ve thought about it, haven’t you? Someone you know is cheating on their taxes, making huge refunds when they don’t even work, while you bust your backside making ends meet. Makes your blood boil doesn’t it? I know it does because people write to me all the time wanting to report an ex or a neighbor that they know is cheating on their taxes. I did a post about reporting fraud a few years back, here’s a link to it: Reporting Tax Fraud

Basically, if you’re just reporting fraud, you file form 3949, send it to the IRS and let them take it from there. You’re done.

But if you want to get a reward for reporting the tax fraud, that’s a different story! And, of course, a different form. But how do you know you can qualify for an award? Well first, you have to be able to provide specific and credible information. You can’t just send the IRS a form saying, “I think my neighbor’s cheating on his taxes, he can’t afford that new Volvo on the money he makes at the Post Office.”That’s just not going to fly. Also, it’s got to be a significant Federal tax issue. “My ex-wife claimed that those old clothes she gave to Good Will were worth $500 and they couldn’t have been worth more than $450.” That’s not big enough to make it worth their while to investigate.

There are two types of whistle blower cases: ones where the amount of tax, penalties, and interest exceed $2 million dollars. (Geek speak, that’s a section 7623(b).) That’s usually a business case. Or if you’re dealing with an individual, his or her income must be over $200,000 annually for at least one of the tax years you’re reporting on. In these types of cases, the IRS will pay between 15% and 30% of the tax that they recover. Seriously, if you’re in a position to report on a major case like that, you should find an attorney to represent you. Don’t mess with that on your own. 30% of $2 million is $600,000, it’s worth hiring an attorney for!

The IRS also has another program for cases where the tax is under $2 million or an individual makes less than $200,000. (Geekspeak, that’s section 7623(a).) Although the paperwork is the same, the rules are a little different for the smaller cases. The maximum award will be 15% of the tax recovered. Also, the awards are discretionary; meaning – the IRS doesn’t have to give you an award if they don’t feel like it. And, if you’re not happy with your award, you can’t go to Tax Court and argue it. You’re done. That’s it. So even if you’ve got the perfect case, there’s no guarantee that you’re going to get paid.

Just to give you an idea of how things go though, in 2015, of the 204 claims that were paid, 99 awards were given so it’s about half of the claims. But the IRS generally doesn’t pay awards until 5 to 7 years after a claim is filed so if you are going to get anything out of this, you’re going to be waiting for quite some time.

But let’s say you still want to go ahead with this. What do you do? You’re going to want to submit form 211. Here’s a link to that: Form 211

Basically, the form is going to ask for the name, address and the last 4 digits of the tax cheat’s social security number. The IRS will also want a description of what he or she did and why you believe it’s a violation of tax law. You’re also going to need to describe how you know about the cheating. How are you related to that person? And also how much tax you think that person owes. The bottom line here is, you really need to know something about the tax cheat to report them.

Here’s the last piece of information I want you to have. The IRS Whistleblower – Informant Award, unlike other whistle blower programs, does not provide whistle blower protection. That means that whoever you report on could find out. If it’s an employer, you could lose your job. If it’s someone you know (like an ex spouse), you could be placing yourself in danger. You really want to think about this before sending the IRS form 211.

If you still want to report a tax cheat, and don’t care about a reward, then go ahead and send form 3949-A instead. You can do that and remain anonymous. Continue reading →

Posted on August 15, 2016August 15, 2016 by Jan Roberg

Settle Your IRS Debt!

Over the past year I’ve taken hundreds of calls from people asking me about settling their IRS Debt. They have all sorts of questions:

Have you heard of that Fresh Start Initiative?

Do I need an attorney?

Can I really settle my debt for pennies on the dollar?

How much does it cost to do that anyway?

A lot of those companies that advertise on TV are charging from $5,000 to $8,000 – that’s money that you could have used to pay down your tax debt! And they keep your money even if the IRS turns you down!

So I’m going to be teaching a class about how to do do an offer in compromise by yourself. A step by step, easy to understand, instruction guide. Why do that? Because, the hardest part about making a deal with the IRS isn’t the forms you fill out, it’s pulling your paperwork together and figuring out your monthly expenses. And you’re doing that part yourself even if you’re paying the TV tax guys $5,000. So why give them all your money after you’ve already done all the work? You can use that cash to pay the IRS instead!

I’ve done a bunch of offers in compromise. The key is to use the IRS formula for making the offer. If you use the right formula-you get your offer accepted. If you can’t afford to pay what the IRS formula says you need to pay, you’re not out of options. You can still make an installment agreement to settle that debt.

So if you could do me a little favor, I’d really appreciate it. Don’t leave a comment below, please just respond to my survey. I want to make sure that I cover all the questions that people really care about. And most importantly, I want to make sure that I make it easy to understand. Thanks for your feedback

-Jan

Click Here for the Survey!

Posted on July 24, 2016 by Jan Roberg

Easiest Tax Quiz Ever!

Here’s an easy Tax Quiz.

1. Are you married? What’s your spouse’s name?

2. Do you have children? What are their names?

I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?

You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.

It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born.

I’m not just giving you “what ifs”. These are all real examples that happened to real people that I know. The ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old when her father passed away.

We all like to think that if we died, our family members would do the honorable thing and share accordingly. Hopefully they will, but it’s still better to put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.

Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.

You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?

So here’s your little Roberg Tax to do list. Check your life insurance policy. Check your retirement plan. Check your investment and bank accounts. And, check your will. Make sure that the people you have listed as your beneficiaries are the people that you want to receive your money when you die. If you’ve got the wrong people listed, you need to make some changes.

Your family loves you. They’d much rather have you be alive than be your beneficiary. But, because you love them too, make sure you take care of that paperwork.

Posted on June 16, 2016 by Jan Roberg

Missouri Sales Tax Issues for Professional Photographers

Missouri has special rules for sales taxes for photographers

Professional photographers have unique issues when it comes to Missouri sales taxes.

I work with quite a few professional photographers and I’m always being asked about Missouri sales tax. There seem to be different answers about what is considered taxable and non-taxable here in Missouri. Well, I decided to get to the bottom of this – I called the Missouri Department of Revenue and this is what they told me.

Service – is not subject to sales tax. So if you perform the service of photographing a wedding (for example) the service portion of your work is not subject to sales tax.

Product – is subject to sales tax. So, if you produce a tangible product that you can hold in your hand – like a wedding album – that product is subject to sales tax. Even if you ship that product out of the state–it’s going to be subject to Missouri sales tax. Note – that’s for photographers only! Let’s say you manufacture a product – like wedding garters for example. You sell those garters online to people all over the country. If you sell that garter in Missouri, yes, that’s subject to tax, but if you sell it to someone outside of the state – then there is no Missouri sales tax. Photographers are treated differently on this issue.

Combined service/product is subject to sales tax. Let’s say you are going to photograph a wedding and the fee is $5,000 and that includes a wedding album book that you provide the bride and groom with at the end. In a situation like this – because the service and the product are priced as one unit – then the whole thing is taxed!

What’s the lesson here? You separate out the price of your service from your product! So if that album is worth $500 – then you say the service of taking the photos is $4,500 and the album is $500. You need to break it out so that your clients will not be taxed on your service of photographing the event.

Here’s a few more things to consider:

Electronic downloads are not taxable. If your client can purchase the photos by downloading them online – the photos are not subject to sales tax. It doesn’t matter if the downloads occur across state lines or in Missouri – downloads are not subject to sales tax. (That would include things like video games or apps as well.)

One more thing – if you paid sales tax on the product instead of using your business exemption – then you don’t have to charge sales tax on that product! So if you take the photos and have the wedding book printed up by someplace that charges you sales tax – then you don’t have to charge sales tax when you sell the book! Remember, even in this situation, you still need to break out the service fee from the product!

Some other thoughts –

What about saying the service is $5,000 and the album is free? My opinion is that would make the whole thing taxable. Your clients are basically getting the wedding book for $5,000 and I believe that would make your service taxable.

Okay, so what if I said the service is $5,000 and the wedding album is a penny? Once again, I would think that would still make your service taxable. Being realistic, the wedding album is worth more than a penny. I think you need to price the album at a fair market rate to pass Missouri scrutiny.

The big take away here though is that you must separate out your service fee from your product fee or else you’ll be paying sales tax on all of your work.

Posted on June 12, 2016November 30, 2017 by Jan Roberg

Death, Taxes and IRAs

When people talk about “death” taxes, they usually mean “estate” taxes. Now, for 2017, there is no federal estate tax if your estate is under $5,490,000. So for most people, you don’t have to deal with estate tax. But IRAs are a different animal!

An IRA is considered to be taxable income. So – if you die, your beneficiary will have to pay tax on that IRA money. So, maybe you don’t care – since you’ll be dead anyway. But if you do care about leaving a taxable legacy to your heirs, here’s a few things to think about.

1. Roth IRAs are not taxable. Not to you, not to your heirs. (I always like Roth IRAs.)

2. A lot of people sign up for IRAs but they don’t know who the beneficiary should be (or they don’t have all the information they need to complete that part of the paperwork.) When they sign up they just put “estate” down in the beneficiary box. This is usually a bad thing. What happens is that your heirs wind up having to file a form 1041, an Estate and Trust tax return. Now, if you Google “estate tax” you’ll probably find all the tax rates on estates – and you’ll read the tax brackets for if you have over $5,450,000. (And that’s a form 706 – it’s a different animal.)

The 1041 form for income tax on estates and trusts is for the income earned by the estate – which includes your IRA income. The first $2,550 is taxed at 15%, the next bracket up to $6,000 is taxed at 25%, the next bracket up to $9,150 is at 28%, then up to $12,500 is at 33%, and anything over that is $39.6%. It doesn’t take a whole lot of money to kick your IRA income into the top tax bracket! Just to give you a comparison – a single person won’t hit the 39.6% tax bracket until he or she reaches $418,400 in taxable income.

So what does this mean? Well, if your heirs aren’t rich, they’re going to be better off if they inherit your IRA directly from you instead of from your estate.

3. If your goal is to leave a legacy to your children – life insurance is better than an IRA. (I can’t tell you how much I hate sounding like a life insurance salesman but it’s true.) Your IRA is your retirement account – it’s supposed to be money for you to spend during your retirement. In a perfect world, you spend it all before you die. (And of course, have enough to enjoy a long and happy retirement.) Life insurance provides your loved ones with tax free cash after you die.

This is really a personal decision on your part. Do you want to leave something for the kids or not? For some people that’s a major priority, for others, not at all. It’s your choice. But not matter what you decide, be sure to work with your financial advisor to make sure your heirs are properly listed as beneficiaries to your taxable retirement accounts.

Posted on June 10, 2016 by Jan Roberg

The Three Sexiest Retirement Savings Strategies

Start planning now to have the retirement you choose, not the one that’s forced on you.

I just used the words “sexy” and “retirement” in the same sentence and I’m serious! Everybody needs to save for retirement, we all know that. That’s not sexy, that’s just a fact of life. But if you can get free money or tax free income while you’re saving – well, that makes it downright sexy!

So what are the three sexiest retirement savings strategies? The employer match, the Roth IRA, and the solo 401(k). Let me explain why.

First: The Employer Match. An employer match is where your boss matches a certain amount of your 401(k) contribution. For example: let’s say you make $50,000 a year and your employer has a 3% match. Three percent of $50,000 is $1,500. Your employer will “match” what you put in, so you’ll need to contribute at least $1,500 into your 401(k) to get the $1,500 from your employer. That’s free money to you! When you contribute to your 401(k) – it’s not counted on your tax return, but you still pay social security and medicare withholding on that money. The employer match has no withholding on it. It’s a straight contribution to your retirement savings. Free money. Free money is sexy! If you work for a company with an employer matching program, you need to get in on the action!

Second: the Roth IRA. A Roth IRA has no up front tax benefits to it. You put the money in after you’ve already paid tax on that money. What’s sexy about the Roth is that your investment grows tax-free. And more importantly, when you retire – you take that money out tax-free! I cannot stress just how valuable being able to access tax-free income during your retirement is! The Roth is probably the most accessible of the retirement options I’m talking about, but there are limits as to who can contribute to a Roth. Here’s a link to the IRS website showing the current limitations: Roth Limitations

Third: The Solo 401(k). If you’re a solo business owner, or you and your spouse own a business together, then a solo 401(k) might be the plan for you. For one thing – you can contribute up to 100% of your earned income (up to the maximum contribution allowed) to your 401(k). This is great for folks who are actively trying to “catch up” on their retirement savings (and also happen to have another source of income!)

A solo 401(k) also allows you to make an “employer match” of up to 25% of your earned income. You see, when you work for yourself, you’re both the employer and the employee!

So how do those numbers work? Let’s say you own an S Corporation and you pay yourself a wage of $50,000. You can make an elective deferral – that’s what they call your 401(k) contribution – of up to $18,000 (or $24,000 if you’re 50 or older.) That means your W2 is going to show that you have $32,000 of taxable income. ($50,000 minus the $18,000 that you applied towards your 401(k). You’ll have paid social security and medicare taxes on the full $50,000 – because you still pay the FICA on your retirement savings, just like if you worked for someone else.

But now, you’re still allowed to make an employer match of up to 25% of your earned income – in this case, I mean wages. So, you could contribute another $12,500 towards your 401(k) as an employer match TAX FREE! You don’t pay regular income tax on that money because it’s a business expense, right? So it’s deducted from your business income as an employee benefit (where you’re the employee.) And, since it’s an employer match – you don’t pay FICA either. How cool is that?

Saving for retirement is necessary for everybody, but if can manage to swing tax free savings or tax free income it makes saving much more exciting. You might even call it sexy!

Posted on June 6, 2016November 30, 2017 by Jan Roberg

What You Need to File Your Taxes

Sometimes, the hardest part about filing your taxes is getting the paperwork together.

Whether you’re hiring a professional or preparing your own return, make sure you have all of your paperwork together before you start. If you’re expecting a refund, you’re probably anxious to get everything together so that you can file as soon as possible. For those of you who expect to pay, you’re probably not too thrilled about it. I know I never am anyway.

Here’s a list of some of the more common documents associated with filing. Not every person will have every form on this list, but hopefully this will help jog your memory so that you don’t forget something you need.

W-2 forms – that’s your statement of wages, you’ll need a W-2 for each job you held
1099 forms – there are several types:
- 1099-INT for interest
- 1099-DIV for dividends
- 1099-B for sale of securities (some companies, like Edward Jones or Raymond James, will send out a combined form that has your 1099-INT, 1099-DIV and 1099-B all in one statement)
- 1099-R for annuities, pensions and other retirement plan withdrawals
- 1099-G is for government payments like a state tax refund or unemployment benefits
- 1099 MISC is for miscellaneous income, like commissions or non-employee compensation
- SSA-1099 is for Social Security income — a note about the SSA 1099 form, it has to be the most frequently lost form on the planet. It’s usually the first one mailed out and I think it kind of gets lost in the shuffle. If you receive Social Security benefits, or are assisting someone who does, please make sure that this form is included with the other tax documents. For some people, it’s not taxable—but you need to include the figures from this form when preparing your taxes to determine if it is taxable or not.
- W-2G is for gambling income. If the Social Security form is the most frequently lost form, the W2-G comes in second. If you’ve received one of these statements, you need to include it on your tax return. If you don’t, you will get a letter from the IRS. (Gambling losses, up to the amount of winnings, can be deducted on your Schedule A.
1098 tells how much interest you paid on your mortgage – you want this because it can be used as a deduction
1098-E shows interest paid on a student loan – ditto!
1098-T shows the amount of tuition paid at an educational institution (you need this to claim those college tax credits.) Here’s the kicker, if you’re the parent paying the tuition, you won’t get the form, your student child will. You may need to work at getting your student to download this of the student portal.

If you sold stocks, mutual funds, or real estate, you’ll want to have your basis information on hand. (Basis is what you paid for the property. Many investment firms include the information right on your 1099B, but some don’t, especially if you sold old stocks.) Make sure you have this information ready before you file – it can save you lots of money!

If you purchased or sold a home this year, you’ll want to have a copy of your settlement statement. Depending upon your situation, there may be valuable deductions hidden in those statements.

If you are a member of a partnership, joint venture, S corporation, estate or trust, you will also need a copy of the Schedule K-1. Those forms aren’t required to be completed until March 15^th, so you may not be able to file your personal return before then. It’s a good idea to make your tax appointment once you have all of your other forms together. The K-1 information can be added at a later date.

And of course, you’ll want to have all the documents to support your deductions like real estate taxes, charitable contributions or deductible business expenses.

It’s always a good idea to have a copy of your last year’s return with you also. Sometimes you might have items that can carry forward into the next year. If you don’t provide you preparer with your old return, you’ll miss those deductions and credits.

If you save all the mail that says “Important Tax Information Enclosed”, you’re onto a good start. Having all of your tax paperwork together before you start your tax return is one of the best ways to avoid getting a letter from the IRS later.

Posted on January 24, 2016May 31, 2016 by Jan Roberg

Can I Claim My Friend’s Child on My Taxes?

Mom with little girl reading book in sofa

Even if you feel like they’re your kids, do not claim children that do not belong to you on your tax return for EIC.

I cannot tell you how many times I’ve heard this scenario:

My friend has 2 kids but she didn’t work last year. She wants me to claim them for her on my taxes and we’re going to split the money. Should I do it?

The answer is, NO! Absolutely not! It’s tax fraud. Those children are not yours so claiming them on your tax return is illegal.

But she says we won’t get caught!

Oh sure, you might not get caught right away, but someone might disapprove of what you’re up to and tell. For example, let’s say the children’s father finds out and he reports you. He could make a real problem for you.

The father is out of the picture, he’ll never tell.

Okay, then what happens when she decides that you didn’t give her enough of the refund? I’ve seen it happen hundreds of times. The friend claims the kids, the child’s mother gets upset over something and then turns the friend into the IRS for fraud. Seriously, it happens all the time. I’m not joking.

My friend’s not like that, we’re like sisters!

You’re like sisters until the child’s father comes back into her life. Or that new boyfriend decides that he wants some of that tax money. Or she thinks you cheated her.

Good friends stay good friends when money isn’t in the way. If there is a problem, and there will be a problem, you will be the one who has committed fraud, not her. You will be the one who has to pay back the tax, not her. You will be the one in trouble with the IRS, not her. Are you listening? All of the risk is on you.

A good friend won’t ask you to cheat on your taxes. Sure you’ve probably seen people do it and get away with it. We’ve all seen people game the system one way or another. But that doesn’t make it right. And it doesn’t mean they won’t get caught either.

If I don’t do it, someone else will.

Probably. But at least it won’t be you. You’ll have a clear conscience and you’ll be able to sleep at night.

If you want to know who can legally claim a child for EITC, use the IRS EITC assistant. When you go to the link, answer all of the questions honestly. EITC Assistant

It’s a really good tool and will tell you who you can and cannot claim. It asks very specific questions about your relationship with the dependent you are claiming. Here’s a clue: “foster child” means a child that has been placed in your home by the court. You can’t just call a child your “foster child” because you spend a lot of time with them. And niece and nephew mean the child of your brother or sister, not the child of your friend. If you don’t pass the test using the EITC assistant, then do not try to claim EIC on those children. It’s that simple.

Will your friend be mad at you for turning her down? Probably yes. If she’s a real friend, she’ll get over it. If she’s not a real friend, then you made a real good decision by turning her down didn’t you?

Posted on November 1, 2015May 31, 2016 by Jan Roberg

S Corporation – Computing the Tax Savings

When deciding if you should elect Sub-chapter S corporation status for your company, you need to run the numbers first!

Electing to be taxed as a Subchapter S Corporation instead of as a Sole Proprietor could mean big tax savings for you as a small business owner. Notice I said could–because it’s not always the case. It’s really important to run the numbers – all the numbers – and do a comparison so you can make an informed decision.

This post is going to be a little technical. I apologize for that up front. I’m going to try to keep it in plain English though, because even if you can’t run the numbers yourself, you need to see what I’m talking about so you can discuss this with your accountant.

Here’s an example where I think choosing to be a Sub S Corporation is the right choice for a business owner: Jack Sparrow is a single, self employed pirate with net self-employment income of $100,000. (Yes, Johnny Depp was on TV last night.) Jack has no other income to report on his tax return.

I ran the numbers for 2014 and it shows the total tax on the 1040 return to be $30,680. ($16,550 for the income tax and $14,130 for the self employment tax.)

That’s a lot of taxes!

But what if Jack were to set up a Sub Chapter S Corporation? He’d have to set himself up to receive payroll–(that’s part of the deal with an S Corporation, you have to pay yourself a salary) but the rest of his income would be taxed at his regular tax rate (they call that ordinary income) instead of at the self employment rate.

So for my example, I set Jack up with a payroll of $40,000, his S Corp income is $56,340 (not $60,000 because he’s paying some payroll taxes that are deducted.) So when I run the taxes for that, I’m showing that his total tax on his 1040 is $17,400.

Right here you’re probably going, “$13,280 in tax savings per year? Awesome! Sign me up now!”

But it’s not that simple. Because remember, part of being an S Corporation means that you must set up a salary for yourself and pay the payroll taxes. If you don’t include the cost of those payroll taxes in your calculations, you’re not giving yourself a true comparison of the total tax cost.

For Jack’s example, we set up a payroll for $40,000. From his $40,000, Jack will have $3,060 withheld as his employee share of FICA-that’s the Social Security and Medicare tax that gets withheld from everyone’s wages. Also, remember when I said his S Corp income was $56,340 instead of $60,000? That’s because as an employer, Jack also had to pay an additional $3,060 for the employer’s share of FICA, and I added another $600 for state and federal unemployment taxes. The unemployment tax will vary by state but $600 is a reasonable estimate.

When you add those payroll tax costs to the 1040 tax cost, Jack’s total S Corp taxes are now $24,1120. That’s still a big tax savings of $6,650! In this case, of course I would recommend that Jack go for the S Corp.

Just for fun, what if Jack were offered a pirate job as a wage earning position? All W2 income with no self-employment at $100,000 per year? Just running the numbers straight like that, his 1040 taxes would be $18,341 and his FICA withholding would be $7,650 so his total tax cost would be $25,991 which turns out to be $1871 more than his S Corp taxes.

Now in real life, there would be other considerations – like health insurance and other fringe benefits that might make Jack want to jump at that wage position. But I left all of that out for this comparison.

The chart at the bottom of the post shows the numbers for Jack’s case side by side so you can see how I got to my numbers, in case you want to replicate them for yourself.

So, how do you determine if YOU should have an S Corporation instead of a sole proprietorship? You look at these numbers and it’s pretty persuasive. If you could save $6,000 or more a year, who wouldn’t do that? But taxes have a lot of moving parts these days. Maybe you have investment income, maybe you have wages from another job. Maybe you have deductions that are allowed on a Schedule C that aren’t allowed for an S Corp. Healthcare costs can also make a difference and so can your retirement savings goals.

If you don’t run the numbers fully through a tax program, including the payroll tax costs, you could actually lose money going with an S Corp. I ran a scenario the other day – this is a real person’s actual numbers: her tax savings by converting to an S Corp–before adding in any payroll taxes, was only $1,338. She’d spend that much in accounting fees for the payroll and additional tax return. Adding in the FICA and employer payroll taxes we send her to the loss column. I never would have known that had I not sat down and ran the numbers based on her whole situation.

While that taxpayer’s situation was unique, your situation is also unique to you. Before electing to be an S Corporation, make sure you have all the facts and run all the numbers. You’ll be glad you did.

Here’s that chart I promised you:

Comparison of wage, vs. self-employment, vs. Sub S Corporation taxes