S-Corp vs LLC: Save $9,000+ Annually
LLC (Sole Proprietor)
Net Business Income
$100,000
Self-Employment Tax (15.3%)
$15,300
Income Tax (22% bracket)
$22,000
Total Tax Burden
$37,300
S-Corporation
Reasonable Salary
$60,000
Distributions (Not subject to SE tax)
$40,000
Payroll Tax on Salary (15.3%)
$9,180
Income Tax (22% bracket)
$22,000
Total Tax Burden
$31,180
Annual Tax Savings with S-Corp: $6,120
Plus additional savings from qualified business deductions and retirement contributions
Only pay payroll taxes on your salary, not on distributions. This alone can save $6,000-$12,000 annually.
Potentially deduct up to 20% of qualified business income, reducing your effective tax rate significantly.
Maximize 401(k) contributions ($23,000 + $7,500 catch-up) plus profit-sharing contributions.
Retirement & Tax-Advantaged Accounts
Annual Contribution Limits:
- $100,000 - $300,000+ per year (age and income dependent)
- Significantly higher than 401(k) limits
- Ideal for business owners 50+ with stable income
Example:
A 55-year-old professional earning $400,000/year could contribute $200,000+ annually, reducing taxable income by $200,000 and saving $70,000+ in taxes.
2024 Contribution Limits:
- 401(k): $23,000 ($30,500 age 50+)
- Roth IRA: $7,000 ($8,000 age 50+)
- Employer profit-sharing: Up to $69,000 total
Strategic Approach:
- • Max out 401(k) for immediate tax deduction
- • Backdoor Roth IRA for tax-free growth
- • Mega backdoor Roth for additional $46,000
- • Solo 401(k) for self-employed professionals
Investment Options:
- Rental properties (residential & commercial)
- Private lending & mortgage notes
- Real estate syndications & crowdfunding
- Tax liens and REITs
Key Benefit:
All rental income, capital gains, and appreciation grow tax-deferred (traditional IRA) or tax-free (Roth IRA). No taxes on property sales within the account.
How It Works:
- Refinance appreciated property to access equity
- Loan proceeds are NOT taxable income
- Interest may be tax-deductible
- Use funds for investments, business, or other properties
Real Example:
Property purchased for $500K, now worth $800K. Cash-out refinance at 75% LTV = $600K loan. Extract $100K tax-free (after paying off original loan) to invest in additional properties.
Frequently Asked Questions
Generally, when your net business income exceeds $60,000-$80,000 annually. At this level, the self-employment tax savings outweigh the additional administrative costs of running an S-Corp (payroll processing, tax filings, etc.).
Absolutely! The most effective approach combines S-Corp election, maximized retirement contributions, cost segregation on rental properties, and strategic cash-out refinancing. We help clients layer these strategies for maximum tax efficiency.
Loan proceeds are not considered income by the IRS because you have an obligation to repay them. This allows you to access your property's equity without triggering capital gains taxes, which would occur if you sold the property.
The IRS requires S-Corp owners who work in the business to pay themselves a "reasonable salary" comparable to what similar professionals earn. Typically 40-60% of net income is defensible, but this varies by industry and role. We work with CPAs to determine appropriate salary levels.
Yes! A self-directed IRA can purchase rental properties, and all rental income and appreciation grows tax-deferred (traditional IRA) or tax-free (Roth IRA). However, you cannot personally use the property, and there are specific rules about financing and prohibited transactions.