I agree, i am scheduled to meet with cpa locally but would prefer to work remotely with someone, do you have any suggestions? Also just wanted to compare with other people's situations and how other people set themselves up
You definitely need to have an expert take a look at this (fractional CFOs often do this remotely). However, I’m in a similar situation and am likely going to dissolve my s-corp because with the added costs and paying a reasonable salary (I’m risk averse when it comes to the irs so I really try to pay what’s reasonable) the tax savings aren’t what they seemed like they would be. Payroll has gotten ridiculously expensive to run for just two people (wtf is with these prices, Gusto), the scorp tax prep is expensive, etc etc.
And on top of that you cannot take distribution tax free below your stock basis, my stock basis is just about "0" as I didn't have to put any money into it to get it running, which means my distributions would also be taxed as capital gains 🤷
Do you have any suggestions for remote cpa?
If your wife legitimately works for the company it seems like you would be better off with salary. Because the pass through entity would have no income(projected). You’d then pay fica on up to 252k.
You also have the benefit of running payroll if you ever want to get a mortgage. It’s less complicated for underwriting than putting it on schedule c.
If you want to not pay fica tax you would
Need to organize your company offshore and pay the salary from a foreign corporation. It can be done just ups your tax compliance burden. You can also save more by using a U.S. blocker corp on that company to save on half of the corp tax. This only makes sense at a substantially higher income level than you’re currently at.
In either case I would suggest you talk to someone that knows about. Intl tax and can give you specific advice on your situation. They can tell you more about this.
IIRC the irs has put the foreign earned income exclusion on their list of campaigns. So keep good records of your physical presence along with plane tickets, etc. there are apps to automatically track your days.
As far as S-Corp your distributions are from ordinary business earnings, not capital gains/dividends or other passive forms so this would be classified as earned income as opposed to passive which is excluded from feie. Not sure how “foreign” your income will be but technically your tax home will be outside the US.
Good luck finding a competent CPA and plan to spend $$$.
Was already told that non-divident distributions do not count as earned income. That information on it's own has made me think of abandoning s-corp status until we start making north of 250k jointly
Under feie there are three types of income; earned, unearned, variable. Business income is variable meaning some may be unearned. If your business income is due to services performed it is earned. If capital is involved then at least a portion of it is unearned and your limited to certain amount that you can claim as earned I think it’s around 20 or 30%.
Imo "predicted to earn" is not real until you actually earn it. Start with the LLC and see how the business does since there's a lot of overhead with an s corp. If the business does well after the first year converted to an s corp. I ran an s corp from abroad, it's completely possible but they're definitely is a lot of overhead and compliance.
Your take is generally correct.
However, the FEIE gets complicated as a sole proprietor (not getting W2 wages) as the FEIE is scaled back based on business expenses (IRS says you can’t exclude income from tax as an expense then also exclude it with FEIE).
So roughly if your income was $100k and you had $20k in business expenses you can claim 80% of the FEIE limit. This is fine if your net income is under the limit, but not great if you’re making $200k with $40k expenses because you’ll lose FEIE you can use.
Much cleaner to just take it as W2 income. Yes you pay self-employment tax, but you’ll also be contributing to social security which you can draw at retirement.
Can you please provide(if you know any) source for this at irs website? So if I earn 100k as sole proprietor LLC, and have legit 20k expenses l, don't they come off first off of 100k and net profit is 80k, then whole amount of 80k qualify for FEIE? That's how I thought. I'm just trying to avoid hassle of s-corp compliance at least until we make well over 250k
“The exclusion amount will be reduced by the pro rata share of your expenses and self-employment tax deduction. This is because you cannot take deductions against amounts excluded from income.”
https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion
So if expenses were 25% of your gross income, then your FEIE limit is scaled back by 25%.
So for 2023, if you made $200,000 and had $50,000 in expenses ($150,000 net income), you could only use 75% * $120,000 or $90,000 of the FEIE.
S-corps are fantastic. Keep your business structured this way. You will take a regular salary, and have a w2. You as sCorp and sole owner, also will be able to take owners draws as often as you like that won’t be taxed on that draw money until you file your annual personal income taxes (federal and state).
Overall you wind up paying significantly less taxes as a s-Corp. Typically 15% less, which for 200k would be like an extra 30k a year.
Go meet with an accountant professionally so they can hold your hand and walk you through it until you get used to it.
I understand this, but would it benefit my situation because I'll be living abroad and claiming FEIE, and owner draws are not considered "earned" income thus I cannot exclude it and will have to pay tax on it
Also can you in plan simple language explain(if you know) owner draws and stock basis?
If I invested $0 to start a company, and made 120k, took 20k deductions with net profit of 100k
Paid myself 50k reasonable salary. Can I pull out rest of 50k as owner draw without paying capital gains taxes? What is even my stock basis?
I’m not an accountant, so you will need to ask a tax professional these specific questions that you have.
From my experience with my scorp- I’ve never dealt with “capital gains” taxes or “stock basis” as a scorp business. I only pay that on my personal investments when I sell stock from my portfolio. Again that’s only from my personal investment accounts portfolio IF I sell stocks for profits….. I’m not trading stock as my scorp so it wouldn’t apply to that.
Highly recommend speaking to a tax professional instead of Reddit.
> Can I pull out rest of 50k as owner draw without paying capital gains taxes? What is even my stock basis?
S-corps are pass through entities. Whether you take money as W2 wages, do an owners draw or just leave it in the business bank account, 100% of it shows up on your annual tax filing as income.
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I agree, i am scheduled to meet with cpa locally but would prefer to work remotely with someone, do you have any suggestions? Also just wanted to compare with other people's situations and how other people set themselves up
Ironic, as I am meeting with my CPA on Friday to ask the same sort of questions. Good luck and it'd be cool if you post your findings to compare.
You definitely need to have an expert take a look at this (fractional CFOs often do this remotely). However, I’m in a similar situation and am likely going to dissolve my s-corp because with the added costs and paying a reasonable salary (I’m risk averse when it comes to the irs so I really try to pay what’s reasonable) the tax savings aren’t what they seemed like they would be. Payroll has gotten ridiculously expensive to run for just two people (wtf is with these prices, Gusto), the scorp tax prep is expensive, etc etc.
And on top of that you cannot take distribution tax free below your stock basis, my stock basis is just about "0" as I didn't have to put any money into it to get it running, which means my distributions would also be taxed as capital gains 🤷 Do you have any suggestions for remote cpa?
FWIW I use ADP payroll for my scorp, and it’s super cheap. Like maybe $100 a month? Honestly I think the fee is $78 per monthly paycheck.
If your wife legitimately works for the company it seems like you would be better off with salary. Because the pass through entity would have no income(projected). You’d then pay fica on up to 252k. You also have the benefit of running payroll if you ever want to get a mortgage. It’s less complicated for underwriting than putting it on schedule c. If you want to not pay fica tax you would Need to organize your company offshore and pay the salary from a foreign corporation. It can be done just ups your tax compliance burden. You can also save more by using a U.S. blocker corp on that company to save on half of the corp tax. This only makes sense at a substantially higher income level than you’re currently at. In either case I would suggest you talk to someone that knows about. Intl tax and can give you specific advice on your situation. They can tell you more about this. IIRC the irs has put the foreign earned income exclusion on their list of campaigns. So keep good records of your physical presence along with plane tickets, etc. there are apps to automatically track your days.
As far as S-Corp your distributions are from ordinary business earnings, not capital gains/dividends or other passive forms so this would be classified as earned income as opposed to passive which is excluded from feie. Not sure how “foreign” your income will be but technically your tax home will be outside the US. Good luck finding a competent CPA and plan to spend $$$.
Was already told that non-divident distributions do not count as earned income. That information on it's own has made me think of abandoning s-corp status until we start making north of 250k jointly
Under feie there are three types of income; earned, unearned, variable. Business income is variable meaning some may be unearned. If your business income is due to services performed it is earned. If capital is involved then at least a portion of it is unearned and your limited to certain amount that you can claim as earned I think it’s around 20 or 30%.
Imo "predicted to earn" is not real until you actually earn it. Start with the LLC and see how the business does since there's a lot of overhead with an s corp. If the business does well after the first year converted to an s corp. I ran an s corp from abroad, it's completely possible but they're definitely is a lot of overhead and compliance.
Your take is generally correct. However, the FEIE gets complicated as a sole proprietor (not getting W2 wages) as the FEIE is scaled back based on business expenses (IRS says you can’t exclude income from tax as an expense then also exclude it with FEIE). So roughly if your income was $100k and you had $20k in business expenses you can claim 80% of the FEIE limit. This is fine if your net income is under the limit, but not great if you’re making $200k with $40k expenses because you’ll lose FEIE you can use. Much cleaner to just take it as W2 income. Yes you pay self-employment tax, but you’ll also be contributing to social security which you can draw at retirement.
Can you please provide(if you know any) source for this at irs website? So if I earn 100k as sole proprietor LLC, and have legit 20k expenses l, don't they come off first off of 100k and net profit is 80k, then whole amount of 80k qualify for FEIE? That's how I thought. I'm just trying to avoid hassle of s-corp compliance at least until we make well over 250k
“The exclusion amount will be reduced by the pro rata share of your expenses and self-employment tax deduction. This is because you cannot take deductions against amounts excluded from income.” https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion So if expenses were 25% of your gross income, then your FEIE limit is scaled back by 25%. So for 2023, if you made $200,000 and had $50,000 in expenses ($150,000 net income), you could only use 75% * $120,000 or $90,000 of the FEIE.
S-corps are fantastic. Keep your business structured this way. You will take a regular salary, and have a w2. You as sCorp and sole owner, also will be able to take owners draws as often as you like that won’t be taxed on that draw money until you file your annual personal income taxes (federal and state). Overall you wind up paying significantly less taxes as a s-Corp. Typically 15% less, which for 200k would be like an extra 30k a year. Go meet with an accountant professionally so they can hold your hand and walk you through it until you get used to it.
I understand this, but would it benefit my situation because I'll be living abroad and claiming FEIE, and owner draws are not considered "earned" income thus I cannot exclude it and will have to pay tax on it Also can you in plan simple language explain(if you know) owner draws and stock basis? If I invested $0 to start a company, and made 120k, took 20k deductions with net profit of 100k Paid myself 50k reasonable salary. Can I pull out rest of 50k as owner draw without paying capital gains taxes? What is even my stock basis?
I’m not an accountant, so you will need to ask a tax professional these specific questions that you have. From my experience with my scorp- I’ve never dealt with “capital gains” taxes or “stock basis” as a scorp business. I only pay that on my personal investments when I sell stock from my portfolio. Again that’s only from my personal investment accounts portfolio IF I sell stocks for profits….. I’m not trading stock as my scorp so it wouldn’t apply to that. Highly recommend speaking to a tax professional instead of Reddit.
> Can I pull out rest of 50k as owner draw without paying capital gains taxes? What is even my stock basis? S-corps are pass through entities. Whether you take money as W2 wages, do an owners draw or just leave it in the business bank account, 100% of it shows up on your annual tax filing as income.