Almost every business owner we work with lists paying too many taxes as one of the major problems they’d like to solve.
That’s because as you become more successful, more of your money goes to the government.
It’s frustrating to work so hard and then see all your money vanish in those quarterly tax payments.
At Wealth Factory, we’re all for paying our fair share of taxes. We just don’t think it’s necessary to leave a tip.
So we help our top clients find and implement quick tax-saving strategies while they are building a solid, comprehensive, and permanent tax-reduction strategy.
And one of the simplest strategies you can use immediately is how you pay yourself.
Now if you’ve been following Wealth Factory closely, you may already have this strategy dialed in.
However, many readers have written in asking for more explanation, so we thought it was valuable to clear up any confusion on this topic and make sure everyone has the information they need to use this powerful tax-saving strategy..
And if you already have this strategy in place, feel free to send us some of your own favorite tax strategies you’d like us to research and write about.
How you set up your business is key to lowering your tax burden…
And Garrett often talks about paying yourself partly in “dividends” to reduce your taxes.
Some people have asked questions about this…
Because not all CPAs use the same terminology.
To be clear, these “dividends” are not the same kind of taxable dividends a C-Corporation issues to its stockholders.
The “dividends” Garrett refers to in this case (e.g. in this popular Cash Flow presentation) are also called “S-Corp distributions.
Many CPAs call them dividends as an accurate description of how they function, and this is the simple terminology Garrett chooses to use most often.
Here’s How it Works
If your business is set up as an S-Corp, you can pay yourself either as an “employee” (W-2 income) or as a shareholder (i.e. “dividends” or “distributions”).
The IRS requires that you pay yourself a salary as an employee if you perform employee-like activity in your business. This pay must be “generally commensurate with your duties.”
This is what Garrett describes as working “in” your business.
You can also make distributions to yourself appropriate to your role in the S corporation as an owner/investor/shareholder. This is what Garrett refers to as “working on your business.”
The advantage is that you don’t have to pay FICA or self-employment tax on those distributions — only income tax (as it is passed through to you as an individual).
In the right circumstances, this can save small business owners thousands of dollars each year in reduced taxes.
You have to be careful, though. Tax courts have held that you can’t pay yourself with 100% owner distributions.
The key is to combine distributions and wages. Most people get into trouble because they just pick a number out of thin air which could easily be challenged in an audit.
The method Garrett teaches in the Cash Flow Optimization Guide gives you a verifiable breakdown to make your case before the IRS (in case you are ever audited).
This proven method objectively justifies the amount you take as an owner distribution vs. a salary and gives you confidence that you are following the letter of the law.
Excellent strategies and solid record-keeping like this are part of a comprehensive tax strategy that not only lowers your taxes automatically but also makes passing an audit a breeze.
What To Do Next
If you are a small business owner, there’s a 93% chance you are overpaying the government with your taxes.
So clearly, this is a critical issue to building your wealth. Today’s example is just one of many tax-lowering strategies you can use to keep more of the money that’s rightfully yours.
Here’s how to implement this tip and how to get more tax strategies:
- Consult with your business or tax attorney (or any other qualified member of your financial team) to see if you are set up as an S-Corp. Although it is the structure we most generally recommend, everyone’s circumstances are different, and your chosen business structure should be part of your overall Financial Blueprint and Wealth Strategy.
- If your business structure allows you to take some of your compensation as an owner distribution, consider using the technique Garrett describes in the Cash Flow Guide to differentiate your income.
- If you prefer to work with our team of financial experts 1-on-1 to build a comprehensive tax-reduction strategy, see if we’re the best fit for your personal financial situation right now.We’re thrilled to work with you in our elite FastTrack program if you qualify. But there may also be other options that will help you reach your financial goals as quickly as possible. So the best way to find out is to fill in your details and let us know where you’re at and what you want to accomplish.
Until next week…
Build the life you love,
The Builders at Wealth Factory
What is Living Wealthy Weekly?
Each week we share timely trends, news stories, and current events that affect your life. We help you see the impact, personally and socially, and give you possible solutions to avoid any negative effects. We also give you additional links and resources if you want to investigate further. The purpose is not to be the last word on any topic. Rather it’s to help us all stay informed of what’s going on in the world without letting those events negatively impact your lifestyle. Our goal is to help us all live richer, fuller lives from a position of financial strength. This allows you to weather economic hard times, and seize whatever new opportunities arise in our changing world.