Most Clearwater-area businesses seek the services of a Clearwater accounting firm to file their tax returns accurately and efficiently. FMA, C.P.A goes beyond this by providing business advisory services that improve the business’s cash flow and further reduce the business owner’s tax burden.
One example is a doctor who was referred to FMA, C.P.A.
The doctor’s practice was doing very well. Because it was doing so well, the doctor’s long-time accountant (not FMA, C.P.A.) had advised the doctor to take as large a salary as possible – $400,000 a year. The accountant reasoned that he was worth that much. After paying the doctor’s salary, the practice ended up with very little profit – less than $10,000.
What was the problem with this advice?
For a business owner, salary is the least tax-efficient form of compensation. This is because not only is salary subject to federal income tax, but it is also subject to Medicare and Social Security taxes. The business pays 7.65% and the employee also pays 7.65%. Since a business owner is both business owner and employee, they are effectively paying 15.3% of their salary in Medicare and Social Security taxes.
On the other hand, a business owner is allowed to issue themselves a distribution of profits which is subject to federal income tax but not subject to Medicare and Social Security taxes.
Therefore, the doctor had the opportunity to reduce his tax burden by lowering his salary, increasing the profitability of the business, and then issuing himself a distribution of that profit.
Experience and Expertise are the Keys
Now, if you’re a business owner, don’t go off and cut your salary to zero and make your entire compensation a distribution.
The IRS requires business owners to take a “reasonable salary.” The IRS, however, does not define what a “reasonable salary” is.
This is where experience and expertise is important.
Pay yourself too high a salary, and you will end up paying more in taxes than is necessary. Pay yourself too low a salary, and you could be hearing from the IRS.
Saving $5,000 in Taxes
When the doctor came to FMA, C.P.A., we reviewed his books, and we advised him to reduce his salary to $250,000 a year. This enabled him to save $5,000 on his yearly taxes.
If you are looking for an accountant in Clearwater, Largo, Dunedin, Oldsmar, Lutz or Land O’ Lakes, that will not just file your taxes but also reduce your tax bill, contact FMA, C.P.A. to schedule a free consultation.