Financial planning, in many ways, can be difficult to show someone because it’s personal to their own financial situation. That’s particularly true when it comes to tax planning, or figuring out how to save on taxes throughout the year.
But for those in private practice or who work for themselves, tax planning is such a key component to ensuring that you can keep more of your profits. This can lead to higher income, of course, but also allow you to better invest in the organization and reach your financial goals.
How you save on taxes will depend on many different things, like what type of business structure you have, how many expenses you face in a year, what type of business – solo or group practice – you own, and how much you save for retirement.
It’s also hard to comprehend how impactful such steps can have on a business and a family’s finances. And, if you don’t know what financial planning looks like, it may be hard to picture it.
This video helps to show this impact and gives a little insight into what the process looks like. It highlights how a private practitioner can use a certain tax tactic – the S-Corp opt-in – to save approximately $12,000 in taxes in a single year.
What could you do with an extra $1,000 a month?
Tax Strategy Explained
In the example, the reason that the tax fell was because of how you’re earmarking income or revenues that come into the business. A portion of the revenues gets paid out via salary to you. This portion, you’re paid 15.3% on the amount, to cover Social Security and Medicare.
But the S-Corp separates you out. You’re both employee and employer. As an employer, you can take additional profits and treat them like a return on your business investment. This gets taxed as income, but does not receive that 15.3% component to cover Social Security and Medicare. (Note: I initially mispoke in the video, when describing the tax rate on this income. It’s not capital gains taxes, but taxed as income tax.)
This reduction of the 15.3% on a large percentage of the income results in a reduction in the overall tax exposure, since as an employer, you’re not paying Social Security and Medicare tax on that portion of profits.
What Can Go Wrong?
There are downsides to S-Corp designs, like the cost to run the business. As a business you’re going to have to use a payroll system, which will cost money. You will also file a tax return for the business – which is usually above and beyond the cost of the personal tax return. And, you need to actually have profits in order to make it work.
It’s important to remember, though, this is just one tactic. There’s almost always other savings to find during the financial planning process.
And, really, that process will not begin until there’s a clear sense of where you are now, and where you want to go.
From there, we can find similar tactics so you can reach your goals and better help clients.
