Additional Accounting Costs

By Jason Watson, CPA
Posted Sunday, October 29, 2023

Paying shareholders through payroll and filing a corporate tax return costs money- but with a potential 8% to 10% savings of net income, the benefits will exceed the costs especially if the net ordinary business income (profit) after expenses and deductions exceeds $48,000. This is net income after expenses (profit)- not gross revenue. So many business owners think in terms of gross income- we don’t care about gross income necessarily when contemplating an S corporation election, and the IRS doesn’t care about gross income when it comes to taxable income.

Since the cost of payroll services and corporate tax return preparation is relatively fixed, the more profit you earn the more you’ll save. Something to discuss and consider.

Quick Numbers: Let’s say $100,000 in net income saves you $9,000. WCG charges $4,320 ($360 per month) for business entity and individual tax returns, payroll and estimated taxes, income tax modeling and planning, and business consultation under our Vail Business Advisory Services plan. Therefore, a $100,000 S corporation saves you close to $5,000 after our fee, and we do all the work (and give you wonderful tax planning, the forgotten art of most accountants).

Here is a link to our transparent fee structure including our Business Advisory Service plans (a CPA firm who publishes fees?!)-

wcginc.com/fee

If you already have a partnership or multi-member LLC, and you file a partnership tax return (Form 1065) your break-even point is about half, or $20,000 based on the sunk cost of the business entity tax return preparation.

Sidebar: The savings illustrated here and throughout our book is per person. If you have a multi-member LLC with three partners, and the business has profits of $300,000 (as an example), an S Corp election could easily save the group $27,000 as a whole.

If you also run payroll within your business because you have a staff, then the annual cost of having an S Corp could be zero. So, now your $100,000 actually puts $8,000ish in your pocket (there are some other expenses like unemployment taxes, keep reading).

In other words, a large chunk of the $4,320 is business tax return preparation and payroll (about $2,700). Therefore, if you already pay for these services within your business then they are considered sunk costs when contemplating the S Corp election.

Sidebar: Consideration of sunk costs should be removed from decision making. One and done costs, like business formation and set up fees should be amortized over the projected life of the business. Yes, it is real money. Yes, it hurts especially all at once. Yes, the pain goes away with time. Just ask a Jets or Browns fan.

If you break-even on the fees as compared to your savings, keep in mind the additional benefits. With our business advisory service packages you are getting individual tax return preparation plus routine tax planning and consultation. There is value there, so if you break-even in terms of cost-benefit analysis, you might actually be ahead.

We are not considering the huge benefits from pass-through qualified business income tax deductions as outlined in Section 199A of the Tax Cuts & Jobs Act of 2017. At this point, in this chapter, one of our primary focuses is the delta between a non-S Corp and an S Corp. Real numbers and real examples used to be contained in this book, but are now parsed out to be a separate addendum.