Deven L. Munns, Esq.
New York City has a lot to offer when it comes to world-class entertainment, dining, and sightseeing: Rockefeller Center, the Museum of Natural History, the Brooklyn Bridge, Time Square, and Broadway! However, unbeknownst to visitors to this preeminent metropolis, beneath its bustling streets lays a deep, dark secret that continuously haunts small business owners. What is this secret? The city that never sleeps taxes S-Corporations like C-Corporations.
Our firm has been raving about S-Corporations for decades as the supreme entity for all active income to pass through. Then, in 2018, the self-employment tax savings in an S-Corp got even better!
Some say we are giving this cherubic sentinel of tax savings a lot of hype, but it most often lives up to it. The S-Corp is our number one tax savings strategy and often results in thousands to tens of thousands in tax savings.
Here is an example:
Take an optometrist with her own small clinic on main street America. She is pulling in $250k in revenue in her clinic and another $200k/year in glasses frames and contact sales. After paying rent, payroll, cost of goods sold and other expenses, she is left with $150k in net income from her small business.
If this optometrist ran her business as an LLC taxed as a sole prop, she would be paying nearly $21,000 in Self Employment taxes. Alternatively, in an S-Corp with a reasonable salary of $60k, she would pay just over $9,000.
Of course, there are other factors, which come into play. A reduced Qualified Business Income deduction, for example, will reduce the $12k in savings, but she would likely be well over $9k in savings after factoring that in. This tax savings reduces her overall effective tax rate (including Self Employment tax) by 6%!
With that much in savings, I think we were right to be big on the S-Corp!
So what does this mean for New Yorkers?
Who is Affected?
This assessment on S-Corporations only affects businesses whose partners are residents of New York City, OR do business, employ capital, own or lease property, or maintain an office in New York City (including the five boroughs). Therefore, if you don’t fall into this category, you are off the hook!
How is the Tax Calculated?
New York City has a General Corporation Tax on all S-corporations. The tax is calculated in four ways, and S-Corps have to use whatever method results in the largest amount of tax.
Method 1: 8.85% on all net income sourced within the five boroughs.
Method 2: 0.15% of business and investment capital allocated to New York City.
Method 3: 8.85% of 15% of net income plus the number of salaries or other compensation paid to any person, including an officer, who owned more than 5% of the corporation’s capital stock.
Method 4: A receipts tax graduating from a $25 tax on $100k, up to $5,000 on $25M in receipts.
What is the Strategy?
With these different methods of calculating the tax, there is no real way around it except not to do business in NYC. You can’t just pay officers with high salaries a lower net income, or you may have to attribute their salaries to business income. Additionally, a high salary for an owner negates the benefits received on Federal taxes, so that’s no good. You can plug in various salaries and determine which salary at your net income level gets you the best overall result. Let’s do that for our Optometrist, assuming no investment capital is involved.
|Salary||Method 1||Method 2||Method 3||Method 4||Highest Tax|
|$ 60,000.00||$ 7,965.00||$ –||$ 1,991.25||$ 75.00||$ 7,965.00|
|$ 80,000.00||$ 6,195.00||$ –||$ 1,991.25||$ 75.00||$ 6,195.00|
|$ 100,000.00||$ 4,425.00||$ –||$ 1,991.25||$ 75.00||$ 4,425.00|
|$ 120,000.00||$ 2,655.00||$ –||$ 1,991.25||$ 75.00||$ 2,655.00|
|$ 125,000.00||$ 2,212.50||$ –||$ 1,991.25||$ 75.00||$ 2,212.50|
|$ 130,000.00||$ 1,770.00||$ –||$ 1,991.25||$ 75.00||$ 1,991.25|
So, to pay the smallest General Corporations Tax, our Optometrist would want to take a salary of over $125,000. But, how does this affect her Federal Self-Employment taxes? By paying a $125,000 salary, her QBI deduction would get reduced to $5,000 and she would be paying almost as much self-employment taxes as with the LLC. Let’s do some math there, assuming a 24% federal income tax rate.
|Salary||SE Tax||SE Tax + NYC GCT|
|$ 60,000.00||$ 9,180.00||$ 17,145.00|
|$ 80,000.00||$ 12,240.00||$ 18,435.00|
|$ 100,000.00||$ 15,300.00||$ 19,725.00|
|$ 120,000.00||$ 18,360.00||$ 21,015.00|
|$ 125,000.00||$ 19,125.00||$ 21,337.50|
|$ 130,000.00||$ 19,890.00||$ 21,881.25|