Tax Reduction Podcast

Episode 40. S-Corporation Distributions vs. W-2 Salary

• Boris Musheyev • Episode 40

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If your accountant is telling you to max out your W-2 salary and avoid distributions, they're literally costing you thousands in unnecessary taxes.

In this podcast I’m breaking down why taking high S Corporation distributions compared to your W-2 salary is the smartest tax planning move for business owners in 2025. Most CPAs and tax preparers get this backwards, telling you to increase W-2 wages while avoiding S Corporations distributions entirely.

The REAL reason S Corporations exist (hint: it's to REDUCE self-employment tax and payroll taxes, not increase your W-2 salary). I break down S Corp taxation, pass-through entity taxation, how to avoid double taxation, and why maximizing W-2 wages destroys your tax savings.

I share a real client example where his accountant told him to take everything as W-2 salary. This terrible advice would've cost him the Pass-Through Entity Tax (PTET) deduction, state tax deductions, and tens of thousands in unnecessary taxes, Social Security tax, and Medicare tax.

We also cover the additional tax strategies you can use when you structure your S-Corporation distributions properly. You can open doors to tax deductions your high W-2 salary is currently blocking. Plus, I'll tell you exactly what to do before year-end so you can start saving money on taxes immediately. No more overpaying because someone gave you backwards advice about W-2 vs distributions.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/?el=podcast&htrafficsource=buzzsprout

Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/?el=podcast&htrafficsource=buzzsprout

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this ...

Speaker 1:

A lot of business owners, their accountant tells them to increase their W-2 by a lot higher and leave nothing for distribution as an S-corporation. It should be the other way around. Now, why is it a problem? Ptet is one of the best tax strategies for S-corporation business owners. It changes how you pay your tax. If you are a business owner watching this, ask your accountant, are you doing PTET for me? And a lot of accountants will tell you oh, you don't need it, it doesn't apply to you. Complete, complete, complete BS. Ladies and gentlemen, speak to your accountant and be like hey, what is my W-2 salary at my S-corporation? Can I lower it? And you're not only lowering it for the sake of Medicare tax savings or social security tax savings, but it's also for the sake of unlocking these additional tax strategies. That's why, if you don't have a tax advisor, ladies and gentlemen, I'm telling you right now, and I guarantee you, you are overpaying in taxes, because these are simple things that you can do in your business, literally within 30 days, to start saving money on taxes.

Speaker 2:

Welcome to the Tax Reduction Podcast for money-making entrepreneurs with Boris Mushaev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

It is okay to take out very high S-corporation distributions compared to your W-2 salary.

Speaker 1:

A lot of business owners that when they come to work with us for tax advisory, I notice that their accountant tells them to increase their W-2 by a lot higher and leave nothing for distribution as an S-corporation. It should be the other way around. So I'm going to show you exactly how to do that and that it is okay to take out S-corporation distribution versus W-2. And actually, when you do do that, what happens is that you unlock for yourself additional tax strategy. So I'm going to give you an example how a client of mine had a 1.3 million dollar net profit. His accountant said take everything out as a W-2. He would have missed out on a PTET and you as a business owner, additionally, would have missed out on a qualified business income deduction. So I'm going to break down the entire thing for you so that you can actually know what do you need to do by the end of the year how much distribution to take, how much W-2 to take, and start saving money on taxes. Now let's kind of walk through this tax strategy about the S-corporation distribution. The reason I wanted to do this is that in the past couple of months I started getting clients in our tax advisory firm that their accountant tells them I started getting clients in our tax advisory firm that their accountant tells them don't take out distribution, increase your W-2, because they're saying you're going to pay tax on that. I've got a case study that I'm going to show you.

Speaker 1:

Now, before we get into the case study, I want to spend one minute. One minute explaining the concept of an S-corporation. So if you are that business owner, and especially if you have pretty good, high net profit in an S-corporation, you need to know that S-corporation is a pass-through entity. Okay, it was designed for the purposes of small business owners so that you do not have to pay dividend taxes, taxes on your distribution, so there is no double taxation. So, for example, how does double taxation work? In a regular C-corporation, if you had a net profit, you would pay tax on the net profit, but also when you take the money out as distribution, you would pay taxes on it. With an S corporation it's different. The entire income gets passed through to your personal tax return. That means there is no double taxation if you take the money out as a distribution from your net profit. So it is okay for you to reduce down your salary. That is why S-Corporation was designed. There is no dividends. These are just distributions that are tax-free from the double taxation because it gets passed through on a personal tax return anyways.

Speaker 1:

So now that we've got that clear, let me walk you through an example and show you how you can unlock additional tax strategies by reducing down your salary. So actually I got a client happens to be a dentist here in New York. His net profit for 2024 was $1.3 million. His accountant before he came to work with us for his tax advisory services said take out the entire thing on a W-2, $1.3 million, leaving him with a zero taxable S-corporation profit. So that means there will be nothing passed through to this client's personal taxes. Everything will be on a W-2.

Speaker 1:

Now why is that a problem? First of all, when you're a W-2 and take the money out and you pay yourself on a W-2, you pay self-employment taxes, you pay tax on a social security and Medicare as an employer and as an employee. So on a $1.3 million it's $69,000 in payroll taxes, $21,000 is social security taxes and $37,000 is Medicare taxes. So that's the problem number one. That is the main reason why a lot of S-corporation businesses become S-corporation because they want to reduce down their W-2, so they don't pay the Medicare tax. But what a lot of people don't realize, and what a lot of accountants don't realize to do for their clients, is that when you actually reduce down the salary, you unlock additional tax strategies. That's why if you've got, especially if you have a million dollar S corporation business, you do need to get yourself a tax advisor. You don't have a tax advisor, ladies and gentlemen. I'm telling you right now, and I guarantee you, you are overpaying in taxes because these are simple things that you can do in your business literally within 30 days to fix it.

Speaker 1:

So let me walk you through this example. So I did a reasonable compensation for this dentist. Okay, so he's a client. This could work for any S corporation, it's just in my example it happens to be a dentist. So we did his reasonable compensation, we ran the reports, we did the interview, we did everything that we needed and I came up with a number that basically fits what he does, which is $360,000. That is because his social security tax is going to stay unchanged, but his Medicare tax is now going to be $10,000, which is less than $37,000.

Speaker 1:

So now, right off the bat. By lowering down salary, he saved $27,000. The entire 930, excuse me, $940,000. Yes, you can take it out as a distribution. He's like Boris, it's not possible, is it true? I'm like absolutely, and he's not the only client that said that. I'm like yes, if you have $940,000 left as your net profit in your S-corporation and you already paid yourself a reasonable compensation, you can absolutely pay yourself $940 as a distribution. He's like Boris, I can just like transfer a check. Yes, you can transfer, wire transfer. Write a check, do Zelle. However, whatever works for you, okay, and you can do this on a monthly basis, whatever works for you, okay. So we have unlocked that.

Speaker 1:

And he was like very surprised and I said look, this is what the S corporation is. We, we followed the law. You have a pretty high, reasonable compensation. Now, a lot of people may even argue that this is too high. Well, there are other strategies that we're using for him. Why we wanted it to be this high. But based on the fact what he does in his business in New York State, this came out to be a reasonable compensation. I was happy with it, he was happy with it, and now we moved on. Okay, now that you understand the difference. What's how this is? Okay, let's talk about additional tax strategies and we'll be right. We'll be back right after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner Seven tax write-offs every S-corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

All right, now that we are back, let's talk about PTET. What is a PTET? Ptet is a pass-through entity taxation. Ptet is one of the best tax strategies for S-corporation business owners because when you pay your state income taxes, you have a limitation. With the big beautiful bill, that limitation went up to $40,000, but you also have property taxes. You also have local taxes. Any taxes that are capped by the limitation okay can now be deducted as a business expense.

Speaker 1:

So in this scenario for 2024, he was paying a lot of state income taxes on a W-2, which was capped right. So he's in the state of New York. His state tax was $130,000. He could not deduct $130,000. He was only able to deduct $10,000. So, because he now has a profit, we said you know what You're going to pay, what's called pass-through entity taxation.

Speaker 1:

Because pass-through entity taxation, it changes how you pay your tax. Instead of paying a personal income tax, we start paying a business income tax. So no more personal income tax, because he's going to get a credit for it, and now there is a business income tax. Why does it make a difference? Because the business income tax is a business expense, because it's paid on the state level and this becomes tax deduction. So remember the $940,000 that we had for this client. Well, guess what? The $940,000, it was subject to 10% PTET tax. That is $94,000 and that saved him $33,000 on taxes. So $27,000 on Medicare taxes plus we've got $33,000 on PTET taxes.

Speaker 1:

So if you are a business owner watching this, you are in a similar situation, or your net profit is $800,000, whatever that may be, just know. And if you're already doing the W-2 salary for yourself and it's reasonable, and you're like Boris, my W-2 is solid ask your accountant, are you doing PTET for me? And a lot of accountants will tell you oh, you don't need it, it doesn't apply to you. Complete, complete, complete BS. Okay, every business owner. It applies to every business owner, especially if you're taking a standard deduction. All right, it works even better. So, ladies and gentlemen, speak to your accountant about that.

Speaker 1:

Now the second tax strategy that is being unlocked is qualified business income tax deduction. It did not unlock for my client because he's a dentist and dentists are what's considered specified service, trade or business. You don't get the QBI if you're over certain income thresholds. Now this usually applies to medical professionals, accountants and attorneys. So if you are in that category, this doesn't get unlocked for you if your income is in this range. But if you're not in that category, well guess what?

Speaker 1:

We have what's called a qualified business income deduction, which is 20%. It's 20% lower of your taxable income or business profits. Usually, business profits are lower than your taxable income because you've got W-2 and other sources of income. So, for this example, if this is you, we'll take $940,000, multiply that by 20%. This is literally a free gift from the IRS. 20%. That gives you $188,000 deduction, which will save you $66,000.

Speaker 1:

So if my client was not an SSTB, this is another thing that I would have triggered for him, bringing total savings to $126,000.

Speaker 1:

In his case, though, it was only $60,000, because the $66,000 doesn't apply to him, because IRS apparently thinks that doctors, attorneys and accountants are very, very rich people, and when you start making over a certain threshold I think 400,000 and change, you don't get the QBI deduction. Well, that's government's opinion and that's what happens here. But in your case, if you are that business owner, that is not an SSTB, which is even more amazing. So you've got to work with your tax advisor. Be like hey, what is my W-2 salary on my S-corporation? Can I lower it? And you're not only lowering it for the sake of Medicare tax savings, for the sake of Social Security tax savings, but it's also for the sake of unlocking these additional tax strategies. And again, ladies and gentlemen, it is totally okay if you take out S-Corporation distributions that are a lot higher than what you pay yourself on a W-2, because that is the purpose of the S corporation. I hope this was helpful. Thank you so much for watching and until the next time.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.