I have a sole proprietorship but I am exploring the tax implications of converting to an S-Corp.
When determining the business profit (paid as a distribution or corporate dividend), would I exclude all payroll taxes (FICA/FUTA), employee income, and employer 401k matches before determining federal tax liability?
Let's say for example, my business has a revenue of $120,000 with $20,000 in business expenses. I pay myself $50,000 as its employee plus $3,825 (7.65% of $50,000) in employer FICA and $420 (6% of $7,000) in FUTA. I also provide an employer match to my Solo 401k of $12,500.
Am I correct in calculating my federal tax liability as follows?
Business Revenue: $120,000
Business Expenses: (-$20,000)
Salary: (-$50,000)
Employer FICA/FUTA: (-$4,245)
Employer 401k Contribution: (-$12,500)
Business Profit: $120,000 - $20,000 - $50,000 - $4,245 - $12,500 = $33,255
FEDERAL TAX LIABILITY: $33,255 (business profit) + $50,000 (salary) = $83,255 (less standard/itemized deduction)
