Lessons in Las Vegas
I was in Las Vegas on April 29th, 2014 at about 8 p.m. and had to charge my cell phone in the the car, as I had left my cell phone charger in Seattle. I was in Vegas as one of the speakers for the NIPA conference, the National Institute of Pension Administrators — a good group of actuaries and attorneys which is headquartered in Chicago.
Dave Ramsey speaks
Since I had to charge my phone, I decided I may as well listen to the radio — and on the radio was Dave Ramsey. I had heard of him through Rodney Ballance, and I knew that he irritated many financial planners. So, since I had nothing to do, I figured I may as well listen to him for the first time and see what he had to say.
The show started out pretty well, cautioning people about debt. Debt for cars — no good. Debt for student loans — no good. Debt for buying a house — no good. Whether you agree with him or not, his message about staying out of debt is generally a good one. How most people will pay cash for a house was unclear, but whatever. Then someone called in who had his own business and wanted to know if he should incorporate. The answer: "No. Unless you are concerned about being sued, there are no good tax benefits to setting up a company." Silence. Surely he hadn't said it. Then he repeated it. The caller thanked him and hung up. I fell out of my chair.
Dave Ramsey's blunder
In the world of tax planning, the establishment of a company in order to lower your taxes if you are self employed is really basic and simple. The cost of obtaining a corporate charter is about $200, but varies from state to state. Let's say the caller earned $20,000 in his business, created a corporation and filed an S election. The caller could potentially pay himself a salary of $10,000 and distribute $10,000 on a K-1, save the Social Security and Medicare tax, and pocket $1,530.
Let's say the caller made $50,000 gross. He could potentially pay himself $30,000, distribute $20,000 as a K-1 and save himself $3,060 in payroll taxes.
