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It’s no secret athletes pay a lot of taxes. With multiple income streams and most states looking to increase their tax dollars, athletes become easy targets under current tax rules. However, with high earnings comes the opportunity for great tax planning. Let’s look at how incorporating can help keep more money out of the hands of the IRS.
The Bottom Line
Incorporating a business for revenue streams outside of sports is a great way to protect your net worth and reduce taxes. Whether you choose an S Corp or a C Corp, the most important aspect is creating a winning game plan and sticking with it. Through advice and planning from MBMG, Inc. you will be well on your way to securing your financial future for you and your family.
Setting up a Limited Liability Company (LLC) is a great way to protect different revenue streams in case of a lawsuit. Structured correctly, the limited liability protects much of your net worth from creditors or lawsuits from other businesses. For example, if you invest in real estate through an LLC and the tenants were to sue, income and assets from other investments outside of the LLC would not be used to settle the lawsuit.
Since an LLC isn’t a corporation it has to choose how it will be taxed. LLC’s can be taxed as an S corporation or a partnership, both of which are not taxed. The income earned in these entities would be taxed on your personal return each year. The upside to an S corp is you don’t pay self-employment tax on earnings. You would have to take a reasonable salary as an employee, but the remaining earnings are not taxed at an additional 15.3% for self-employment. Sponsorships, speaking arrangements, and any income earned outside of your sport would go through the S corp lowering your tax bill.
S Corps do have their limitations since you would have to take a reasonable salary and the earnings are still taxed each year. Since your income will most likely put you in the highest tax bracket each year, it makes sense to consider setting up a C corp. While your tax rate would be 32-37%, a C Corp would be taxed at just 20%. Also, C Corps don’t require a reasonable salary each year since all earnings are taxed, but the dividends taken out would be taxable too. Finally, if you hold off on taking dividends until once you retire, your tax bracket will most likely be much lower.