Dave Ramsey needs your help!
By Nick Paleveda MBA J.D. LL.M
National Pension Partners
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.
Let's say the caller made $100,000. He could potentially pay himself $50,000, distribute $50,000 and save $7,500 in payroll taxes. In almost every case, the caller would benefit by establishing a company and making an S election, unless he made $1,000 or less. In that case, it's debatable whether he should even be in business.
On to Denver
After leaving Las Vegas, I went on to Denver to speak at the office of the largest CPA firm in Colorado. The financial planner I met with mentioned all the mistakes Ramsey made, then added, "But he's just an entertainer." That's correct, Ramsey is just an entertainer. However, the financial planner, who has a large following, also said he is writing a book on all the Ramsey mistakes. He said it's going to be a big book.
Don't take tax advice from an entertainer. The poor soul on the radio who thanked Ramsey for his advice will lose tens of thousands of dollars each year if he follows it. Enough to pay for a whole life policy.