Business Entity

[Guest]

Alright I've been in this 5 years now and tired of paying self emplyment tax. I know I can avoid it if I set up a proper entity.

So, do you have an entity and do you pay self-employment tax? What type of entity? S-Corp?

 

[Crabcake Johnny]

As the owner you can never avoid the tax. When you work for an employer he pays half and you pay the other half. When you run your own business you pay the entire amount. If you're a sole proprietor you pay twice. If you incorporate then "you" pay half and "the business" pays the other half. Well, the business is you. So you can't avoid it.

Regarding taxes, when you're a sole proprietor you're taxed on your 1099s minus expenses. In theory when you have a business structure you can cut yourself a paycheck for say $1,500 a week if you're making $2,000 a week and avoid paying taxes on the other $500 a week. In reality that $500 per week you're not paying in income tax on must stay in your business account. The second you withdraw it and it's not expense related you pay income taxes on it.

Can't beat the system.

 

[moonlightandmargaritas]

True, it flows through to income, but there is no payroll tax (i.e. social security) on it. Can be substantial savings if you're making alot of $$$$.

 

[Crabcake Johnny]

If the corporate tax rate is less then your current tax rate. And that depends on how much you're making. For 99.5% of all agents they save nothing by incorporating. If you're really crushing it and making sick money you can indeed save on taxes if you incorporate.

 

[Larry Tew]

You probably want to consult a business tax accountant before making a final decision. (now... let's see who notices)

 

[sman]

You probably want to consult a business tax accountant before making a final decision. (now... let's see who notices)

Holy crap Larry. Reaching deep into the archives.

 

[Agent Ben]

An S-corp could work for most agents. Depends on what your CPA thinks. You could pay yourself a modest salary that you owe payroll/self-employment taxes on. The rest can be paid as dividend distributions that you only pay income taxes on.

The trick is figuring out what is considered a "reasonable" salary by the IRS. Some guys say its half your total income. Others say it has to be what is the average for an agent in your area. Others are more adventurous and do things like minimum wage or hourly wage at a low amount. If you get audited, its up to the IRA agent to accept your interpretation of the tax law.

 

[Larry Tew]

Holy crap Larry. Reaching deep into the archives.

You get the prize. I wondered how long it would take for someone to realize this thread died almost 7 years ago.

 

[xrac]

An S-corp could work for most agents. Depends on what your CPA thinks. You could pay yourself a modest salary that you owe payroll/self-employment taxes on. The rest can be paid as dividend distributions that you only pay income taxes on.

The trick is figuring out what is considered a "reasonable" salary by the IRS. Some guys say its half your total income. Others say it has to be what is the average for an agent in your area. Others are more adventurous and do things like minimum wage or hourly wage at a low amount. If you get audited, its up to the IRA agent to accept your interpretation of the tax law.

Ben is correct on the S-corp. And yes an old thread was revived.

 

[sman]

You get the prize. I wondered how long it would take for someone to realize this thread died almost 7 years ago.

Awesome! What's the prize?