tax planning

You are employed by a publicly traded corp. where you make $60,000.00 per year. You also about to start your own business, while maintaining you
other job. You have been advised that you can act as a sole proprietorship or create your own S Corporation. You were told that S Corporation are good only because even though you will make $110,000.00 net profit, you only have to pay $50,000.00 of that out as reasonable wages to yourself for services rendered. The rest flows through payroll-tax free as an S Corporation distribution. Looking only at the payroll taxes, the excess FICA credit and self employment taxes only.analyze which structure would result in lower taxes.
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You don't ever want to make decisions based solely on tax issues. You should look at overall costs/benefits. What type of side business are you performing? Because that may make a difference on what someone recommends as an entity structure.
Sole-proprietor may make sense here, again, based not entirely on tax issues, but on a reduced cost (Schedule C is much less expensive and burdensome to prepare than an 1120S is). That being said, the excess payroll tax under an "S", at least on the company side (matching FICA and Medicare, FUTA and SUTA) is greater than paying the SE tax on the $110,000 of profits under a Schedule C business, but you'll get a portion of that back (excess SS tax) when you file your individual return. The tax difference is about $461 in favor of a corporation. But, and I regress to my initial statement, the costs to create and maintain the corporation, to prepare and file payroll tax returns, and other compliance costs will more than dwarf the tax savings in this case. There are unknown factors, like the type of work, that may impact the choice of entity decision.
You may want to consult a local CPA or EA to get a better understanding of the costs of operating a corporation in your locality.
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Paul Thomas, CPA
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