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
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
Looking only at the payroll taxes, the excess FICA credit and self
employment taxes only.analyze which structure would result in lower taxes.
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.
Paul Thomas, CPA
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