Results 1 to 11 of 11

Thread: Incorporating into S-corp

  1. #1
    Featured Member
    Joined
    Aug 2006
    Posts
    829
    Thanks
    433
    Thanked 1,332 Times in 328 Posts

    Default Incorporating into S-corp

    How easy is this to do and is it the right, best thing to do. Just looking for advice.

    I want to incorporate myself and be considered an S-corp. I've been webcamming as well as content sales for a few years. From my understanding, and I dont know too much about this, this would be beneficial because S-corps don't pay corporate income taxes and all profits pass through to the shareholder's (me) tax return. So from what I understand, I would just assign myself a salary which can be any amount of all profits since i am the sole employee, and any profits in excess of that salary will be distributed as dividends to shareholders (me) as unearned income and the self employment tax doesn't apply to unearned income.

    So say i profit 100k in one year and designate my salary to be 50k annually, i can distribute the rest of the 50k to myself as dividends which would be considered unearned income and safe from self employment tax? And then pay taxes only on the 50k thats considered earned income?

    I'm just trying to find the least expensive route to go. any advice

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Incorporating into S-corp

    An LLC offers essentially all of the advantages of an S-Corp including exemption from corporate income tax ... with one exception. All LLC income is passed through to the 'owner' as self-employed income, thus the 'owner' must in turn must pay self-employment taxes on the entire amount of income. In contrast S-Corp income is passed through to the 'owner' via an official 'employee' salary plus a dividend payment. The dividend payment portion is exempt from self-employment tax. However, the salary payments must be 'officially' reported to the IRS by the S-Corp under the same payroll requirements as apply to any other corporation with employees. In general, for a single owner S-Corp with a single 'employee' that isn't generating MAJOR income, the cost of the additional payroll accounting / salary reporting / 'employee' tax withholding compliance requirements exceeds the self-employment tax savings.

    If you have an accountant in the family, or if you personally have the skills and time available, an S-Corp might indeed wind up being the best choice. But if you're going to wind up PAYING an accountant to do the salary payment accounting and reporting, an LLC might be the least expensive option overall. Also keep in mind that today's lower tax rate on dividend income may NOT apply in the future, as most of the 'tax the rich' proposals have involved raising the dividend tax rate ( or taxing it as ordinary income ), tacking on an additional social security / medicare tax percentage to investment / dividend income etc. ! Also, in some states, the 'salary' portion may be subject to 'employer' unemployment insurance, worker's comp etc. payments by the S-Corp ( which may offset the tax savings ... although providing unemployment and worker's comp benefits in the process ).

    I would also add that the IRS has directed targeted enforcement towards S-Corps with the specific purpose of making sure that the 'salary' portion of total S-Corp payments is being paid at a level that isn't below 'industry standards'. They are also clamping down on payroll reporting / tax withholding compliance by S-Corps. Give a read.

    ~
    Last edited by Melonie; 11-15-2011 at 02:15 PM.

  3. #3
    Featured Member
    Joined
    Aug 2006
    Posts
    829
    Thanks
    433
    Thanked 1,332 Times in 328 Posts

    Default Re: Incorporating into S-corp

    thank you thank you
    I just need to really calculate the savings and see if it'll really be beneficial. In the long run I think s-corp maybe my best bet. Ill finish my accounting degree this semester and think i'll be able to figure how to do this myself with out having to spend money on an accountant. That should reduce a lot of the costs but i didn't even think of what liabilities might arise just in being the role of an owner. thanks for the response, more researching to do!

  4. #4
    Veteran Member person's Avatar
    Joined
    Sep 2007
    Posts
    633
    Thanks
    33
    Thanked 34 Times in 23 Posts

    Default Re: Incorporating into S-corp

    So the advantage here comes from the lower tax rate of "qualified dividends" in America?
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

  5. #5
    Featured Member
    Joined
    Aug 2006
    Posts
    829
    Thanks
    433
    Thanked 1,332 Times in 328 Posts

    Default Re: Incorporating into S-corp

    The advantage is the self employment tax only applies to earned income and the dividends distributed to the shareholders, yourself, is considered unearned income.

  6. #6
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Incorporating into S-corp

    Person, it's a combination of the US income tax rate difference between 'ordinary' income and 'qualified dividend' income PLUS a question of a US 'self-employment' ( - social security plus medicare ) tax applying or not applying on top of the income tax.

    But with that difference also comes a major 'compliance' issue. Unlike an LLC where all income and all estimated tax filing passes through to the individual 'owner', an S-Corp must operate an 'employer' payroll system to make 'salary' payments to the 'owner'. This means 'employer' withholding of tax money from every check, this means the withheld tax money must be sent in to the IRS and state tax departments every time a 'salary' check is issued, this means that the S-Corp must file annual employer 'salary' reports with the IRS, etc. In some states, this also means that the S-Corp must withhold, report on, and send in 'employee' worker's comp and unemployment insurance payments after every 'salary' payment etc.
    Last edited by Melonie; 11-17-2011 at 01:49 AM.

  7. #7
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Incorporating into S-corp

    I guess that I should point out clearly that the LLC versus S-Corp merits boil down to an issue of 'economy of scale'. Unless the 'owner' has extensive personal knowledge of corporate accounting, payroll tax withholding, etc. plus the time available to do all of these things themselves, hiring an accountant to maintain all of the 'books' and compliance requirements for an S-Corp might cost $5k per year. Additionally, the cost of unemployment insurance and workers comp insurance premiums to the S-Corp might run another $5k per year. So choosing an S-Corp over an LLC involves a commitment to spend a fairly significant amount of money on S-Corp compliance issues that are not a factor with an LLC.

    In order to make it worthwhile, the tax advantages of the S-Corp must actually outweigh the additional costs of operating the S-Corp. In a scenario of a 'serious professional dancer' earning say $200k per year, being able to pay a 15% income tax on $100k worth of dividend earnings plus pay a 24% effective income tax rate on $100k in salary adds up to major savinga s versus having to pay a 33% effective tax rate on $200k in self-employed earnings.

    But if the annual earnings are $100k per year, being able to pay a 15% income tax on $50k worth of dividend earnings plus an 18% effective tax rate on $50k in salary is nowhere near as large of a comparative tax savings versus paying a 24% effective tax rate on $100k in self-employed earnings. At this lower level of income, the tax savings may not be able to offset the additional S-Corp accounting and compliance costs, unemployment and workers' comp insurance premium costs etc.

    And I would again point out that discussions are already on the table in Washington to change tax rules in regard to the future tax rate for dividend earnings, the application of social security / medicare tax to dividend earnings and other forms of 'passive' income, etc. which would reduce the present tax advantages of an S-Corp. But on the flip side the same sort of discussions are already on the table in Washington to increase personal income tax rates. So at this particular moment, unless someone is earning $200k+ per year the choice of S-Corp versus LLC is questionable.

    ~
    Last edited by Melonie; 11-17-2011 at 04:32 AM.

  8. #8
    Featured Member
    Joined
    Aug 2006
    Posts
    829
    Thanks
    433
    Thanked 1,332 Times in 328 Posts

    Default Re: Incorporating into S-corp

    hmmmm yeah i mean, im doing good, not that good. I can minimize a lot of the accounting costs and have all the time in the world to make sure everything meets with compliance, that's where i see the benefit. I'll have to look up the costs of unemployment and workers' comp insurance as well as the future of tax laws to really see if the savings would be worth it. Thanks Melonie!

  9. #9
    Member adverteyes's Avatar
    Joined
    Nov 2011
    Posts
    46
    Thanks
    4
    Thanked 14 Times in 10 Posts

    Default Re: Incorporating into S-corp

    I am not a lawyer or an accountant.
    Please seek the proper professional advice before investing.

    That being said:
    http://www.amazon.com/Own-Your-Corpo...1813060&sr=8-2

    And also that link might have my previous cookies on it so the book is "Own Your Own Corporation" (Sutton,2001).
    That book will tell you everything you need to know and even give low cost outsourcing options for service providers.

    There are various advantages and disadvantages to entities and locations depending on your
    business.
    Nevada for example does not make C corps pay state taxes.

    But as well this is a good site for Wyoming
    http://www.nevada-corporation.com/?g...FYtR7AodbwFjrw

    The best idea is to have an entity that will allow you to expense first and then pay taxes. Expenses can even be investing in assets that expand your income for the next year. As long as you spend the majority of the gross profit before the tax deadline on investments you can expand your income and consistently push taxes into the future. Your personal income can be as low on paper as you want it to be. (this means less personal tax)

    Don't listen to me. Educate yourself and then decide.

  10. The Following User Says Thank You to adverteyes For This Useful Post:


  11. #10
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Incorporating into S-corp

    here's a link to a more recent book which does a very good job of discussing the advantages and disadvantages of sole proprietorships versus LLC's versus S-Corps versus C-Corps for a 'small' business ...




    Your personal income can be as low on paper as you want it to be. (this means less personal tax)
    While this was more or less true several years ago, today the proportion of 'salary' payments ( that are subject to all taxes ) versus 'dividend' payments ( which are subject to different income taxes and exempt from social security / medicare taxes ) is now an area of targeted enforcement by the IRS. Thus current and future attempts to set small business corporation 'salary' payouts at levels that are unrealistically low - in comparison to 'salary' levels prevalent for employees of large corporations who perform similar work - are virtually guaranteed to attract an audit. If the IRS finds that the small business corporation's primary function is to act as a 'tax shelter', they can disallow treatment of certain 'dividend' payments, treat all payouts as 'salary', and also assess a penalty.

    When discussing this potential IRS enforcement issue with my own accountant as part of LLC versus S-Corp decision making, his opinion was that the minimum 'safe' level of 'salary' payments must be on the order of the 'average' US semi-skilled employee wage rate or currently at least $19 per hour. As a 'full time' employee of an S-Corp or C-Corp that translates into 40*52*$19 = $39,520 per year. This pay rate will also be subject to state unemployment insurance and worker's comp insurance premium payments by the S-Corp or C-Corp, which may now run in the $4,000 per year ballpark depending on rates in particular states.


    Expenses can even be investing in assets that expand your income for the next year. As long as you spend the majority of the gross profit before the tax deadline on investments you can expand your income and consistently push taxes into the future
    This is also an issue that was more or less true several years ago, but which has now come under scrutiny re IRS targeted enforcement. C-Corps are legally allowed to divert current year corporate income towards 'retained earnings' which can then be invested in the name of the corporation on a 'discretionary' basis. But LLC's and S-Corps are now generally required to pass through every dollar of current year net corporate earnings to the 'owners'. LLC's and S-Corps that 'retain earnings' today need to have a specific stated and documented reason for doing so ( i.e. accumulating cash for a future corporate real estate / business vehicle purchase, making market investments intended to fund future 'employee' benefit costs to the corporation, etc. ).

    ~
    Last edited by Melonie; 11-20-2011 at 02:43 PM.

  12. #11
    Member adverteyes's Avatar
    Joined
    Nov 2011
    Posts
    46
    Thanks
    4
    Thanked 14 Times in 10 Posts

    Default Re: Incorporating into S-corp

    Beginning businesses usually have a three year break even period. They lose money for the first three years. The people that start them sometimes go without a salary at first.

    Pay no dividends. Reinvest in the business before declaring profit. Give yourself good benefits. Retained earnings are crap because you have to pay tax on them as long as you hold them.

    Build the business credit and borrow money to invest in more assets. Within the proper entity pretax gross profits can be spent on assets that belong to the business but you get to use as an employee. ( cars, computers, uniforms, business services) Basically anything that bleeds your post tax earnings can be owned by the business. If the money becomes large enough the investment can be commercial building or apartment building. That would start another stream of income from rents and give you a way to grow through equity.


    As soon as one of the assets has gross income, that income can be reinvested in more assets before declaring profit.
    Raise your salary and hire employees to take care of additional asset management for the business.

    Once again, I am not an attorney or an accountant. Please educate yourself on how rich people make money and enlist the proper advisers. Pay them by the hour to brainstorm this stuff. Lawmakers will keep the loopholes in place so that they can become rich. Seek the path and you will find it.

    They like to throw a lot of confusing numbers and new rules at you to keep you on your toes.
    A bean counter's job is to take care of this stuff for you. Make sure you get one you can trust and check their work with another one.

    Figure out how almost everything you buy is a business expense. If you are in the sex industry and you tell a dirty joke at lunch you talked about business so it can be expensed.

    You go to a club and get lap dances from your buddies. This is called market research

    ( Hey sweetheart, just one last thing, here's a tip and I'm gonna need a receipt for that dance)

    If your business buys everything for you that meager "income" does not need to be spent.

    Think of your business entity like your sugar daddy.
    The way to persuade "daddy" to give you more money is to figure out how to expense it.
    Save receipts and give them to the bean counters.

  13. The Following User Says Thank You to adverteyes For This Useful Post:


Similar Threads

  1. Incorporating
    By Luxxxe in forum Dollar Den
    Replies: 8
    Last Post: 10-06-2008, 10:12 AM
  2. incorporating for strippers?
    By Adelina in forum Dollar Den
    Replies: 16
    Last Post: 05-10-2007, 03:16 PM
  3. Mentor Corp. News
    By smartcookie in forum Body Business
    Replies: 6
    Last Post: 05-23-2005, 08:43 AM
  4. Corp.Thugz again
    By whirlerz in forum The Lounge
    Replies: 6
    Last Post: 09-15-2004, 07:02 AM
  5. Corp.Thugs
    By whirlerz in forum The Lounge
    Replies: 22
    Last Post: 08-05-2004, 02:07 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •