Is an S-Corporation Right for me?

Question

For the past two years I have been running a website as a sole proprietorship. Taxes have been absolutely brutal to me and I am looking to try to save money by incorporating. From what I understand, a single member S-Corporation (I am in California) would allow me to pay myself a "reasonable wage" and then pay whatever other earnings my website generates to myself as dividends.

So for example, as a sole proprietorship or an LLC if my website generated $100,000 in profit I would pay roughly 25-30% for taxes PLUS my self-employment tax of 15%. ... this would leave me with somewhere around $55-$60k. If I had this set up as an S-Corporation, would I be able to set a wage... say $30k for maintenance.... and then pay myself the rest as dividends free of any self-employment tax? This would mean.... 25-30% on 100k, and 15% on 30k... that would add up to around $65-70k as opposed to the $55-60

Am I understanding this alright? Are there other taxes I am overlooking?

Yea, that was another concern that I had... exactly what is "reasonable wage". That article answered alot for me. What sort of tax is associated with the S-Corp if any?

Answer 1

Whatever you do, first click on the link that open4one provided. It is a bit dated, but it outlines the importance of stating too little income and too much dividends. Wouldn't that be horrible to go though all the time, trouble, and expense of filing as an S-corporation to only have the IRS step in and say you owe for all those FICA taxes you hoped to avoid.

Additional: The S-corp doesn't pay any taxes by itself. It is called a pass-through entity. What passes to you (the shareholder) are two components: employee earnings and dividends. The earnings are subject to Self-Employment (SE) taxes which you pay at double what you normally pay as an employee...15.3%. Thank congress for steadily increasing social security entitlements to people other than retirees and for the ever increasing Medicare costs for such a high amount. It is so high that, just like other high taxes since the dawn of time, people will do just about anything to avoid. How does an S-corp shareholder/employee avoid it? By paying it out as a dividend instead of as earnings. Both dividends and earnings are income on your 1040. The dividends from an S-corp are never "qualified", meaning they are taxed at your marginal rate, not the more beneficial 15% rate. But, the dividends are not considered "compensatory" income and not subject to SE tax.

So, going back to your $100,000 profit...the first $30,000 would be income plus SE tax. The SE tax alone would be (30000 x 0.9235 x .153) = $4,239. You do get to subtract half of the SE tax ($2,120) from your income, so your $70,000 dividends plus $30,000 earnings minus $2,120 would give you an AGI of $97,880. Long before you figure you tax on this, don't forget to subtract exemptions and deduction amounts. Worse case (single, no dependents, standard deduction), your taxable income would be $89,430 causing a tax liability of $19,372 added to the $4,239 SE tax would give you a final tax bill of $23,611. Not the end of the world, but if you want to lower it more, talk to a tax dude. He/she will show you ways to put money aside for retirement thereby lowering your taxes. They may also be able to show you more ways to show expenses that you may not have realized were deductible.

Now, as far as what is reasonable, what I tell my clients is to look for job postings in their area that are similar. Clip and save them. Keep them with your records and, if you are audited by the IRS, show them the comps. At the end of the day, the only way to know for sure if your "salary" is reasonable depends on what the man in the suit sitting across the table from you at the audit says. You could wimp out and say that all of the profits are earnings, or you could do some due diligence and come up with a salary that is reasonable. I had a friend get a little too greedy and was audited. However, during the audit, his accountant said some song-and-dance about how he was divorced and all his earnings were being sucked up by the ex. The auditor backed down. Turns out the auditor was also going through a bad divorce. Sometimes it pays to be lucky.

Answer 2

Scorp is beneficial because the corp pays no tax. On the other hand if you net income is huge at the end of the year, you as the sole shareholder will have to pay tax on the net income. It passes through to you on Sched E.

you have to make sure that you are paying correct quartely est payments and you are taking enough witholdings from you weekly/semiweekly paychecks.

its too late to request S crop status for 2006, but for 2007, you still have time. Fill out form 2553 from IRS website and you have to send it to them requesting S corp status. IRS will send you back a notice stating if you are an Scorp or not. The process can take 4-6 weeks.

Answer 3

Your share of profit gets reported on sched E and you would pay tax on that. Therefore there is no need to distrib a dividend. In fact, the main purpose of an s corp to avoid the (double) dividend tax.
If you make yourself an employee then you and the s corp will have to pay your soc security taxes equally (7.65% each) so there will no benefit in avoiding s.e. tax - it will be the equivalent. Actually it will cost more to make you an employee since there are taxes that only an employer (the s corp) pays such as Fed unemployment tax.
I agree that you will pay the least as an s corp as long as you don't make yourself an employee. This answer may vary however depending on the actual #'s

Answer 4

No, businesses don't seem to be humans, they're entities run by means of humans. It's all within the tax code. There's a cause why private taxes are distinctive from company taxes. A tax on a company is a tax on an entity. A tax on a man or woman is a private tax. It's naturally acknowledged. This is a primary illustration of the truly Mitt Romney. He both is making an attempt to be misleading or he is not the businessman he thinks he's. Also, if Romney is familiar with the function he is making an attempt to assert, he has to turn out his is in want of doing what's high-quality for the humans. The charter naturally stipulates that every American is entitled to the pursuit of happiness and that the federal government exists for the humans, by means of the humans, of the humans. There is not anything in there approximately entities and businesses within the announcement. So, with Romney considering that organizations extra main in his plans proves he's out of contact at the function of presidency and its role on this nation. He's now not have compatibility for the activity.

Answer 5

What you are overlooking is the power the IRS has to decide that the salary you pay yourself is too low, and deem what you call "dividend income" as "earned income".

You're going to have to pay yourself what you'd expect to earn if you didn't own the company, and anything over that MIGHT pass scrutiny as Dividends.

Answer 6

see http://www.smallbusinessaid.net/llctaxes.html