Author Topic: Incorporation to save on Taxes (Read 27289 times)

lisafx · « **on:** May 12, 2009, 13:54 »

I'm so excited! Just received my articles of incorporation and federal Tax ID today.

After getting killed by taxes on my 2008 return my tax pro suggested becoming an S corp. Apparently you can pay yourself a salary and anything beyond that is not subject to social security tax. You still have to pay income taxes, but since self-employment social security tax is 15% of income it looks like the savings will be substantial.

Hooray!

Since I had to use a credit card check to pay the outstanding balance to the IRS on 2008 taxes I am really eager for tax relief this year.

snaprender · « **Reply #1 on:** May 12, 2009, 13:57 »

Hey Lisa,

On the money that you pay yourself, do you have to deduct taxes and so on like a company would pay and employee from each check you make out to yourself?

lisafx · « **Reply #2 on:** May 12, 2009, 14:00 »

Quote from: snaprender on May 12, 2009, 13:57

Hey Lisa,

On the money that you pay yourself, do you have to deduct taxes and so on like a company would pay and employee from each check you make out to yourself?

Presumably so. I have to get with the accountant to find out if I have to withhold from each paycheck or can tally it all up at the end of the year.

aremafoto · « **Reply #3 on:** May 12, 2009, 14:02 »

I am looking into this as well. I had to pay a substantial amount of self-employment tax for the 2008 tax return. Do you know any good websites that have good information on forming the S-corp?

Thanks,
Supri

bittersweet · « **Reply #4 on:** May 12, 2009, 14:03 »

We also got killed on 2008 taxes, to the tune of $10,000 combined owed federal and state. Super huge *gulp* ...

Also looking into forming an S corp. Several people advised me to do it a few years back and dummy me didn't listen. I'm listening now. $:-\$

leaf · « **Reply #5 on:** May 12, 2009, 14:03 »

Yeah, I have heard thoughts about this as well and perhaps it is a good idea... i suppose i should check it out eventually as well.

You still end up paying taxes on all the money earned - just at a later date when you are perhaps in a lower tax bracket.

Sean Locke Photography · « **Reply #6 on:** May 12, 2009, 14:13 »

Quote from: whatalife on May 12, 2009, 14:03

We also got killed on 2008 taxes, to the tune of $10,000 combined owed federal and state. Super huge *gulp* ...

I wish !

willie · « **Reply #7 on:** May 12, 2009, 14:23 »

Quote from: lisafx on May 12, 2009, 14:00

Quote from: snaprender on May 12, 2009, 13:57
Hey Lisa,

On the money that you pay yourself, do you have to deduct taxes and so on like a company would pay and employee from each check you make out to yourself?

Presumably so. I have to get with the accountant to find out if I have to withhold from each paycheck or can tally it all up at the end of the year.

speaking from an accounting standpoint, limited company makes you not an employee but more an owner of the separate entity that is your company. when you pay yourself , it comes out as Drawings in your balance sheet, not as salary. You pay yourself as a shareholder, not an employee.

i speak from Canada standpoint or UK tax experience. Maybe US is different, but it probably is quite similar as Corporate Law is based on English Law.

lisafx · « **Reply #8 on:** May 12, 2009, 15:58 »

Quote from: aremafoto on May 12, 2009, 14:02

I am looking into this as well. I had to pay a substantial amount of self-employment tax for the 2008 tax return. Do you know any good websites that have good information on forming the S-corp?

Thanks,
Supri

I went through a site called floridaincorporationservice.com. They were cheaper than legalzoom.com. I don't know if they have branches for other states but they probably do. And if not, legalzoom definitely does.

Perseus, what you are saying about the Canadian corporation sounds very similar to what I have been told about an S corp. That is why I won't be subject to the Social Security taxes on the income, as it is considered investment income. I will still have to pay the income taxes at my and my husband's personal rate, but saving on the SS tax is going to help out so much.

Not being an accountant I am a bit fuzzy on the details but I have talked to several tax pros and they seem to agree this is the way to go.

I figured I wasn't the only one in this boat. The good news: lots of us are earning money in microstock. The bad news: wow those taxes come at you out of left field!!

willie · « **Reply #9 on:** May 12, 2009, 16:09 »

Quote from: lisafx on May 12, 2009, 15:58

edited

Perseus, what you are saying about the Canadian corporation sounds very similar to what I have been told about an S corp. That is why I won't be subject to the Social Security taxes on the income, as it is considered investment income. I will still have to pay the income taxes at my and my husband's personal rate, but saving on the SS tax is going to help out so much.

Not being an accountant I am a bit fuzzy on the details but I have talked to several tax pros and they seem to agree this is the way to go.

I figured I wasn't the only one in this boat. The good news: lots of us are earning money in microstock. The bad news: wow those taxes come at you out of left field!!

lisa, the advantages of incorporation outweights the dis.
you lisafx and the corporation are 2 separate entities. we'll say lisacorp , is not ms. lisa xxx the person. so, the property you own as a person ,etc... is not part of the company. only your capital is liable. what i mean is, say XXX sues lisacorp, and you and your husband are shareholders of lisacorp. mr. and mrs xxx also owns a boat, house, etc..
if i sue you, i cannot claim your boat, house, etc.. i can only claim to the limit of lisacorp's capital.
that alone is enough to make anyone with a substantial income incorporate.

i hope i explained it well.

lisafx · « **Reply #10 on:** May 12, 2009, 16:17 »

You did explain well. Thanks so much. That is definitely an added bonus.

We aren't in the category of having big assets at the moment, but who knows about the future. Maybe stock will make us rich one day!!

willie · « **Reply #11 on:** May 12, 2009, 16:18 »

Quote from: lisafx on May 12, 2009, 16:17

You did explain well. Thanks so much. That is definitely an added bonus.

We aren't in the category of having big assets at the moment, but who knows about the future. Maybe stock will make us rich one day!!

live well & prosper !

snaprender · « **Reply #12 on:** May 12, 2009, 16:33 »

Please keep us updated on how things go. I'm curious if you have to put yourself on payroll, if you will incure payroll taxes and so on.

lisafx · « **Reply #13 on:** May 12, 2009, 18:14 »

I will definitely update this thread when I find out about payroll. Gotta know how to get paid - most important part of the whole project

leaf · « **Reply #14 on:** May 13, 2009, 01:23 »

Quote from: Perseus on May 12, 2009, 16:18

Quote from: lisafx on May 12, 2009, 16:17
You did explain well. Thanks so much. That is definitely an added bonus.

We aren't in the category of having big assets at the moment, but who knows about the future. Maybe stock will make us rich one day!!

live well & prosper !

Since you seem to know what you are talking about Perseus, here is another question.

How does being incorporated save on taxes?

If corporate tax is 15% and personal tax is 30%, then you save 15% tax on all the money earned that you are able to just keep in the corporation. BUT, you still have to pay personal tax on that money when you finally pay it out to yourself. So perhaps the savings are because you are in a lower tax bracket.

But here is the problem. Usually this works and you won't be taxing yourself twice because you can write off the 'drawings' as an expense, but if you are old and are the business is not generating much, or any income any longer, then writing something off as an expense doesn't have any positive effect, and the income you take out then will be taxed once when it came into the business (say 10 years ago) and now when you are withdrawing it.

willie · « **Reply #15 on:** May 13, 2009, 07:59 »

Tyler, if you checked my previous communications with lisafx above, I never mentioned incorporation saves taxes. That was the title of this blog.
Traditionally, incorporation was advised to protect your liability as a professional, since you become a separate entity from the corporation.
Whether this would actually save you taxes or not, depends on how well you apply the taxation benefits offered to Coporations. You consult a Tax Consultant for that, ie. during my days such specialists hold the designation ATII within the old British Commonwealth (perharps they are now called ACA/ACCA). They were distinct from Public Accountants ( eg.US - CPA), although usually, in a Public Accounting firm, they would some distinctive ATIIs on board.

mattb · « **Reply #16 on:** May 13, 2009, 08:12 »

Here's what I remember from my days as an independent consultant when I had an S corp. If this is your main source of income you will need to pay yourself enough salary to make the IRS think you really are taking a salary from the company. Both you(as an employee) and the S corp will have to pay all the normal payroll taxes on this salary. You can take the rest of the money out as dividends. The only taxes you pay on that money is the same amount you pay on your other investment income. Since its investment income, you don't pay all the payroll taxes which is where your tax savings come from.

aremafoto · « **Reply #17 on:** May 13, 2009, 10:28 »

Quote from: lisafx on May 12, 2009, 15:58

Quote from: aremafoto on May 12, 2009, 14:02
I am looking into this as well. I had to pay a substantial amount of self-employment tax for the 2008 tax return. Do you know any good websites that have good information on forming the S-corp?

Thanks,
Supri

I went through a site called floridaincorporationservice.com. They were cheaper than legalzoom.com. I don't know if they have branches for other states but they probably do. And if not, legalzoom definitely does.

Perseus, what you are saying about the Canadian corporation sounds very similar to what I have been told about an S corp. That is why I won't be subject to the Social Security taxes on the income, as it is considered investment income. I will still have to pay the income taxes at my and my husband's personal rate, but saving on the SS tax is going to help out so much.

Not being an accountant I am a bit fuzzy on the details but I have talked to several tax pros and they seem to agree this is the way to go.

I figured I wasn't the only one in this boat. The good news: lots of us are earning money in microstock. The bad news: wow those taxes come at you out of left field!!

Thanks! Please keep us posted.

willie · « **Reply #18 on:** May 13, 2009, 10:49 »

I am sure somewhere on the www there are already stockphotographers in your country who is already doing this. I suggest you confer with them. It does help to have a consultant who specializes in that field, as it is having an Entertainment Lawyer represent you, if you are a director ,etc.
Generalists are not as informed as Specialist, so it would be to your advantage to talk to some of the more established people to see what they do in similar situation as you.

lisafx · « **Reply #19 on:** May 13, 2009, 10:56 »

Quote from: mattb on May 13, 2009, 08:12

Here's what I remember from my days as an independent consultant when I had an S corp. If this is your main source of income you will need to pay yourself enough salary to make the IRS think you really are taking a salary from the company. Both you(as an employee) and the S corp will have to pay all the normal payroll taxes on this salary. You can take the rest of the money out as dividends. The only taxes you pay on that money is the same amount you pay on your other investment income. Since its investment income, you don't pay all the payroll taxes which is where your tax savings come from.

Thanks Matt. This is exactly how it was explained to me too. The savings comes from the 15% Social Security taxes you don't have to pay on the dividend income.

michaeldb · « **Reply #20 on:** May 13, 2009, 12:24 »

Very interesting thread. I now pay 40% US taxes on my stocking income. After April 15 my accountant reminded me, "Whatever you buy for the business you are getting it at 40% discount."

40% tax is way too high, it makes me sick. So I am looking for ways to cut it down.

I was president of a small subchapter S corp (about 30 employees) for many years. And I started another one from scratch for myself once, mostly for legal protection. As Perseus correctly said, "Traditionally, incorporation was advised to protect your liability as a professional, since you become a separate entity from the corporation." So incorporating does offer that benefit, it protects you somewhat from being sued personally.

But to have an S corp, as I recall, you have to have shareholders and issue stock, and you have to have officers, and meetings (at least on paper) and all kinds of crap.

Ultimately a corporation is just another way for gov to tax you. And raising corporate taxes is something which is currently being proposed, it will be a popular idea in the current political climate.

I hope this thread grows with the experiences and thoughts of a lot of people on this topic.

willie · « **Reply #21 on:** May 13, 2009, 12:33 »

well said michaeldb.

whether you benefit is largely dependant on where you are. some countries, even some provinces (as called in Canada) or counties (in ole UK,etc..) offer grants to small businesses to incorporate. At times, this is on top of what the country offers.
If you are a resident in a country or state that caters to corporations in favour of the working mom and pop, you would benefit from incorporating.
Do your homework. As they say, "most people spend more time in research buying a car, than they do in getting a mortgage or incorporating". Don't be one of those (wink).

mattb · « **Reply #22 on:** May 13, 2009, 12:35 »

Quote from: lisafx on May 13, 2009, 10:56

Thanks Matt. This is exactly how it was explained to me too. The savings comes from the 15% Social Security taxes you don't have to pay on the dividend income.

And don't forget Medicare and probably state unemployment insurance.

goldenangel · « **Reply #23 on:** May 14, 2009, 01:15 »

Can a company pay all of its income as dividends? I was wondering if this is something that raises eyebrows at the IRS.

lisafx · « **Reply #24 on:** May 14, 2009, 09:41 »

Quote from: goldenangel on May 14, 2009, 01:15

Can a company pay all of its income as dividends? I was wondering if this is something that raises eyebrows at the IRS.

I will ask the accountant when I meet with her tomorrow, but I think I would rather play it safe and draw a salary.

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Author Topic: Incorporation to save on Taxes (Read 27289 times)

lisafx

snaprender

lisafx

aremafoto

bittersweet

leaf

Sean Locke Photography

willie

lisafx

willie

lisafx

willie

snaprender

lisafx

leaf

willie

mattb

aremafoto

willie

lisafx

michaeldb

willie

mattb

goldenangel

lisafx

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