What is everyones opinion on going Incorporated ? What are the pro & cons......
This is true, to an extent. This works for an S corporation. However, the IRS long ago caught on to the scheme of taking a 25,000 salary and 25,000 in distributions to keep from paying payroll taxes on the full 50,000 of earnings.Originally posted by LawnLad
To add to John's point about size of risk... regardless of your bank account size, what is your aversion to risk? What are you willing to loose? You might not require $100K in the bank to justify being incorporated.
Run the numbers. One of the advantages of being incorporated is that you can avoid self employment taxes on draws that you take which amounts to a 15% savings. Avoiding payroll taxes on all your profit/income is an advantage, particulary the larger the number.
If you're a sole proprietorship and you have a profit/income (no distinction with SP) of $50,000, you will pay self employment tax of approximately $7500.
If you're incorporated and take a salary of $25,000 and then draw the remaining $25,000 you'll save $3,750.00 in self employment taxes.
Is this the only reason to incorporate? No. As long as you're making the profit to justify it along with the other numerous advantages, it is seriously worth considering.
But you can only draw what you have basis for. You can't take 25k in draws unless you've contributed 25k in investment for that year. At least that's what my acct says.Originally posted by LawnLad
To add to John's point about size of risk... regardless of your bank account size, what is your aversion to risk? What are you willing to loose? You might not require $100K in the bank to justify being incorporated.
Run the numbers. One of the advantages of being incorporated is that you can avoid self employment taxes on draws that you take which amounts to a 15% savings. Avoiding payroll taxes on all your profit/income is an advantage, particulary the larger the number.
If you're a sole proprietorship and you have a profit/income (no distinction with SP) of $50,000, you will pay self employment tax of approximately $7500.
If you're incorporated and take a salary of $25,000 and then draw the remaining $25,000 you'll save $3,750.00 in self employment taxes.
Is this the only reason to incorporate? No. As long as you're making the profit to justify it along with the other numerous advantages, it is seriously worth considering.
Not exactly right. You are limited to accumulated basis that you haven't previously drawn. It could be previous earnings, not just investment.Originally posted by Mike Bradbury
But you can only draw what you have basis for. You can't take 25k in draws unless you've contributed 25k in investment for that year. At least that's what my acct says.
As far as insights, in general, how much time is spent on job, what comparable people in comparable companies make, size of company, etc. would be some things they would look at.Originally posted by LawnLad
Yes Bruces, you're absolutely right. I neglected to mention "reasonable" in my post. Thanks for clarifying the point so eloquently.
Here'e a hypothetical for your Bruce...
A Sub S Corp has sales of $750,000. Owner takes $50,000 in salary. Company profits another $150,000. Owner takes $75 K in draw. Reasonable?
Better question for you is do you have insight as to how the IRS determines reasonable? If you're paying yourself what you'd have to pay someone else to do your job - would this be reasonable even if the draw is larger than the salary? How does the relationship between the two effect the equation of reasonable?
Thanks...