RE: 1099 vs Incorporation Pros &* Cons

Subject: RE: 1099 vs Incorporation Pros &* Cons
From: "Richard G. Combs" <richard -dot- combs -at- voyanttech -dot- com>
To: "TECHWR-L" <techwr-l -at- lists -dot- raycomm -dot- com>
Date: Tue, 9 Jan 2001 14:46:12 -0700

Wayne Menke wrote:
> There's really no difference here. Your corporation (your money) pays
> 7.65%, and so do you, for a total of 15.3%. Your corporation gets a
> writeoff of 7.65% as an expense.
> As an independent, you pay both halves, but get an adjustment to
> income for one of those halves.

Actually, an S Corporation gives you a significant advantage vis-a-vis
payroll taxes (Social Security and Medicare).

Assume, for example that you have taxable income of $60k and you're a sole
proprietor working on a 1099 basis. You'll owe payroll taxes (15.3%, less a
credit on income tax) on all $60k. That's about $9k.

If, on the other hand, you own an S Corp., that corporation can reasonably
pay you a salary of, say, $30-35k. You take the remaining $25-30k out of the
corporation as shareholder profit, on which you don't have to pay payroll
taxes. Thus, instead of paying 15.3% of $60k, you pay 15.3% of $30-35k,
cutting your payroll taxes by thousands of dollars.

"So why not pay yourself an even lower salary," you ask, "and cut your taxes
even further?" Well, if you get too greedy, the IRS notices. They can decide
that the "excess" profits you collected are really wages, and bill you for
payroll taxes on that amount, plus penalties and interest.

Theoretically, the salary or wage you pay yourself should be "reasonable"
for the job, location, etc. Most people assume that the IRS won't check too
closely if you're taking half or more of your earnings as wages and less
than half as profit. YMMV. Check with your tax and legal professionals.

Richard G. Combs
Senior Technical Writer
Voyant Technologies, Inc.
richard -dot- combs -at- voyanttech -dot- com
rgcombs -at- free-market -dot- net

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