Contracting through your own corporation

Subject: Contracting through your own corporation
From: Michael Uhl <uhl -at- VISLAB -dot- EPA -dot- GOV>
Date: Mon, 6 Nov 1995 16:08:42 -0500

In a previous professional life I was the president of a New York State
subchapter S corporation that provided technical communication consulting
services to businesses in the Western New York area. So it was with dismay
that I saw Peter Kent's (71601 -dot- 1266 -at- compuserve -dot- com) misinformed posting
concerning the advantages and disadvantages of incorporation for technical
communcators. Here's my response.

1. <<Most freelance tech. writers are _not_ incorporated. I've heard
writers say you should be incorporated, but I simply can't agree,
for a variety of reasons.>>

It is probably true that most technical communicators work under a
Doing Business As (DBA) tax category. This means they file Schedule C
with their personal income taxes each year.

2. <<First, incorporating is a hassle, lots more paperwork. It's also
expensive; you'll pay more taxes. There's a misunderstanding about
incorporating, that it actually saves you taxes. It can in some
situations, but many tech writers will actually pay more taxes. They'll
pay taxes on the salary the corporation pays them, they'll pay taxes
on the corporation's profits, and then they'll pay taxes on any
dividends that the corporation pays. Plus there's the cost of the
additional paperwork, either the cost of paying someone else to do it,
or the cost of your own time dedicated to this task.>>

Most technical communicators who receive professional advice when
setting up a corporation will choose a subchapter S corporation. This
means that corporate income flows through to their personal return and
is taxed at the personal rate. Most S corps are designed to pay out
all, or nearly all, revenue toward expenses within a given fiscal year;
this includes salaries and bonuses to the employees. S corporations do
not typically pay dividends.

Consequently, you often pay less taxes because you pay at the personal
rate but gain many of the advantages the corporation entity offers.

3. <<Some clients think that if the writer is incorporated, they are
protected, that the writer must be truly independent. There are two
problems with this; just because a writer isn't incorporated doesn't
mean he's not truly independent. And just because a writer _is_
incorporated doesn't mean that he _is_ truly independent--that depends
on the specific work situation.>>

The tax liability issue here revolves around payroll withholding. If
you are an active shareholder in a corp. then you *must* be paid only as
an employee, i.e. no draws against the business. That means taxes *must
be withheld* from your wages and deposited with the US Treasury.
If you do not pay yourself in this manner, penalties will apply when
the amount you receive exceeds a certain--relatively small--amount.

When you work as an employee through a corporation, whether it's one
you own, partly own, or have no ownership in, your customers are free
from the tax withholding liability. For example, when I worked for an
agency at Glaxo Inc., which is a very cautious company, there was no
doubt in anyone's mind about tax liability. I worked on site at Glaxo,
used Glaxo equipment, conformed to regular hours--sometimes ;-)--,
dressed according to Glaxo standards, and so on. According to IRS
guidelines concerning independent contractors, I was an employee of
Glaxo. However, I was clearly *not* an independent contractor because
I was an employee of The Registry, Inc. a contracting agency.

The corporation you work for is responsible for payroll. That is, the
officers of the corporation for which you work are *personally*
responsible for the payment of wages and the associated tax withholding.
The corporation status does not shield officers from this liability.

When you work under a DBA, you must meet strict IRS guidelines
concerning your status. Many companies--read "corporations"--have
attempted to avoid payroll taxes by calling employees "independent
contractors." The IRS gets very ugly when it catches these folks.
And the so called independent contractor loses all those wonderful
tax deductions they took advantage of. (On the other hand, the
"employer" will owe .0765 of the gross wages for FICA, which you
will then get credited for.)

4. <<I would advise that writers _don't_ incorporate just to get the few
clients who say you must be incorporated. First, I don't believe there
are that many who won't hire. Certainly many large companies won't...

Large, cautious companies with deep pockets, will often deal only
with other corporations. Their legal departments advise managers
to minimize risk by going the safe, corporate route.

One of the many advantages of working for your own subchapter S
corp. is that you are both an owner and an employee and derive
the benefits--and burdens--of both positions. As an employee,
payroll withholding means no quarterly payments or nasty surprises
at the end of the year. You pay yourself under a strict set of
guidelines that impose discipline.

Additionally, being incorporated shows an apparent commitment to
the specific business for which the corporation registered with the
IRS and state. (Unlike a DBA, corporations are generally restricted
to carrying on business only in the area specified on their corporate
election and corporate tax returns,)

5. <<...forget about the incorporation thing. And you don't need to
incorporate to use a company name; simply register one with the

In New York and North Carolina DBAs are registered at the county
level. Corporations are state-level entities.

The decision to incorporate is a non-trivial matter and you should
pay for the service of a good accountant and attorney when deciding.
I'm rather tight with my money and have learned the hard way that
I've been too often penny wise and pound foolish. Don't rely on Peter
Kent or me to make a business decision such as incorporation. Hire the
pros. That's what we ask companies to do when they need technical
communication products. Why should we be any different?


P.S. The name of my business is "O'Meghan Corporation," named after my
daughter Meghan. We are in the long, nasty process of killing the New York
State version and are currently re-establishing it in North Carolina.

Michael Andrew Uhl Internet: uhl -at- vislab -dot- epa -dot- gov
Lead Technical Writer (NESC) Phone: (919) 541-4283
Lockheed Martin Fax: (919) 541-0056
Primary Support Contractor for the US EPA ftp site:
Scientific Visualization Center, Research Triangle Park, NC
National Environmental Supercomputing Center (NESC), Bay City, MI
US EPA, Environmental Research Center, Research Triangle Park, NC

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