Contracting through your own corporation

Subject: Contracting through your own corporation
From: Peter Kent <71601 -dot- 1266 -at- COMPUSERVE -dot- COM>
Date: Tue, 7 Nov 1995 10:40:28 EST

Re: Michael Uhls <uhl -at- VISLAB -dot- EPA -dot- GOV> post, in response to my earlier post:

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.

True, the S corp is a valid option. However, why do you pay less taxes? What
tax-saving advantages do you gain? The most important two -- the ability to
write off all your medical expenses, and the ability to set up a pension fund
from which you can borrow -- are not available to the S Corp. Most tax
deductions are available to the independent contractor; schedule C lets you
deduct rent, computer equipment, office supplies, and so on, anything you
spend on your business. And you can set up a pension fund that allows you to
deduct 20% of your business income (yes, I know everyone says it's 25%, but
once you do the circular calculation it's actually 20%.) And the S corp is
still more hassle than filing Schedule C.

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.)

As Richard Mateosian has pointed out in an early msg, the fact that you are
incorporated does not protect your clients. Nowhere in the IRS list of 20
questions, used to determine whether you are independent or an employee, does
it mention incorporation. You can incorporate and still have the IRS say you
are an employee. The real trick is to work in such a way that you fit the IRS
profile of an independent...that way you are free and clear regardless of
whether you are incorporated or not.

Richard Mateosian goes on to say that "The IRS has stated explicitly that
incorporation is irrelevant to this determination." Richard, can you point us
to a particular document?

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,)

Yes, "Large, cautious companies with deep pockets, will often deal only with
other corporations." Of course they often won't deal with you even if you are
incorporated, because they're not stupid, and they know that there's little
difference between an independent contractor and an independent contractor
who's incorporated. Many such companies have lists of tech. service agencies
with which they work, and you'll have a hard time getting onto these lists.
Also, many large companies will work with independent contractors. I've been
on independent contractors with MasterCard (can't get much bigger than that!),
MacTools, Amgen, and NEC.

Also, large companies are not the only fish in the sea. There are many
middling and small companies, too, some of which are concerned about this
incorporation thing, many of which are not.

Now, about the idea these "benefits--and burdens"; what benefits and burdens.
Be specific. It sounds like you are suggesting that the corporation doesn't
have to pay taxes during the year. Or are you saying that the employee
doesn't. Oh, but the employee is the same person, isn't he?

"You pay yourself under a strict set of guidelines that impose discipline."

Anothe vague benefit. Are you saying that this discipline is a benefit? That
the non-incorporated person doesn't need discipline? What does this mean.

"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

Again, this is all very vague. To whom am I showing this commitment? Does it
mean that once incorporated my clients will think that I'll never go out of

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

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 shouldpay for the service of a good accountant and
attorney when deciding.I'm rather tight with my money and have learned the
hard way thatI've been too often penny wise and pound foolish. Don't rely on
PeterKent or me to make a business decision such as incorporation. Hire
thepros. That's what we ask companies to do when they need
technicalcommunication products. Why should we be any different?
You are absolutely correct that "The decision to incorporate is a non-trivial
matter and you shouldpay for the service of a good accountant and attorney
when deciding." That's my point. Incorporating is not something to rush into
for vague reasons such as "maybe I'll get more business if I incorporate."
Nor, come to that, for vague reasons such as "it will impose discipline on me,
it will show my commitment, or whatever."

Still, I said "simply register one [a company name] with the state." I didn't
say "simply incorporate". Incorporating is never simple. I would not say that
incorporating is never a valid option, either. What I said was, "Incorporating
to avoid this problem is like taking a chain saw to open a letter. It's
overkill." The problem we were discussing was one of losing clients because
they want to work with people who are incorporated. That's not, for most
writers, a good reason to incorporate. As I said before, there are many
reasons for losing potential contracts, and this issue is only one of them,
and probably one of the least important.

So you lose a contract, so what? You can't turn your business life upside
down because you can't get a contract with some company that probably wouldn't
have anythign to do with you even if you _do_ incorporate. You shouldn't even
incorporate because you lose a contract that you could have had had you been
incorporated; there are plenty of other contracts around.

I think there's a basic problem with the premise of this argument for
incorporating, anyway. It seems to go like this:

1. Many companies only work with corporations. (True)
2. If I'm not incoporated, I can't get contracts with these companies. (True)
3. If I'm incorporated, I can get contracts with these companies. (Not always

As I've just said, many of these companies won't work with you even if you
are incorporated. They want a real corporation, one with employees. Not an

Even if they will accept your corporation, that doesn't mean you get the
contract, does it? You've still got to get through all the usual
questions..such as "can you do the job," "are you cheaper than the guy down
the road," "do you use WordPerfect." At the end of the day, this group of
companies that will only work with corporations has been whittled down to a
small number of lost contracts.

If a losing a contract now and again is a big problem, you are in the wrong
business. Freelancer writers are sales people (as repulsive as that idea may
seem to many writers!). In sales you have to get used to the idea of losing
more sales than you win. That's the nature of sales (after a while you may
reach a point at which you sell more than you lose, but to start with, you're
going to lose more than you sell).

Yes, there are good reasons to incorporate. (Though I don't think anyone's
really pointed them out yet.) But remember, "The decision to incorporate is a
non-trivial matter."

Peter Kent

Peter Kent: 71601 -dot- 1266 -at- compuserve -dot- com, 303-989-1869
Coming soon, an updated and revised Technical Writer's Freelancing
Guide. E-mail for more information. Comments/suggestions welcome.

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