Author Topic: Incorporation to save on Taxes (Read 25258 times)

willie · « **Reply #25 on:** May 14, 2009, 10:04 »

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.

goldenangle, there is a distinction:
drawings is for your personal use, dividends are paid from profits earned in the course of business.
you can fudge the two.

Sean Locke Photography · « **Reply #26 on:** May 14, 2009, 10:47 »

Every article I've read says that not drawing a reasonable salary for the position (50/50) is a huge red flag for the IRS to come and take a good look at what you are doing.

I'm also not sure whether all the costs involved with the corporation aspects (different from LLC ) including physical payroll and such, actually end up outweighing the benefits.

http://en.allexperts.com/q/Tax-Law-Questions-932/sub-S-corp.htm
http://www.mymoneyblog.com/archives/2006/07/forming_an_scor.html
http://taxes.about.com/od/scorporations/qt/scorp_payroll.htm

PeterChigmaroff · « **Reply #27 on:** May 14, 2009, 11:03 »

I'm Canadian and this may not apply at all to Americans but I do see a lot of similarities. For me incorporation allows income to be retained and spread out from high income to lower income years, Tax on dividends are much less. Some protection from law suits against personal assets, this can be a big deal if you own more than a 50D. The system takes you more seriously so as long as I am not being silly, gaining tax deductions for travel etc. is legitimized. I do pay more for accounting now. I just went through a hassle with my bank redoing a line of credit. They did not want to look at my dividend income when calculating loan rates and percentages. This was fixed. It costs more to administer corporations. A good accountant, and I would not take this on without an accountant, will tell you when you are making enough to make it worthwhile. You need a certain income before for it to make sense.

mattb · « **Reply #28 on:** May 14, 2009, 11:05 »

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.

You do have to pay yourself a salary to keep the IRS happy, what that salary needs to be is definitely a question for your accountant.

willie · « **Reply #29 on:** May 14, 2009, 11:08 »

Quote from: Zeus on May 14, 2009, 11:03

I'm Canadian and this may not apply at all to Americans but I do see a lot of similarities. For me incorporation allows income to be retained and spread out from high income to lower income years, Tax on dividends are much less. Some protection from law suits against personal assets, this can be a big deal if you own more than a 50D. The system takes you more seriously so as long as I am not being silly, gaining tax deductions for travel etc. is legitimized. I do pay more for accounting now. I just went through a hassle with my bank redoing a line of credit. They did not want to look at my dividend income when calculating loan rates and percentages. This was fixed. It costs more to administer corporations. A good accountant, and I would not take this on without an accountant, will tell you when you are making enough to make it worthwhile. You need a certain income before for it to make sense.

Zeus, you could get a better line of credit by 2 % or more, if you secured it. Do you have other investments that you can use as collateral. If so, negotiate that with the bank.

PeterChigmaroff · « **Reply #30 on:** May 14, 2009, 11:14 »

Quote from: Perseus on May 14, 2009, 11:08

Zeus, you could get a better line of credit by 2 % or more, if you secured it. Do you have other investments that you can use as collateral. If so, negotiate that with the bank.

That's what we are doing and even then there always seems to be an argument about exactly what the lowest rate is. "ooooo we can't possibly offer that rate, oh well if your walking across the street to the other bank we do a have better rate for customers like yourself". B@@@ards.

willie · « **Reply #31 on:** May 14, 2009, 11:26 »

Quote from: Zeus on May 14, 2009, 11:14

Quote from: Perseus on May 14, 2009, 11:08

Zeus, you could get a better line of credit by 2 % or more, if you secured it. Do you have other investments that you can use as collateral. If so, negotiate that with the bank.

That's what we are doing and even then there always seems to be an argument about exactly what the lowest rate is. "ooooo we can't possibly offer that rate, oh well if your walking across the street to the other bank we do a have better rate for customers like yourself". B@@@ards.

Yes, you do have to brush up your negotiating skills, esp when you do have collateral. Usually a mention of another bank wanting your business, and the chances of your moving the rest of your investment there, could suddenly get you a ,"um, I may have to call you back on that".
And then you say, "Um don't take too long!" lol.. Speaking with the Manager always gets you more, than if you deal with one of the agents.

Although I can understand that it is possibly less leeway now with prime so low, and the lending rate at what? zero. Still, look on the bright side, even at Prime +3 , you're not getting a premium
like it used to be in the 90's. So, enjoy it while it lasts.

lisafx · « **Reply #32 on:** May 15, 2009, 18:44 »

Just returned from the accountant. Wow, my head is spinning!

I do have to pay myself payroll. The accountant will take care of the details. Thank God.

Apparently you can draw out the money from the business account as you need it and they just work the payroll out on paper at the end of each quarter. Sounds reasonable.

The weird thing is you have to take the payroll tax to the bank and they send it on to the IRS. I had no idea it was done that way. The whole thing mystifies me.

Seems well worth it to pay the accountant to spoon feed me instructions.

shutterdrop · « **Reply #33 on:** May 17, 2009, 05:29 »

INC really means: I need Cash!

I had a corporation for ten years. You may save money on income tax. You will have an increase in state and local business taxes and inventory tax. Plus a mega increase in paperwork , legal fees, and accountant fees.

Weigh the factors very carefully INC are like marriage, very easy to get into and messy to get out.

If you paid alot of income taxes last year. Try to minimize your taxes by creating a 401k, or IRA. Increase your deductions: health insurance, buy a new car, equipment, or business trips. Deduct, deduct, remember if you are self-employed and alway working and almost everything is deductable. Keep those receipts!!

Get a good CPA and Quickbooks. You still have 6 month to deduct.

Think taxes all year long, if you wait until taxes are due it is too late and you pay!

donding · « **Reply #34 on:** May 17, 2009, 16:10 »

Quote from: shutterdrop on May 17, 2009, 05:29

INC really means: I need Cash!

I had a corporation for ten years. You may save money on income tax. You will have an increase in state and local business taxes and inventory tax. Plus a mega increase in paperwork , legal fees, and accountant fees.

Weigh the factors very carefully INC are like marriage, very easy to get into and messy to get out.

If you paid alot of income taxes last year. Try to minimize your taxes by creating a 401k, or IRA. Increase your deductions: health insurance, buy a new car, equipment, or business trips. Deduct, deduct, remember if you are self-employed and alway working and almost everything is deductable. Keep those receipts!!

Get a good CPA and Quickbooks. You still have 6 month to deduct.

Think taxes all year long, if you wait until taxes are due it is too late and you pay!

I was incorporated for 15 years and as shutterdrop said it was a mess to get out of...You are the shareholder....you have to pay taxes on your salary...every quarter with a 941 form at the bank. We had to pay property taxes as well as unemployment on ourselves even though we couldn't ever draw it. A small S corp which has very little capital, really doesn't protect you...most places won't give you a loan or credit cards unless you sign as the person responsable, even though it is in the business name you personally are the account holder, not the business...which means if for some reason that corp goes bankrupt they come after you personally. The tax savings may be on the money sitting in there, but when you pay self employment tax you actually save money because social security and medicare is only ...if I remember right 12 or 13% whereas with a corp by you drawing a salary it costs you 15%. I was told along time ago by our accountant that unless your income is over 100 thou a year a S Corp will cost you more money than you will save. See with a business when you draw a salary as an employee...the business has to meet what is paid into SS and Medicare so in the long run you are paying more taxes on your self. Oh and there is also state francise taxes that have to be paid...so I really hope you did the right thing. I'm surprised the accountant didn't advise you of all this before hand.

lisafx · « **Reply #35 on:** May 17, 2009, 16:58 »

Quote from: donding on May 17, 2009, 16:10

...if I remember right 12 or 13% whereas with a corp by you drawing a salary it costs you 15%. I was told along time ago by our accountant that unless your income is over 100 thou a year a S Corp will cost you more money than you will save. See with a business when you draw a salary as an employee...the business has to meet what is paid into SS and Medicare so in the long run you are paying more taxes on your self. Oh and there is also state francise taxes that have to be paid...so I really hope you did the right thing. I'm surprised the accountant didn't advise you of all this before hand.

Sorry Donding, but you are misinformed here. As a sole proprietor you pay 15.3% social security and medicare taxes - half as the employee and half as the employer. And you pay it on your ENTIRE income. If you are a corporation you still have to pay both halves of SS tax (15.3%) but you only have to pay it on the amount of money you pay yourself as a salary. Not on the rest of the money your corporation brings in.

So lets say you make $50,000 (nice round number to keep it simple) a year in gross receipts as a sole proprietor. You will pay $7650 in SS taxes plus whatever your income tax bracket puts you into.

If you are an S corp and pay yourself $25,000 in salary and the rest in draw, or investment income, then your social security tax burden is only $3825. You saved $3825 in taxes.

Deduct the amount of money your accountant is going to charge for the year (over and above what you would pay to get your taxes done as a sole proprietor) and if the difference is considerably less than the $3825 you are ahead of the game.

Here is the relevant info on Florida state corporate/franchise taxes:

Florida imposes a franchise tax on foreign and domestic corporations for the privilege of doing business in Florida. The tax rate is 5.5% of net income. The first $5,000 of net income for the year is exempt. S Corporation status is recognized by the State of Florida. Further, Florida does not have a personal income tax; thus shareholders would not be taxed on corporate earnings. A separate state election from the federal election is not required.

If I am reading correctly (and I will check with my accountant on Monday) then the way to avoid the state taxes is to not leave more than $5,000 in net income in the corporation, but to make sure it all goes out as expenses, salary, or dividend payments. This would seem to be something that could vary widely from state to state.

What I do know is that I have been paying almost 40% of my income in taxes as a sole proprietor and according to the accountant I should be paying more like 25% total after the incorporation. She's been doing this for 25 years here in Florida, so presumably she would know. Since I did not incorporate through her, but online I don't see why she would mislead me...?

donding · « **Reply #36 on:** May 17, 2009, 18:23 »

I hope they are right. We were incorporated for 15 years and disolved the corporation in 2007. If you notice on your 1040 line 27 under adjusted gross income, you deduct half of your self employment tax.

donding · « **Reply #37 on:** May 17, 2009, 18:49 »

this is a link to the IRS employment "Circular E, Employer's Tax Guide"..It will give you an idea of how much you need to withhold when you decide what your salary is going to be.

http://www.irs.gov/pub/irs-pdf/p15.pdf

also it tells you how to file it and what forms you will need. Hope it helps.

madelaide · « **Reply #38 on:** May 17, 2009, 19:03 »

Lisa, I'm curious (although this does not apply to me, and maybe this is a stupid question for those living in the USA). In your example, you receive 25k as salary and 25k as investor, is it so? Also you've only mentioned SS and MC, but doesn't the company have to pay a profit tax or something of this sort, as well as yourself over your total earning?

Sean Locke Photography · « **Reply #39 on:** May 17, 2009, 20:34 »

Yes, you have to pay regular income tax on your "dividends".

shutterdrop · « **Reply #40 on:** May 18, 2009, 07:19 »

SS the employer pays half and employee half.

Donding is correct my CPA told us to wait till annual income was at least $250,000.

We incorporated to bring in investor and provide some liability protection. Given the legal society we live in makes it much easier to pierce the corp umbrella today.

I think you are spinning your wheels if you are incorporating to diminish a $10,000 tax liability.

mattb · « **Reply #41 on:** May 18, 2009, 07:38 »

If you do decide to go the S corp route you might want to look into a payroll company to handle the filing of your quarterly forms as well as the salary you are going to pay yourself. From what I remember it really wasn't that expensive and it saved the hassle of doing the paperwork. For me it was worth it but in the end you need to figure out if your going to save enough in taxes to cover your costs of the S corp and have some left over.

lisafx · « **Reply #42 on:** May 18, 2009, 11:23 »

Quote from: mattb on May 18, 2009, 07:38

If you do decide to go the S corp route you might want to look into a payroll company to handle the filing of your quarterly forms as well as the salary you are going to pay yourself. From what I remember it really wasn't that expensive and it saved the hassle of doing the paperwork. For me it was worth it but in the end you need to figure out if your going to save enough in taxes to cover your costs of the S corp and have some left over.

Yes, my accountant is going to handle all that for a very reasonable fee.

As for all the other state taxes, that varies from state to state. I just got off the phone with the accountant and S corps don't pay state taxes in Florida, except for sales tax if you sell a product in state. Which I don't. The money is reported on the shareholder's personal income tax. And there is no personal state income tax in Florida.

Obviously YMMV depending on which state you are in.

lisafx · « **Reply #43 on:** May 18, 2009, 11:28 »

Quote from: shutterdrop on May 18, 2009, 07:19

I think you are spinning your wheels if you are incorporating to diminish a $10,000 tax liability.

Well, thanks for sharing your opinion Shutterdrop, but as you don't know details of my situation nor are you familiar with the tax laws in my state, I think I would be better off listening to my accountant than to you. Nothing personal.

I am not advocating the incorporation route for anybody. Feel free to ignore this thread if you want.

But for anyone who, like me, got clobbered on income and SS taxes last year because of their photography business, this is one avenue to explore. Whether it will save you significant money depends on your income and the state you are in.

michaeldb · « **Reply #44 on:** May 18, 2009, 11:30 »

Quote from: shutterdrop on May 18, 2009, 07:19

We incorporated to bring in investor and provide some liability protection. Given the legal society we live in makes it much easier to pierce the corp umbrella today.

Speaking of 'umbrellas', if you are really worried about your liability to lawsuits, a business umbrella insurance policy might be worth considering, with or instead of your corporate protections.

To add to what Mattb said, don't forget that if you get a payroll service, the cost is tax deductible; i.e. if you are paying 40% taxes, the actual cost of the payroll service is only: cost * 60%.

lisafx · « **Reply #45 on:** May 18, 2009, 12:23 »

Quote from: michaeldb on May 18, 2009, 11:30

Quote from: shutterdrop on May 18, 2009, 07:19
We incorporated to bring in investor and provide some liability protection. Given the legal society we live in makes it much easier to pierce the corp umbrella today.

Speaking of 'umbrellas', if you are really worried about your liability to lawsuits, a business umbrella insurance policy might be worth considering, with or instead of your corporate protections.

To add to what Mattb said, don't forget that if you get a payroll service, the cost is tax deductible; i.e. if you are paying 40% taxes, the actual cost of the payroll service is only: cost * 60%.

Both really good suggestions Michael. Thanks!

donding · « **Reply #46 on:** May 18, 2009, 12:34 »

Quote from: lisafx on May 18, 2009, 11:23

Quote from: mattb on May 18, 2009, 07:38
If you do decide to go the S corp route you might want to look into a payroll company to handle the filing of your quarterly forms as well as the salary you are going to pay yourself. From what I remember it really wasn't that expensive and it saved the hassle of doing the paperwork. For me it was worth it but in the end you need to figure out if your going to save enough in taxes to cover your costs of the S corp and have some left over.

Yes, my accountant is going to handle all that for a very reasonable fee.

As for all the other state taxes, that varies from state to state. I just got off the phone with the accountant and S corps don't pay state taxes in Florida, except for sales tax if you sell a product in state. Which I don't. The money is reported on the shareholder's personal income tax. And there is no personal state income tax in Florida.

Obviously YMMV depending on which state you are in.

Texas, which is where we had our corporation, does not have state income tax either. I hope you the best of luck with it all lisafx and I meant you no harm in saying what I did.

lisafx · « **Reply #47 on:** May 18, 2009, 13:02 »

Quote from: donding on May 18, 2009, 12:34

Texas, which is where we had our corporation, does not have state income tax either. I hope you the best of luck with it all lisafx and I meant you no harm in saying what I did.

No harm taken Donding

I am curious what type of business you had for 15 years? Maybe some of the costs and/or state taxes you mentioned were specific to your type of business?

As a stock photographer, I don't offer a service or keep an inventory (my backup hard drive doesn't count as inventory) so perhaps that explains why I don't have state taxes and you did?

I will have to pay unemployment tax on myself, but that won't begin to eat the tax savings from SS and medicare. Besides, if my business ever goes belly up I can collect it

donding · « **Reply #48 on:** May 18, 2009, 16:21 »

Quote from: lisafx on May 18, 2009, 13:02

Quote from: donding on May 18, 2009, 12:34

I am curious what type of business you had for 15 years? Maybe some of the costs and/or state taxes you mentioned were specific to your type of business?

As a stock photographer, I don't offer a service or keep an inventory (my backup hard drive doesn't count as inventory) so perhaps that explains why I don't have state taxes and you did?

I will have to pay unemployment tax on myself, but that won't begin to eat the tax savings from SS and medicare. Besides, if my business ever goes belly up I can collect it

Well we were in the car business for 17 years but incorporated for the last 15 years. We never retailed we only wholesaled...meaning we were the middle man between the new car dealerships and the used car dealers. We bought the new car trade in's and then sold them to other dealers at auction. At one point we were the biggest independent wholesaler in the state of Texas....which was why we incorporated. We never had to pay sales tax because we wholesaled.
As for unemployment tax in Texas you couldn't draw it, if you were shareholder but had to pay it in which really never made sense to me and really gotta p***ed me off, but that was what I was told that by someone in the unemployment office.
And of course with the ecomony the way it was and the new car dealers doing no business it trickled down to us. If we were still trying to do it we'd be starving right now because of the situation the new car dealerships are in right now. We were in debt up to our ears and drowning fast before we got out of it thinking it would turn around. And of course with the debt of the business going up that also put our pursonal debt way up there...we were robbing Peter to pay Paul. Needless to say we were able to dissolve the corporation but the debt was our burden...and the only answer for us was bankruptcy which really tugs at our pride especially since I was always one to pay the bills 7 days before they were ever due, never missing one. Our house was even forclosed on.

madelaide · « **Reply #49 on:** May 18, 2009, 16:44 »

Quote from: lisafx on May 18, 2009, 11:23

And there is no personal state income tax in Florida.

Wow, maybe I should move to Florida?

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Author Topic: Incorporation to save on Taxes (Read 25258 times)

willie

Sean Locke Photography

PeterChigmaroff

mattb

willie

PeterChigmaroff

willie

lisafx

shutterdrop

donding

lisafx

donding

donding

madelaide

Sean Locke Photography

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mattb

lisafx

lisafx

michaeldb

lisafx

donding

lisafx

donding

madelaide

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