Hey Lisa,

On the money that you pay yourself, do you have to deduct taxes and so on like a company would pay and employee from each check you make out to yourself?

I am looking into this as well. I had to pay a substantial amount of self-employment tax for the 2008 tax return. Do you know any good websites that have good information on forming the S-corp?

Thanks,
Supri

Yeah, I have heard thoughts about this as well and perhaps it is a good idea... i suppose i should check it out eventually as well.

You still end up paying taxes on all the money earned - just at a later date when you are perhaps in a lower tax bracket.

Quote from: snaprender on May 12, 2009, 13:57

Hey Lisa,

On the money that you pay yourself, do you have to deduct taxes and so on like a company would pay and employee from each check you make out to yourself?

Presumably so.  I have to get with the accountant to find out if I have to withhold from each paycheck or can tally it all up at the end of the year. 

speaking from an accounting standpoint, limited company makes you not an employee but more an owner of the separate entity that is your company. when you pay yourself , it comes out as Drawings in your balance sheet, not as salary. You pay yourself as a shareholder, not an employee.

i speak from Canada standpoint or UK tax experience. Maybe US is different, but it probably is quite similar as Corporate Law is based on English Law.

edited

Perseus, what you are saying about the Canadian corporation sounds very similar to what I have been told about an S corp.  That is why I won't be subject to the Social Security taxes on the income, as it is considered investment income.  I will still have to pay the income taxes at my and my husband's personal rate, but saving on the SS tax is going to help out so much. 

Not being an accountant I am a bit fuzzy on the details but I have talked to several tax pros and they seem to agree this is the way to go. 

I figured I wasn't the only one in this boat.  The good news:  lots of us are earning money in microstock.  The bad news: wow those taxes come at you out of left field!!

lisa, the advantages of incorporation outweights the dis.
you lisafx and the corporation are 2 separate entities. we'll say lisacorp , is not ms. lisa xxx the person. so, the property you own as a person ,etc... is not part of the company. only your capital is liable. what i mean is, say XXX sues lisacorp, and you and your husband are shareholders of lisacorp. mr. and mrs xxx also owns a boat, house, etc..
if i sue you, i cannot claim your boat, house, etc.. i can only claim to the limit of lisacorp's capital.
that alone is enough to make anyone with a substantial income incorporate.

i hope i explained it well.
 

You did explain well.  Thanks so much.  That is definitely an added bonus. 

We aren't in the category of having big assets at the moment, but who knows about the future.  Maybe stock will make us rich one day!! 

live well & prosper !

I will definitely update this thread when I find out about payroll.  Gotta know how to get paid - most important part of the whole project

Tyler, if you checked my previous communications with lisafx above, I never mentioned incorporation saves taxes. That was the title of this blog.
Traditionally, incorporation was advised to protect your liability as a professional, since you become a separate entity from the corporation.
 Whether this would actually save you taxes or not, depends on how well you apply the taxation benefits offered to Coporations. You consult a Tax Consultant for that, ie. during my days such specialists hold the designation ATII within the old British Commonwealth (perharps they are now called ACA/ACCA).  They were distinct from Public Accountants ( eg.US - CPA), although usually, in a Public Accounting firm, they would some distinctive ATIIs on board.

Quote from: aremafoto on May 12, 2009, 14:02

I am looking into this as well. I had to pay a substantial amount of self-employment tax for the 2008 tax return. Do you know any good websites that have good information on forming the S-corp?

Thanks,
Supri

I went through a site called floridaincorporationservice.com.  They were cheaper than legalzoom.com.  I don't know if they have branches for other states but they probably do.  And if not, legalzoom definitely does.

Perseus, what you are saying about the Canadian corporation sounds very similar to what I have been told about an S corp.  That is why I won't be subject to the Social Security taxes on the income, as it is considered investment income.  I will still have to pay the income taxes at my and my husband's personal rate, but saving on the SS tax is going to help out so much. 

Not being an accountant I am a bit fuzzy on the details but I have talked to several tax pros and they seem to agree this is the way to go. 

I figured I wasn't the only one in this boat.  The good news:  lots of us are earning money in microstock.  The bad news: wow those taxes come at you out of left field!!

Thanks! Please keep us posted.

Here's what I remember from my days as an independent consultant when I had an S corp.  If this is your main source of income you will need to pay yourself enough salary to make the IRS think you really are taking a salary from the company. Both you(as an employee) and the S corp will have to pay all the normal payroll taxes on this salary. You can take the rest of the money out as dividends. The only taxes you pay on that money is the same amount you pay on your other investment income. Since its investment income, you don't pay all the payroll taxes which is where your tax savings come from.

Thanks Matt.  This is exactly how it was explained to me too.   The savings comes from the 15% Social Security taxes you don't have to pay on the dividend income.

well said michaeldb.

whether you benefit is largely dependant on where you are. some countries, even some provinces (as called in Canada) or counties (in ole UK,etc..) offer grants to small businesses to incorporate. At times, this is on top of what the country offers.
If you are a resident in a country or state that caters to corporations in favour of the working mom and pop, you would benefit from incorporating.
Do your homework. As they say, "most people spend more time in research buying a car, than they do in getting a mortgage or incorporating". Don't be one of those (wink).

Can a company pay all of its income as dividends? I was wondering if this is something that raises eyebrows at the IRS.

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.

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.

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.

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.

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!

...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...?

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.

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

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.

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.

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!

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

And there is no personal state income tax in Florida.

Wow, maybe I should move to Florida? 

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.

So sorry to hear this Donding.  I know the car business is one of the hardest hit by the economy.  Really terrible to hear how it is affecting real, hard-working people.  It would be a terrible blow to build a business and watch it go down hill due to things totally beyond your control.

Hoping that your future endeavors are successful and you land on your feet. 

I knew this about Texas, not about Florida. I wonder if any other state has higher state income tax than CA. And on top of that our sales tax just went up by 1% ....

According to Wikipedia (http://en.wikipedia.org/wiki/State_income_tax), there are seven (7) U.S. states with no income tax:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

Although they don't have income tax, they have a higher sales tax rate (and probably many other taxes that are higher).

California does have the highest rate for a state, but there are some cities that have a tax rate which (when combined with the state income tax) makes them higher than California.  For example, NYC has a state income tax rate of up to 8.14% and a city tax rate of 4%.

Quote from: goldenangel on May 18, 2009, 18:29

I knew this about Texas, not about Florida. I wonder if any other state has higher state income tax than CA. And on top of that our sales tax just went up by 1% ....

According to Wikipedia (http://en.wikipedia.org/wiki/State_income_tax), there are seven (7) U.S. states with no income tax:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

Although they don't have income tax, they have a higher sales tax rate (and probably many other taxes that are higher).

California does have the highest rate for a state, but there are some cities that have a tax rate which (when combined with the state income tax) makes them higher than California.  For example, NYC has a state income tax rate of up to 8.14% and a city tax rate of 4%.

I always thought that too, but we were paying 8.25% sales tax in the Dallas Texas area, but here in Alabama...it's 8.50% where we live and the next town over is 9.00%!!! Wow was I ever surprised to see that. I really figured since they had state income tax the sales tax would be less, but it isn't..it more.

Here in Brazil only monthly earnings below roughly US$600 do not pay taxes; from US$600 to 1100, we pay 15%; above US$1100, 27.5%.  But that goes in ranges, for instance: US$2000 (=600+500+900) pays (0*600+0.15*500+0.275*900)=322.5 (or 16%).  As I already earn above US$1100 in my job, everything I earn in photography is taxed at 27.5%. 

The above is about salaries or any work profit.  Investment funds and other applications have a different rule.

OUCH...that's gotta hurt. Why are taxes so high there??

It's not much higher than in the US, probably less in some instances. Everything above $33,950 per year is taxed at 25%, above $82,250 at 28%, and that's not including state income taxes (8% for California above $37,234 per year).

If you wish to reject other opinions why put your questions on a public forum?

The Government, CPA, and Attorney  love INC, more control and paperwork for them. Of your CPA want you to INC because he will make a ton of money from you.  Good luck at your first INC directive meeting. Be sure to follow the letter of the law because your are now a corporation.

Been there and done that! Do as you wish baby! Good Luck!

Or the myriad other hidden taxes and fees that we are charged on a daily basis (such as sales taxes, property taxes, gasoline taxes, phone taxes, cable taxes, toll roads, ad infinitum).

We have those too.  Our sales taxes are "hidden" inside the price we pay.  Although we are self-sufficient in oil, gasoline here costs the same as in Europe because of taxes.

Roughly US$1.23 per liter or 4.66 per gallon.  If I am correct, in Europe prices are around EUR1-1.2 per liter, or US$1.35-1.63.