Incorporating from sole proprietorship (USA)
Thread poster: xxxsonjaswenson
xxxsonjaswenson  Identity Verified
United States
Local time: 08:48
Spanish to English
+ ...
Aug 22, 2013

My accountant suggested that it may be time to incorporate as an S-Corp to avoid the stiff self-employment tax, which is getting to be ridiculous now that I am making a decent living.

Has anyone else done it before, and do you have any advice? Anything to watch out for?

Is any one state better than the others to incorporate in and why? I know DE and NV have reputations as being low-tax and business friendly, but I also know you have to register as a foreign entity in your state of residence if you don't live in the state you incorporate in.

I am planning on moving to a different state in about a year, what happens then? Is there a way to move the S-Corp to another state? Or is it worth it to just open up in DE and pay the foreign entity fee? I'm considering waiting until I actually move to do it, but I"m on track to owe quite a bit this year, and the state I am in now is considerably more "business-friendly" than the one I plan on moving to.


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The Misha
Local time: 09:48
Russian to English
+ ...
Incorporating as an S-corp isn't going to do anything for you in terms of tax savings Aug 22, 2013

Sure, you won't have to pay self-employment tax on your 1040, but the feds aren't stupid. They'll want you to take some of the money (at least 50%) as a payroll salary, so you'll have to pay FICA and such on that amount out of your S-corp account AND the personal half yourself. Plus, unless you know what you are doing and are willing to do the payroll calculation yourself your altruist accountant will charge you a little extra for that too - at the rate of $150+ PER HOUR (are we sensing a conflict of interests here yet?) Plus you'll have to do an S-corp return every year on top of your 1040 (yes, you attach the corporate thing to your personal one and pay only once, but you still have to file it), and that'll cost you extra. Plus, depending on what state you are incorporated in, they may want you to pay a "minimum" annual tax by whatever name of $500 or so, and some unemployment insurance to boot that, mind you, being the only person on the payroll you'll never be able to collect upon, and god knows what else. All of that - and chances are, much more - will require additional paperwork that your accountant will only be too happy to charge you for. Also, keep it in mind that dissolving an S-corp when you no longer need it is an undertaking in its own right. I should know - I did it twice (in NYS) and I wouldn't want to have to do it again.

Bottom line: if you are not showing 100K or more in annual revenue, don't bother, and even after that incorporating has more to do with reducing your statistical chances of an IRS audit than actually saving on taxes. Again, Mr. You-Know-Who-in-the-White-House ain't stupid, no, ma'am, he ain't. Even if you decide to incorporate, incorporating anywhere but in your home state at this level will give you nothing but more hassle and extra expense. That may only make sense for big guys with dozens or hundreds of millions in annual revenue.

If you want to save on overhead, buy yourself a TurboTax or something next year, learn to use it (this isn't rocket science) and send your accountant packing. That's what I did years ago, when still running a regular brick-and-mortar, merchandise selling business, and I never looked back. It's kind of fun too, and no one, but no one will give your tax situation more attention than you will yourself. Good luck to you.


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xxxsonjaswenson  Identity Verified
United States
Local time: 08:48
Spanish to English
+ ...
TOPIC STARTER
Interesting.... Aug 22, 2013

Thanks for the detailed reply, that is a lot of useful information. I saw on your profile you have an MBA... Naturally the accountant didn't mention the unemployment tax and FICA (another freelancer did warn me about that though). He did say it would cost about 1200 to set up and another 1200 to file taxes on, and that as a sole proprietor I was looking at owing quite a bit this year. He punched in some figures and came up with a far smaller number with an S-Corp but that was without taking into account the taxes on the corporation itself and payroll, unemployment, etc.

Since I do everything legally, and don't try and pull anything weird on the IRS, I'm not really concerned about an audit. My impression is that he is operating from the perspective that we are all somehow cheating the IRS and trying to get away with it (and pay him 150/hour to help us with that).

If anyone else has any perspective on this, I'd love to hear it!


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Henry Hinds  Identity Verified
United States
Local time: 07:48
English to Spanish
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Self-Employment Tax Aug 22, 2013

When it comes time to collect your Social Security, you'll be glad you paid your Self-Employment Tax. I've paid all along, still pay, and I also collect. Plus I'm so glad to have Medicare, I have paid and still pay for that too, but I get much more out of it than I put in.

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xxxsonjaswenson  Identity Verified
United States
Local time: 08:48
Spanish to English
+ ...
TOPIC STARTER
Thanks again Aug 22, 2013

Thanks for that, too, Henry.

It all seemed a bit short-sighted to me. Of course the accountant wants to do fancy math to get my income down to a ridiculously low figure so I owe less/get more from the IRS, and naturally return to him year after year... But it seems sort of silly if I ever want to buy a house or take out a major loan to say I earn a fraction of reality...


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James McVay  Identity Verified
United States
Local time: 09:48
Russian to English
+ ...
My experience Aug 22, 2013

I operated as an employee of an LLC owned by my wife for several years. Most of the company's proceeds went to her, and she paid self-employment tax on it. That made sense, because it would raise her Social Security annuity, however slightly, whereas I retired from a civil service job under CSRS --meaning I have never paid enough Social Security taxes to earn Social Security benefits. When she retired, however, we retired the corporation. Now I pay self-employment tax on my translation income but will never see a Social Security annuity.

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xxxsonjaswenson  Identity Verified
United States
Local time: 08:48
Spanish to English
+ ...
TOPIC STARTER
Spaciba! Aug 22, 2013

Alright, so we nix the accountant's brilliant plan for me, and work on convincing my friends to start having some children so there is some social security left...

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Daina Jauntirans  Identity Verified
Local time: 08:48
German to English
+ ...
I like my S-corp Aug 22, 2013

Maybe shop around for a different accountant or get a second or third opinion. I was earning more each year and always behind on my quarterly taxes as a result. It was stressful. My accountant also advised an S-corp, which I formed through Company Corporation - it was much less than $1,200. Payroll is about $50/mo. through a payroll corp., not $150/hr., and it's well worth it.

I pay myself payroll (minus taxes) plus some money as a draw (not subject to payroll tax) - I think that's what you are talking about when you say he was trying to get your income as low as possible. Not a good idea unless you have significant other retirement savings, plus the IRS frowns on it. Google "S corp" + "dividend" + "salary." I pay myself a reasonable amount (and pay all payroll taxes, SS, etc.) and take a reasonable amount as a draw, and I have never had any problems. I have enough quarters to earn Soc. Sec. & am constantly adding to it. (Yes, I also hope it will be there!)

You would have some additional filings to do with an S-corp. that you wouldn't have as a sole proprietor. I let my accountant handle my taxes, and that's about another $400 for my corp. taxes - I am told mine is more expensive than others, though, so you could probably knock that down. My accountant is reliable, efficient, all around great, and has helped me out with difficult questions, so I am going to keep him as long as I can afford it!

Here are some more pros and cons:
http://www.bizfilings.com/learn/s-corporation-advantages-and-disadvantages.aspx

Salaries/draws:
http://www.rataxandaccounting.com/pdf/Salary-Draw-S-corp-CDA-Amended.pdf


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Incorporating from sole proprietorship (USA)

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