Accounting Project Source

Accounting Project Source - Will Incorporating Benefit Your...

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Will Incorporating Benefit Your Business? Business owners incorporate to protect themselves from unlimited personal liability for their business. But the tax benefits are not always clear by Karen E. Klein I am a sole proprietor working as a 1099 commission-only consultant. I make between $150,000 and $200,000 annually and have had to pay as much as $30,000 in income taxes. If I incorporate, would it lower my tax bill? —T.R., Long Beach, Calif. Incorporation is a complex issue and there are so many variables that it is difficult to answer your question without getting many more details about your company. This is a situation you should discuss with an accountant who is privy to your financial records, and who can lay out the pros and cons for you based on those specifics, to enable you to make an informed decision. Generally, however, most companies won't find significant tax advantages to be gained by incorporating. "The marginal tax rates for corporations with taxable incomes between $75,000 and $335,000 are actually higher than the marginal tax rates for an individual with equivalent earnings," says Mark T. Nash, a partner based in Dallas in the PricewaterhouseCoopers' private company services practice. "Assuming you withdrew most or all of the earnings from the corporation as salary, the income would be taxed to you personally in any case." Trading Taxes James O'Connor, tax manager at AVZ, an accounting firm based in Hauppauge, N.Y., agrees. "Merely incorporating, without doing anything more, usually will not achieve any savings. Regular corporate earnings are generally subject to two levels of taxation—once at the corporate level, and again when the net earnings are withdrawn from the corporation by the shareholder," he says.
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Assuming you are a U.S. citizen or legal resident, your corporation can elect "S" status or you can form an LLC, which generally eliminates the corporate tax. But in that case, you'll be taxed directly on your company's earnings, which is the same situation you're in now as a sole proprietor. The one area where you might realize some savings is in self- employment taxes, O'Connor says. "While 100% of your sole proprietorship earnings are currently subject to self-employment tax, a savings may be achieved because the S-corp's net earnings are not subject to self-employment taxes." The S-corp must pay you a reasonable salary, which will be subject to FICA (payroll taxes) at your current self-employment tax rate. However, the S-corp profits—net of your salary—are not subject to self-employment tax, so your corporation won't pay them on its earnings. Adding Up Costs and Savings The problem you'll run into, however, is that incorporating is costly. You'll typically have to pay $1,000 or more in the first year to have an
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Accounting Project Source - Will Incorporating Benefit Your...

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