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Seeking Tax advice, self employment tax, incorporating


10-Ring

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I'm sure a lot of people here are self employed.  As you know self employment taxes really stink.  An acquaintance suggested that I look into incorporating.  I've done a little research on my own, and frankly it's confusing.  I work alone as a "sub contractor" but 99% of my work goes to one client.  This is a permanent set up.  Anyone else done something similar to avoid the self employment tax?  Anyone know a good tax attorney in the Knoxville area?

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Guest CigarGuy

An "S" Corp is an alternative, but I'm not familiar with your State income taxes on Corps, if any.

My "break-even" is about $20K in net profits.  If you are making less then that per year, stay

a sole prop/LLC.  If more, with a CPA's blessing, then you may be able to take some combination of

salary and draws that may lower your net S/E tax. 

Seek advice, my friend!

Edited by CigarGuy
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Guest CigarGuy

No state individual income tax in TN. Don't know about corp.

 

<nodding>  Knew that but, I thought there was some "excise" tax or some other such nonsense on Corps?

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<nodding>  Knew that but, I thought there was some "excise" tax or some other such nonsense on Corps?

 

Could be. Rule #1... they're gonna get their money. Forming a corporation and complying with the accounting practices is going to add costs, unless you're an accountant. Again, a good CPA could put these questions to rest in less than an hour. I have great CPA's, but they're in Nashville.

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You would do well to find a good CPA and if you can a lawyer as well. They can help you with the setup of your company.

Most likely, you will want to set up as a Sole Proprietorship or as an LLC... all depends on the tax situation.

Regardless it's well worth the up front investment to get the professionals in on this.

Oh, and the SBA can provide some helpful resources as well: http://www.sba.gov

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Guest Lester Weevils

The beauty of some kind of incorporation, is that the corporation owns certain assets and you personally own other assets. If the corporation goes down the drain or gets sued into the dirt, you get to keep the assets that belong to you personally rather than to the corporation. But there are more rules to follow and you can get in more trouble if you don't follow them the right way.

 

If you are just a sole proprietor, it would be good to avoid too much debt exposure or lawsuit exposure. If the business goes bad with lots of debt, they can and will take yer house and car and empty your bank accounts. So in some ways a corp can be more "adventurous" and "aggressive" without risking the house and car.

 

I don't think incorporation will save you any social security tax, but maybe a good CPA could figure a way. If you are making a LOT of money maybe the incorporation will help more than small-time biz. If you are a corporation, you pay yourself a salary. The corporation pays 7.65 percent of when you write yourself a paycheck, and then the corporation takes out 7.65 percent out of your paycheck, and sends 15.3 percent of your salary to uncle sugar. If you are a sole proprietor, all the profit of the business owes SS tax at a rate of 15.3 percent. So maybe some situations would benefit one way or t'other, but uncle sugar gets 15.3 percent either way. Just with the corporation, you pay 7.65 percent out of your left pocket and pay another 7.65 percent out of your right pocket.

 

Now if you are a corporation, and the corporation loses money hand over fist for several years before you pull a profit, then your corp will pay 7.65 percent and you will pay 7.65 additional percent on the money you take out as living expense salary, even if the corporation is losing bad, and therefore the corporation wouldn't owe income tax, but you would also owe income tax in addition to the SS tax, on the money you are drawing out of your losing enterprise.

 

On the other hand, if you are a sole proprietor and you lose money hand over fist for a few years before pulling a profit, you won't owe one red cent of tax, as long as you ain't making a profit.

 

I knew a "relatively famous" musician who recorded some pop music sessions but was primarily a christian pop musician. He had a non-profit corporation, the "ministry". He hardly drew any salary at all, and the "ministry" owned the big house, fancy cars, the tour bus and the corporate jet, and the corporation paid most of his living expenses. It was a pretty sweet deal and the ministry didn't pay any tax and he hardly paid any tax. But then after about 10 years he got in all kind of trouble with the IRS over his tax-free "ministry" paying a luxury rock-star lifestyle.

Edited by Lester Weevils
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Check Dave Ramsey's site for an endorsed tax attorney in your area.  They all offer a free or low cost consultation. I went through a similar process in Nashville to try and determine if it was worth it for me to go on my own.  It sounds like our situations are similar except that my employment involved work solely for a foreign company which added even more taxes.  Even though my gross would have been fairly high (200k -250k), it did not make financial sense to do it.  In the end, my take home pay may have been less by the time I did everything including incorporating, hiring attorney's, tax accountants, etc.  It may work out for you, but for the little gain I would have seen and the extra risk I would have taken on, it wasn't worth it to me.

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