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tangy yet delightful
Sep 13, 2005



I am looking for advice/recommended reading on the pros/cons for these two setups.

This is for a home business doing photography. There is really no current concern for liability insurance, single employee, other spouse is currently employed full-time and health insurance is via that job. Based in Tennessee.

From reading this article, it looks like the possible taxation benefit comes from taking a smaller salary as an employee of the company and then taking the rest of your pay as a dividend.

Questions I have:

1) Is the S-Corp dividend taxed at the 15% capital gains rate?

2) Will workers compensation and/or unemployment insurance coverage be needed?

3) State of TN taxes?

4) How does one form an S-Corp most efficiently?

5) How do salary and dividends need to be paid, ratio wise, to avoid the IRS reclassifying some portion of dividends as wages?

6) And finally, should the business be something other than S-Corp or Sole Proprietorship? And how would advice change if the business went from the sole employee to both spouses working for the business full-time?

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EAT FASTER!!!!!!
Sep 21, 2002

Legendary.


:hampants::hampants::hampants:

tangy yet delightful posted:

I am looking for advice/recommended reading on the pros/cons for these two setups.

This is for a home business doing photography. There is really no current concern for liability insurance, single employee, other spouse is currently employed full-time and health insurance is via that job. Based in Tennessee.

From reading this article, it looks like the possible taxation benefit comes from taking a smaller salary as an employee of the company and then taking the rest of your pay as a dividend.

Questions I have:

1) Is the S-Corp dividend taxed at the 15% capital gains rate?

2) Will workers compensation and/or unemployment insurance coverage be needed?

3) State of TN taxes?

4) How does one form an S-Corp most efficiently?

5) How do salary and dividends need to be paid, ratio wise, to avoid the IRS reclassifying some portion of dividends as wages?

6) And finally, should the business be something other than S-Corp or Sole Proprietorship? And how would advice change if the business went from the sole employee to both spouses working for the business full-time?

I'm not a lawyer and this advice isn't meant to be legal but a sole proprietorship is a pretty good way to get your poo poo hosed with regard to liability. While you think you have nothing to fear regarding liability, the photography industry is rife with horror stories of individuals with huge legal obligations following somebody doing something dumb around camera equipment. A single individual LLC is immediately a better choice than a SP.

You're going to want to meet with a tax accountant to compare an LLC and an S-Corp moving forward, because so many of the answers of this are "it depends." Like, depending on local tax statutes and incentives, your total tax liability can vary dramatically between the two, but the answer is the Government always gets their taste one way or the other, so figure it out with someone who knows this business inside and out.

Elephanthead
Sep 11, 2008


Toilet Rascal
Federal: Your S Corp income will be taxed at your income tax rate but you won't pay employment taxes on it. You should pay yourself a market rate wage which you will pay employment taxes on before taking distributions.

How much liability protection this affords is state dependent as are state taxes.

Kase Im Licht
Jan 26, 2001
There's not going to much or any liability protection for a one empoloyee corporation. If they can't sue you as an owner they'll just sue you as the employee since you're the one doing the fuckup.

vaginite
Feb 8, 2006

I'm comin' for you, colonel.



S Corp has some tax advantages:

All wages have FICA tax: the employee pays 7.65% and the employer has to match that 7.65%. This is true for anyone with employees. The poo poo sandwich a sole proprietorship has to eat is that this is picked up for business owners as "self-employment" tax, which is a combined 16.3% on income (total of employee and employer match) of the business to the owner, then income taxes on top of that.

An S-Corp works around this somewhat in that you can be an "employee" of your S-Corp and pay yourself a salary. In the salary you still have to pay employment taxes, but only to the extent of your salary. Anything the company makes above and beyond your salary isnt subject to those employment taxes, only income taxes at your personal level. This is really the main tax advantage.

As far as dividends it gets complicated. All S-corp income flows through to your personal taxes - ie the company pays taxes as it makes money, not as it distributes it. All money you put in plus any income the company makes and gets taxed on you are entitled to receive out of the company tax free - any distributions past that result in income that is taxed as a capital gain. This is kind of a simple explanation but in practice it's a lot more complicated and a lot more little things go into it. Google S-corps and tax basis if you really want to get into the nitty gritty of it, but just be aware it can get a lot more complicated than I have described.

As far as legal liability, if you are a proprietorship you can usually get the same protection that corporations have - you need to look into organizing as an llc in your state.

Keep in mind that there some pretty stringent rules about running your business you have to follow to keep your corporate liability protection whether you are an llc or an s corp. The IRS has a lot of rules you have to follow to maintain S Corp satus as well but they arent that complicated. Losing S-Corp status can be devastating tax wise.

If you are making some serious money s corp is usually the way to go. Also recommend getting an accountant if you are making a pretty good chunk of money to help navigate all of this.

Edit: forgot to mention, theres a point in earnings over which employment taxes and self-employment taxes drop significantly. In 2016 the cap was 118,500 - anything you make over that is only subject to 1.45% employee and employer match, or 2.9% aelf employment so if youre making more than that or paying yourself more than that out of an s corp, factor that in.

As for your questions:

1) Taxed at capital gains rate:

Distrubutions are not taxed at all until they exceed your basis, then yes, capital gains rules apply. If you have had the business more than a year, it will be taxed at the lower rate. However, I stress you look up tax basis rules.

2) Workers comp/unemployment

Not affected by organization type I believe. Im pretty sure these are on a state-by-state basis but i might be wrong.

3) State of TN taxes

Shouldnt be a huge impact, its based on your personal federal income with some adjustments, both methods of organization wont create a significant difference for income or other state taxes.

4) How to form an s-corp

Its an election you make on the tax form for a corp the first time you file as a corp - ask your local tax guy.

5) Ratio of dividends

The IRS will challenge your salary, not distributions. If you are an S-corp, you need to pay yourself a "reasonable wage". The IRS cares for employment tax purposes, they dont want you to pay yourself a ridiculous low salary to avoid employment taxes. Its not a ratio as much as being able to justify that your salary is reasonable, ie what someone doing your job would be expected to be paid.

6) Spouses

Same as above applies, as an s corp youll need to each draw reasonable salaries as an S Corp.






vaginite fucked around with this message at 01:50 on Apr 1, 2017

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tangy yet delightful
Sep 13, 2005



Thanks for all the advice. I will plan to seek out an accountant and go from there on best path forward.

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