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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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Apr 1, 2017 00:53
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| # ¿ Apr 29, 2024 01:22 |
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