June --
Software Developer in my 3rd year.
I am currently a solo proprietor and would like to incorporate to avoid some of the self employment taxes.
If I do this in 2008 can ALL my income for 2008 fall under the incorporation or just the income that was earned after the incorporation?
Paul
Westminster, CO
Paul --
What do you mean by "avoid some of the self-employment tax?" Where did you ever get the idea that you would not have to pay self-employment [SE] tax if you incorporate? You haven't been getting tax advice from Aunt Tillie. Have you?
SE tax is made up of Social Security Tax and Medicare tax. You pay it on earned income whether you are self-employed or an employee -- even an employee of your own corporation.
Some people think that if they form an S-corporation and they make, let's say $40,000 as an IT consultant, that they claim only $10,000 of that as earned income and the rest as corporation profit. In that way they pay Social Security tax and Medicare tax on only the $10,000. That's cheating. And in legal circles it's called fraud.
Income earned before incorporating is not income to the corporation.
Best,
June
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3 comments:
Here a good explanation of what I’m thinking …
http://www.powerhomebiz.com/vol81/taxincorporating.htm
Let say I bill out at $75.00 an hour… If I were to hire someone to do the work I would have to pay $40.00 an hour. The $40.00 would be subject to self employment taxes the $35.00 would be profit for the S corp and not subject to self employment taxes
Paul --
Why would I pay you $75.00 an hour when I could have the same work done by someone else for $40.00 per hour?
You must be able to show -- prove -- that what you are treating as profit rather than earned income is really profit. For instance, is the higher price you charge attributable to your corporation's reputation? Your connections in the industry? Your markup on products sold? Get the idea?
Also, remember your expenses will be deducted from your income which will make your profit less than $35.00 an hour.
BTW -- the powerhomebiz link is no longer valid. Can you connect me to it? I am interested in what they have to say about incorporating.
Best,
June
Here is the link...
http://www.powerhomebiz.com/vol81/taxincorporating.htm
Paul
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