I am exploring an opportunity to become a 1099 consultant. For a tax purpose, what is a real difference between sole proprietorship and S-corp? Specifically, in case of S-corp you can pay yourself a modest salary and receive the rest as distribution, not taxed for Social Security purpose. Is this available for selfemployed? Also, selfemployed can deduct 1/2 of selfemployment tax. Anything similar for S-corp? Maybe other consultants on the board can point out other issues.Thanks a lot!
[[I am exploring an opportunity to become a 1099 consultant. For a tax purpose, what is a real difference between sole proprietorship and S-corp?]]Got about three hours???[[ Specifically, in case of S-corp you can pay yourself a modest salary and receive the rest as distribution, not taxed for Social Security purpose.]]That is certainly correct. It's called beat the FICA tax system by using an S-corp. But the "modest" salary better be at least $25k, and should be closer to $30k in order to avoid the wrath of the IRS.[[ Is this available for selfemployed?]]Nope. As a Sch C filer, you'll pay SE taxes on your net earnings from self employment. The whole enchalada.[[ Also, selfemployed can deduct 1/2 of selfemployment tax.]]And the corporation will be able to deduct the corporation contribution of the FICA taxes paid via the corporation payroll. So you are on basically the same playing field there.[[ Anything similar for S-corp? Maybe other consultants on the board can point out other issues.]]There are many, many more of them. I would NOT make this decision without some professional assistance. At a MINIMUM, some substantial additional reading. You really need to know what you are getting into here before you jump in with both feet. The decision regarding a "tax entity" is complicated and delicate. It's not as easy as most people think.So if you want the additional information, you'll need to get to know both the Sch C and also the S-corporation. You can read more about Sch C in IRS Publication 334. You can read more about the S-corporation issues in IRS Publication 589. And I would suggest that you read these publications at a minimum. If you want to move forward from there, you can visit your local bookstore and browse the stacks for various books (there are a number of them) that deal with the "tax entity" issues, that compare and contrast the various entities.Hope this helps...TMF TaxesRoyWant to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
S-Corp has a lot of non-wonderful aspects (at least here in Massachusetts). Among them: non-trivial recurring costs for operating a corporation (several hundred dollars to the state, plus a couple hundre more for the corporate tax return [to a tax pro, unless you are feeling brave to do it yourself...]), you get to pay unemployment taxes (a few hundred per year, depending on your salary), you also may need a workers comp insurance policy, which can run another few hundred per year. You also need an annual corporate meeting (an hour or so of your lawyer's time, to meet paperwork requirements). Much more onerous payroll requirements vis-a-vis IRS. The only reason I did it was my first client would not do business with a 1099 contractor (and it was a 2-year contract, so I wasn't about to argue). The legal shelter of a corporation is largely meaningless for most small S-corps, and as above, there are almost no advantages to electing this. Think long and hard (and get a tax pro to advise you) before you go this route.
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