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Question for drawkbox: if this guy had formed an S corporation, would that have changed the self-employment tax? He'd owe taxes for his own income, but the S co

by sabat 17y ago

Question for drawkbox: if this guy had formed an S corporation, would that have changed the self-employment tax? He'd owe taxes for his own income, but the S corp (IIRC) doesn't pay taxes, right?

drawkbox 17y ago
Nope that tax is always there. Your employer covers most of it mainly in social security/medicare and a C or S corp will pay out of their coffers for that. So most full-time workers never see that hidden 15% but it is blatantly there when you contract, self-employ, LLC etc. SE tax rate. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). http://www.irs.gov/businesses/small/article/0,,id=98846,00.html http://www.irs.gov/businesses/small/article/0,,id=98846,00.h... When I contract, sell products etc. I expect to get about 55% of the revenue after taxes. That is actually a bit low but it is a good number to use to make sure you are charging enough. So if you work for $70/hr you are actually working for about $40/hr and so on.
grandalf 17y ago
The amount of self-employment tax is lower with an s-corp b/c your salary will be lower. With an s-corp you can also benefit from the standard deduction on your individual return. Consider: Sole Propietorship: taxable income is equal to whichever is lower, gross income minus expenses or gross income minus the standard deduction. S Corp: you subtract expenses from the corp's income, and pay your self, say, 60% of the remainder as salary, which is subjected to payroll tax. However, you calculate your taxable income by subtracting the standard deduction from your taxable income. The corp then pays its half of payroll tax, but you can take the remaining income (not paid to you as salary or used for expenses) as a profit distribution, which is only taxed at capital gains rate. So all in all it can save a lot of money, particularly if you have business expenses (which in a sole proprietorship are eaten up by the standard deduction)... Note: You have to do payroll every month for it to be legit with the IRS, and you need to file taxes once you create the corporation, even if your situation changes and you don't use the corporation for anything. You also have to pay yourself a reasonable salary. If you're a single employee S Corp then it may be wise to pay yourself > 50% of the corp's gross income as salary, to avoid arousing suspicion that you're doing the s-corp purely as a tax shelter.

by sabat 17y ago

Question for drawkbox: if this guy had formed an S corporation, would that have changed the self-employment tax? He'd owe taxes for his own income, but the S corp (IIRC) doesn't pay taxes, right?

drawkbox 17y ago

Nope that tax is always there. Your employer covers most of it mainly in social security/medicare and a C or S corp will pay out of their coffers for that. So most full-time workers never see that hidden 15% but it is blatantly there when you contract, self-employ, LLC etc. SE tax rate. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). http://www.irs.gov/businesses/small/article/0,,id=98846,00.html http://www.irs.gov/businesses/small/article/0,,id=98846,00.h... When I contract, sell products etc. I expect to get about 55% of the revenue after taxes. That is actually a bit low but it is a good number to use to make sure you are charging enough. So if you work for $70/hr you are actually working for about $40/hr and so on.

grandalf 17y ago

The amount of self-employment tax is lower with an s-corp b/c your salary will be lower. With an s-corp you can also benefit from the standard deduction on your individual return. Consider: Sole Propietorship: taxable income is equal to whichever is lower, gross income minus expenses or gross income minus the standard deduction. S Corp: you subtract expenses from the corp's income, and pay your self, say, 60% of the remainder as salary, which is subjected to payroll tax. However, you calculate your taxable income by subtracting the standard deduction from your taxable income. The corp then pays its half of payroll tax, but you can take the remaining income (not paid to you as salary or used for expenses) as a profit distribution, which is only taxed at capital gains rate. So all in all it can save a lot of money, particularly if you have business expenses (which in a sole proprietorship are eaten up by the standard deduction)... Note: You have to do payroll every month for it to be legit with the IRS, and you need to file taxes once you create the corporation, even if your situation changes and you don't use the corporation for anything. You also have to pay yourself a reasonable salary. If you're a single employee S Corp then it may be wise to pay yourself > 50% of the corp's gross income as salary, to avoid arousing suspicion that you're doing the s-corp purely as a tax shelter.