4 ms·

You don't pay "15.3% more taxes". with any other election other than a S-Corp all income is subject to the full tax so yes you are responsible for that tax on

by kls 16y ago

You don't pay "15.3% more taxes". with any other election other than a S-Corp all income is subject to the full tax so yes you are responsible for that tax on the full amount of your income. With an S election you are allowed to pay yourself a reasonable salary that is subject to the employment tax while shielding the rest as profit dividend which unlike a C corp are pass through and not subject to corporate taxes. so the taxes on that portion is (0%) so yes if you elect to file any thing other than an S-Corp then you are paying 15.3% on income you would be paying 0% so it is not 7.x% it is 15.3% that you are loosing. Also, the arguable tax advantages of s-corps are likely being reduced or eliminated soon via impending legislation in the US, so don't choose that for tax reasons. That is the worst advice that I have ever heard. The legislation has not been passes and their are a million reasons that a bill can get killed. Making recommendations on speculative future events is irresponsible at best and the fact of the matter is if the poster files an S-Corp and the bill passes then they are in the same place as an LLC for the most part. If it does not pass, they have cost themselves a good deal of money on a inferior election. I was literally just in my accountants office yesterday discussing this subject for a new venture and he assuredly recommended a S-election.

mgkimsal 16y ago
Great feedback. The overwhelming responses here (and my own as well) included "talk to a professional". The majority of people I know haven't seen that much of a tax difference one way or another when freelancing as individuals whether scorp or llc precisely because of the 'reasonable salary' requirement. If you manage to pull in $200k freelancing, but only salary $30k to yourself, yes, you're 'shielding' over $150k from self-employment tax, but that's a pretty big red flag which may trigger an audit. "If it does not pass, they have cost themselves a good deal of money on a inferior election." There's nothing to stop you from changing your corp status or starting a new one if you get to the point where one structure makes more financial sense than another. The original poster's question was to do with freelancing first and later developing an application. I suspect the freelancing income will likely not rise to the point where there's much of a difference between scorp shieldability vs llc passthrough taxation (arguably, yes, any benefit is better than none). Another poster's suggestion of starting up another entity specifically for the application development may be the best option all around, but, yet again, consulting a local professional competent in the laws of your locality would be the best bet one could take, regardless of other HN suggestions. While an scorp structure makes the most sense for your situation, it might not for the OP.

by kls 16y ago

mgkimsal 16y ago

Great feedback. The overwhelming responses here (and my own as well) included "talk to a professional". The majority of people I know haven't seen that much of a tax difference one way or another when freelancing as individuals whether scorp or llc precisely because of the 'reasonable salary' requirement. If you manage to pull in $200k freelancing, but only salary $30k to yourself, yes, you're 'shielding' over $150k from self-employment tax, but that's a pretty big red flag which may trigger an audit. "If it does not pass, they have cost themselves a good deal of money on a inferior election." There's nothing to stop you from changing your corp status or starting a new one if you get to the point where one structure makes more financial sense than another. The original poster's question was to do with freelancing first and later developing an application. I suspect the freelancing income will likely not rise to the point where there's much of a difference between scorp shieldability vs llc passthrough taxation (arguably, yes, any benefit is better than none). Another poster's suggestion of starting up another entity specifically for the application development may be the best option all around, but, yet again, consulting a local professional competent in the laws of your locality would be the best bet one could take, regardless of other HN suggestions. While an scorp structure makes the most sense for your situation, it might not for the OP.