4 ms·

Should everyone be thinking of becoming a pass through business? Person Inc. works for Big Business Inc. Everybody pays 20% tax and we are all happy.

o_nate 9y ago
This handy guide lays out some ways that the legislators in their wisdom have sought to curb this understandable impulse. E.g. the allowable deduction is proportional to regular wages paid by the pass-thru business. So you can only take deductions on income of Person Inc if Person Inc also pays wages that are taxed at regular rates. Provisions like that will keep the tax accountants busy.
- Bedon292 9y ago
  I believe you are addressing #8 on the link. This only applies to high income earners. So if you are under those thresholds you don't need to pay any additional employees.
nodejsbangalore 9y ago
I might be wrong but I think that tax rate is not 20%. I think the deduction is 20%. If I understand it correctly then what it means is that if you have earned $100k then you are taxed only on $80k and 20% (20K in this case) is your deduction. Can someone confirm/deny it.
- jermaustin1 9y ago
  90% confirm. If your company earned $100k, and paid you $50k, you can deduct 20% of the 100k capped at 20% of your ordinary income ($50k), for a total deduction of $10k.
- ttcbj 9y ago
  Yes, it is a deduction of 20%.
  - jermaustin1 9y ago
    Capped at 20% of your ordinary income.
- misiti3780 9y ago
  but not if you are a software consulting apparently: https://news.ycombinator.com/item?id=15973178 https://news.ycombinator.com/item?id=15973178
  - spikels 9y ago
    and your taxable income exceeds $315,000 for married individuals filing jointly or $157,500 for individuals. The 20% deduction starts phasing out at those levels.
DaiPlusPlus 9y ago
I don’t think certain benefits like healthcare and 401(k) accounts can be conferred that way if you’re W-2, but if you’re 1099 I see absolutely no reason not to.
- tptacek 9y ago
  If you're 1099 you're already a pass-thru business.
  - spikels 9y ago
    Unless you set up your business up as a C-corp. Rarely the case for individual consultants because it provides limited benefits and lots of costs.
maxerickson 9y ago
A simple rule of thumb seems to be that if you work for the income don't bother becoming a pass thru. If other people or real estate work to generate the income, go for it!
- kevin_b_er 9y ago
  If you are rich enough, go for it.
spikels 9y ago
If you are not an W-2 employee and your business is not incorporated, by default you ARE running your business as a pass thru entity. BTW - There is no 20% tax. There is a 20% deduction for some pass-thru income.

o_nate 9y ago

This handy guide lays out some ways that the legislators in their wisdom have sought to curb this understandable impulse. E.g. the allowable deduction is proportional to regular wages paid by the pass-thru business. So you can only take deductions on income of Person Inc if Person Inc also pays wages that are taxed at regular rates. Provisions like that will keep the tax accountants busy.

Bedon292 9y ago
I believe you are addressing #8 on the link. This only applies to high income earners. So if you are under those thresholds you don't need to pay any additional employees.

nodejsbangalore 9y ago

I might be wrong but I think that tax rate is not 20%. I think the deduction is 20%. If I understand it correctly then what it means is that if you have earned $100k then you are taxed only on $80k and 20% (20K in this case) is your deduction. Can someone confirm/deny it.

jermaustin1 9y ago
90% confirm. If your company earned $100k, and paid you $50k, you can deduct 20% of the 100k capped at 20% of your ordinary income ($50k), for a total deduction of $10k.
ttcbj 9y ago
Yes, it is a deduction of 20%.
- jermaustin1 9y ago
  Capped at 20% of your ordinary income.
misiti3780 9y ago
but not if you are a software consulting apparently: https://news.ycombinator.com/item?id=15973178 https://news.ycombinator.com/item?id=15973178
- spikels 9y ago
  and your taxable income exceeds $315,000 for married individuals filing jointly or $157,500 for individuals. The 20% deduction starts phasing out at those levels.

DaiPlusPlus 9y ago

I don’t think certain benefits like healthcare and 401(k) accounts can be conferred that way if you’re W-2, but if you’re 1099 I see absolutely no reason not to.

tptacek 9y ago
If you're 1099 you're already a pass-thru business.
- spikels 9y ago
  Unless you set up your business up as a C-corp. Rarely the case for individual consultants because it provides limited benefits and lots of costs.

maxerickson 9y ago

A simple rule of thumb seems to be that if you work for the income don't bother becoming a pass thru. If other people or real estate work to generate the income, go for it!

kevin_b_er 9y ago
If you are rich enough, go for it.

spikels 9y ago

If you are not an W-2 employee and your business is not incorporated, by default you ARE running your business as a pass thru entity. BTW - There is no 20% tax. There is a 20% deduction for some pass-thru income.