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(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your

(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your corporation set up (use an online service or an accountant). It's a bit of paperwork but you can do it for around $400. Once you do that you can open a corporate bank account. At that point you bill your clients as a corporation and provide them with your corporate tax ID instead of your personal SS. The money goes into your business account. Then to pay yourself, the next step is to setup payroll (easiest way is to use an online service like quicken payroll) which will run you about $50/month but will handle all of your withholding and tax filing requirements. It's somewhat of a pain getting this all going but once you do, you are operating as a corporation. Corporations do not pay income tax as such - they do have some filing fee type of taxes, but basically the taxes you pay come out of your payroll. So you do not pay tax on income that your company earns until you withdraw it from the company account via payroll. However, you can spend directly from the corporate account on anything that is reasonably considered a business expense. Computers and equipment, of course, can be purchased. Your company can pay the phone bills, internet connection, travel expenses, business lunches, etc. You can also charge your company rent as well if you are working out of your home. What happens is that you wind up paying yourself a meager salary on which you pay normal tax just like everybody else. So for instance, your company earns $80. You pay yourself a salary of $15k and the remaining $65k money is spent on operating expenses and is a tax write-off. You only pay tax on that $15k. You're likely to even get a small tax refund check instead of a huge bill from the IRS. In some extreme cases you might pay yourself even less, or even come in at a loss and pay no income tax. There is nothing illegal about this as long as your write-offs can be legitimately considered a business expense. This is also great because with payroll setup you are in a position to pay employees and sub-contractors via payroll as well and eventually grow your company with the proper financial system in place. I would highly recommend having an accountant set this up for you and file your taxes though because it is a ton of work and requires understanding the ever-changing tax laws.

hluska 12y ago
> Corporations do not pay income tax as such - they do have some filing fee type of taxes, but basically the taxes you pay come out of your payroll. Are you sure that is correct? I am neither an accountant, nor even American, but IRS.gov says: "The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation." (source - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Corporations http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...) For the 2011 tax year, Wikipedia pegs the US federal income tax rate at between 15% and 35% (depending on income level). (source - http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_Sta...) I think that only applies to C corporations, though I'm curious now about US tax law. Do tax shelters like you propose exist? Do you have any more information??
- snowwrestler 12y ago
  S corps pass through profits, which are reported only once, on the owner's personal income tax statement. It avoids the double taxation of a C corporation.
  - jakejake 12y ago
    Thank you I neglected to mention I was talking about an S-corporation.
sportanova 12y ago
Is this for an S-Corp / LLC? Because C-Corps pay income tax with a top rate of 35%. And is that how pass-through-taxation works? You only pay it once you withdraw it?
- gamblor956 12y ago
  What was described above was basically tax evasion, especially the bit about charging your own company rent to operate out of your house. No form of entity works like that in the U.S. You get a choice: you can either have a pass-through entity (owners are taxed as if they received the income directly...even if they never actually receive it) or a deferral entity like a corporation (corporation is taxed, but its owner are not taxed until/unless they receive a dividend). Moreover, even if you choose a pass-through entity like an S-Corp or LLC, the IRS places certain threshold requirements on the amount of income you must pay yourself, and on the self-employment taxes (FICA) you must pay.
  - sportanova 12y ago
    This makes way more sense.. Sounded too good to be true
curveship 12y ago
The IRS requires that you pay yourself a defensible fair market salary. If you're paying yourself only $15k, you will quite likely get audited, and unless you can defend the idea that your work is truly minimum-wage level work, you will owe quite a lot in fines. If this is advice from your accountant, I think you need a second opinion. Edit to add citation. Also, I'm assuming you're talking about an S-Corp, since it would make not sense for a C-Corp. From http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ... : "If most of the gross receipts and profits are associated with the shareholder's personal services [i.e. not from other employees or capital], then most of the profit distribution should be allocated as compensation." If you're only paying yourself $15k of the %80k your company brings in, and that $80k comes from payment by clients for work that you personally did, then you are definitely on the wrong side of the tax code.
- jakejake 12y ago
  Your tax advice is that if an S-Corporation brought in $80k and incurred $65k of legitimate, legal expenses, that the proprietor should run something more than $15k through payroll because of the "going rate" for developers or for some other reason? I can't help but notice that your quoted text says "most of the PROFIT distribution" rather than "most of the GROSS INCOME distribution" The company can't pay out more than it brought in. Obviously if you don't have $65k in expenses then you can't claim them. But, working as a contractor can have a lot of expenses - travel, office rent, utilities, etc. Giant corporations claim these expenses, a single-person company is entitled to the same deductions. In 15 years of business I have been audited twice by the IRS with very minor amounts due (< $500) and nothing to do with deductions or expenses. The reason I bring it up is simply to illustrate that I'm not just lucky or flying under the radar. One time it was my mistake of a missing payment in my records and I simply paid the amount due. The other time was the IRS's mistake and I successfully contested it. If I had anything to hide I sure as hell would not be contesting an IRS audit for some small amount of money. My point is that I am in no way hiding or trying to sneak around tax codes. I do not encourage anybody to do anything illegal. I only encourage anyone to claim the maximum amount of legitimate deductions that they're entitled to claim. I also highly recommend having an accountant handle it for you who knows the tax laws and ensures that you are operating within them.
rdl 12y ago
Corporations pay tax as a separate person by default. What you describe is a Subchapter S corporation, or an LLC. In general the deductibility of expenses to the corporation is a huge advantage (of a C, S, or LLC), if you're a "professional" with a lot of expenses. OTOH, going from "dollar earned by C corp" to "salary paid by C corp, with both sides of the various withholdings, UI, etc." to "personal income" to "personal income with taxes paid" is MORE of a tax hit than just regular wage income. S/LLC give you the passthrough tax advantage but still have higher filing costs. It only really becomes worthwhile around $20-30k in side income for purely tax reasons. There are plenty of non-tax advantages to incorporating, of course -- some level of asset/liability protection (most debts are firewalled at the corporation as long as you correctly treat corporate assets and liabilities as distinct from your own), the ability to take outside financing or do collaborations with other people, etc. (I am not a lawyer; I am particularly not your lawyer.)
dragonwriter 12y ago
> Corporations do not pay income tax as such Normal corporations pay federal corporate income taxes directly -- and, as employers, they pay the employer share of federal payroll taxes as well. It is true that there are kinds of corporations whose income is passed through to someone else and assessed against that person (notably S Corps, and T Corps in certain circumstances.)
gibybo 12y ago
You don't need to setup a corporation or payroll to get these benefits. Anyone can deduct business expenses. You end up paying the same payroll taxes either way.

hluska 12y ago

> Corporations do not pay income tax as such - they do have some filing fee type of taxes, but basically the taxes you pay come out of your payroll. Are you sure that is correct? I am neither an accountant, nor even American, but IRS.gov says: "The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation." (source - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Corporations http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...) For the 2011 tax year, Wikipedia pegs the US federal income tax rate at between 15% and 35% (depending on income level). (source - http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_Sta...) I think that only applies to C corporations, though I'm curious now about US tax law. Do tax shelters like you propose exist? Do you have any more information??

snowwrestler 12y ago
S corps pass through profits, which are reported only once, on the owner's personal income tax statement. It avoids the double taxation of a C corporation.
- jakejake 12y ago
  Thank you I neglected to mention I was talking about an S-corporation.

sportanova 12y ago

Is this for an S-Corp / LLC? Because C-Corps pay income tax with a top rate of 35%. And is that how pass-through-taxation works? You only pay it once you withdraw it?

gamblor956 12y ago
What was described above was basically tax evasion, especially the bit about charging your own company rent to operate out of your house. No form of entity works like that in the U.S. You get a choice: you can either have a pass-through entity (owners are taxed as if they received the income directly...even if they never actually receive it) or a deferral entity like a corporation (corporation is taxed, but its owner are not taxed until/unless they receive a dividend). Moreover, even if you choose a pass-through entity like an S-Corp or LLC, the IRS places certain threshold requirements on the amount of income you must pay yourself, and on the self-employment taxes (FICA) you must pay.
- sportanova 12y ago
  This makes way more sense.. Sounded too good to be true

curveship 12y ago

The IRS requires that you pay yourself a defensible fair market salary. If you're paying yourself only $15k, you will quite likely get audited, and unless you can defend the idea that your work is truly minimum-wage level work, you will owe quite a lot in fines. If this is advice from your accountant, I think you need a second opinion. Edit to add citation. Also, I'm assuming you're talking about an S-Corp, since it would make not sense for a C-Corp. From http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ... : "If most of the gross receipts and profits are associated with the shareholder's personal services [i.e. not from other employees or capital], then most of the profit distribution should be allocated as compensation." If you're only paying yourself $15k of the %80k your company brings in, and that $80k comes from payment by clients for work that you personally did, then you are definitely on the wrong side of the tax code.

jakejake 12y ago
Your tax advice is that if an S-Corporation brought in $80k and incurred $65k of legitimate, legal expenses, that the proprietor should run something more than $15k through payroll because of the "going rate" for developers or for some other reason? I can't help but notice that your quoted text says "most of the PROFIT distribution" rather than "most of the GROSS INCOME distribution" The company can't pay out more than it brought in. Obviously if you don't have $65k in expenses then you can't claim them. But, working as a contractor can have a lot of expenses - travel, office rent, utilities, etc. Giant corporations claim these expenses, a single-person company is entitled to the same deductions. In 15 years of business I have been audited twice by the IRS with very minor amounts due (< $500) and nothing to do with deductions or expenses. The reason I bring it up is simply to illustrate that I'm not just lucky or flying under the radar. One time it was my mistake of a missing payment in my records and I simply paid the amount due. The other time was the IRS's mistake and I successfully contested it. If I had anything to hide I sure as hell would not be contesting an IRS audit for some small amount of money. My point is that I am in no way hiding or trying to sneak around tax codes. I do not encourage anybody to do anything illegal. I only encourage anyone to claim the maximum amount of legitimate deductions that they're entitled to claim. I also highly recommend having an accountant handle it for you who knows the tax laws and ensures that you are operating within them.

rdl 12y ago

Corporations pay tax as a separate person by default. What you describe is a Subchapter S corporation, or an LLC. In general the deductibility of expenses to the corporation is a huge advantage (of a C, S, or LLC), if you're a "professional" with a lot of expenses. OTOH, going from "dollar earned by C corp" to "salary paid by C corp, with both sides of the various withholdings, UI, etc." to "personal income" to "personal income with taxes paid" is MORE of a tax hit than just regular wage income. S/LLC give you the passthrough tax advantage but still have higher filing costs. It only really becomes worthwhile around $20-30k in side income for purely tax reasons. There are plenty of non-tax advantages to incorporating, of course -- some level of asset/liability protection (most debts are firewalled at the corporation as long as you correctly treat corporate assets and liabilities as distinct from your own), the ability to take outside financing or do collaborations with other people, etc. (I am not a lawyer; I am particularly not your lawyer.)

dragonwriter 12y ago

> Corporations do not pay income tax as such Normal corporations pay federal corporate income taxes directly -- and, as employers, they pay the employer share of federal payroll taxes as well. It is true that there are kinds of corporations whose income is passed through to someone else and assessed against that person (notably S Corps, and T Corps in certain circumstances.)

gibybo 12y ago

You don't need to setup a corporation or payroll to get these benefits. Anyone can deduct business expenses. You end up paying the same payroll taxes either way.