"S" corporation

[David Williams]

An artist friend has told me I need to hire a financial planner and become an s corporation to help with my tax liability. Has anyone done this? And in general does anyone have tips on reducing ones overall tax liability. Tax free investments, business restructuring, etc. I don't have any major purchases of equipment I need this year. I'm trying to arrange for more business travel but that's about all I've thought to do. I'm getting a little nervous that I need to do more. My accountant is the type who just asks what I want to do, rather than tell me what I should do.

[Phil Hoppes]

David,

I'm sure everyone has their own bend on Certified Financial Planners and investing so you will probably get lots of comments on this. Here is my 2 cents.

I've used a CFP for my own personal finances for over 20 years. The first one I used for 8 years, he's now in Levenworth, WAY too long a story for here but suffice it to say I no longer use him. My second CFP I've used for the past 12 years and he has been quite good wrt helping me plan my investments. I'm guessing what your friend is refereing to is using a CFP to help set up retirement plans or investment plans for your studio/company. I've talked to mine about the very same thing. The goals I have for my business is to first, cover it's expenses, second, take advantage of as many retirement investment options as I possibly can and finally to pay me a salary if there is anything left. My CFP has set up his business so that he and his wife are owners and as such are entitled to various retirement investments. What he has told me that when the time comes (sooner rather than later I hope) there are a number of investment instruments you can use to shelter income and provide for your future. It is something worth looking into.

On a S Corporation Filing - I looked around and talked to both lawers and accountants when I set up my studio as a business. There are a number of options as I'm sure you are well aware of. A sole propritarship (sp?) is very easy wrt the paperwork and the filing. An LLC has an appeal if you never plan on having employee's. My son's company is an LLC and it has worked fine for him. An S Corporation has the ability to separate your personal wealth from that of the company from a liability standpoint and that is the reason why I chose to set my studio up as an S Corp. If someone out there is an accountant, I'm sure they will know more about it than me, but I don't believe you will necessarily pay less/more taxes if you are either of what I mentioned. The IRS get's their $$$$ always. Depreciation schedules and the like can be used in all 3 cases and I would suspect that if there are any differences from a tax owed basis it is small. Now your paperwork will be different so it will probably cost you more to file as an S Corp vs a Sole Propritary. For me, my biggest concern was someone breaking something I've made and injurying themselves and then trying to come after me personnally. This is a call everyone has to make for themselves. If you don't have much to loose personnally, then an S Corp is probably overkill. If you do stand to loose or you want the added liability protection of a separate corporation, then filing as an S Corp is probably what you should do.

Things to keep in mind. Look over the paperwork VERY carefully when filing for an S Corp. You need to file your paperwork by the 15th day of the 3rd month for the year you wish to make the election. It is too late to file for an election to be an S Corporation for the year 2003 however you can file now so that 2004 you will be considered an S Corporation. In my case I filed too late for 2002 and now I've had to refile for an appeal to get my studio considered an S Corp for 2002. (I've yet to complete my 2002 taxes as this is all a mess at the moment).

You need a form 2553. I'll send you an email with the form and instructions attached.

Phil

[Brad Walker]

An artist friend has told me I need to hire a financial planner and become an s corporation to help with my tax liability. Has anyone done this? And in general does anyone have tips on reducing ones overall tax liability. Tax free investments, business restructuring, etc. I don't have any major purchases of equipment I need this year. I'm trying to arrange for more business travel but that's about all I've thought to do. I'm getting a little nervous that I need to do more. My accountant is the type who just asks what I want to do, rather than tell me what I should do.

An S corporation has two big advantages over not being incorporated. It also has a couple of disadvantages.

The first big advantage is that an S corporation limits your personal liability. That means that someone who sues can only go after the assets of the corporation, not your personal assets.

The second advantage is that you pay no FICA (self-employment) tax on net income. This can be a significant tax advantage (15.3%!). For example, if you have no corporation and make $50,000, then you'll pay 15.3% ($7,650) in self-employment tax. If you have an S corporation, you'd probably pay yourself a reasonable salary (say, $20,000) and receive the other $30,000 as a dividend. Tax savings: $30,000 times 15.3% = $4,590.00

(There are other advantages to being an S corp, but they're not as significant. The main ones are probably more aggressive treatment of capital and tax-treatment of losses.)

Now for the disadvantages -- you get screwed on how it treats benefits (accident and health insurance). This may not be relevant to you, depending on how you pay for those things now. Another disadvantage is that you life becomes more complicated. Again, this could be a big deal or a small one, largely depending on the quality of your accountant/lawyer/etc.

Finally (and I can't say this too strongly), don't get your financial planning advice off of a bulletin board (or even from an "artist friend"). What's right for me (I have an S corp.) may not be right for you. Ask an expert, either an accountant or a lawyer. Better still, ask more than one expert. If tax-savings is the big driver, do your numbers both with and without the corporation to see which way works best.

(And one more thought -- taxes are good. If you're paying taxes, you're making money. I wish I paid double the taxes I do.)

[Phil Hoppes]

That's good info on the FICA Brad. I didn't know that. And ditto, it is a lot of paperwork. And Ditto^2 gets LOTS of other opinions and perspectives and decide what your goals and objectives are.

Phil

[Dani]

So what's the tax rate on dividend income these days? I agree, I'd like to be paying more taxes, too, Brad. Just not more than I have to and incorporation can lower the liability. It's a balancing act. My former CPA boss always told his clients to spend less time figuring out how to pay Aunt IRiS fewer dollars (he was referring primarily to ways of losing money for the right-off!)... and more time figuring out how to make more money and invest better so everyone made more. My best tax-saving tip is to buy more tools and stuff for the business and live modestly on a personal level. Incorporation creates that clear distinction more solidly than proprietorships or partnerships especially in today's tax climate.

[Brad Walker]

So what's the tax rate on dividend income these days?

Dividends from S corporations are treated as ordinary income, line 17 of the 1040. (not the same as "dividends" from C corporations, which are reported on Schedule B and line 9 of the 1040. Neither are subject to FICA.

Tax simplification, where are you?

[Barbara Cashman]

Just an addendum to the tax thing. Many years back, we had a sole prop. co. and ended up paying $2000/yr just for FICA. We hadn't made enough money to pay Income Tax, but the self-employment thing almost killed us. We changed to an S Corp and took our income as "salaries for officers". Makes a biiiiigggg difference, especially if you're financially struggling. Thankfully, that era is over, but I think we might not be in business today if we hadn't had that option. - Barbara

[Paul Tarlow]

My wife and I just formed an LLC. The primary driver was reducing legal liability. Glass breaks and it is sharp. And people can be jerks.

Oh ya -- keep in mind the right decision will depend on which state you are in.

[Dani]

Just an addendum to the tax thing. Many years back, we had a sole prop. co. and ended up paying $2000/yr just for FICA. We hadn't made enough money to pay Income Tax, but the self-employment thing almost killed us. We changed to an S Corp and took our income as "salaries for officers". Makes a biiiiigggg difference, especially if you're financially struggling. Thankfully, that era is over, but I think we might not be in business today if we hadn't had that option. - Barbara

But, remember that an officer's salary still has fica withheld and the corporation still matches the same percentage. You're still paying, it's just more obscure. I still would like to know what percentage the S Corp. dividend is taxed at.... what's the latest law and how does it compare to social security plus regular income tax as salary?

[Brad Walker]

Dani, let me elaborate on my earlier answer. An S corp dividend is distributed via a K-1 document, which shows up on the owner's personal tax form as ordinary income reported on Form 1040, line 17. The term "dividend" can be confusing, it's not at all like a dividend from a C Corp or a mutual fund. It's really just a distribution of income from the S Corp to a personal tax form. Although they file tax forms, S Corps do not pay income tax, the individuals who own it do. Therefore, the tax rate is the same as the individual's rate, and how much depends on your specific tax bracket.

[Ron Bell]

Brad is right on the money. The biggeest difference between the S corp and C Corp is that the income and losses flow thru to the owners as ordinary income. The advantages when you are losing money is that it is an immediate write-off including such bennies as accelerated depreciation! It is not uncommon to start as an S corp and switch to a C Corp once you are making money. Liability protection is almost the same in most states.

[Brian and Jenny Blanthorn]

My accountant is the type who just asks what I want to do, rather than tell me what I should do.

I get a lot of this not asking the correct questions

The only thing U can do is ask what U wanna achive ie pay less tax n ask how 2 do it

But no matter what U do

U will only find the full Qs after having done something

Usually in my case when it is 2 late

Life is shuch a joy

[David Williams]

(And one more thought -- taxes are good. If you're paying taxes, you're making money. I wish I paid double the taxes I do.)[/quote]

Even if you have to work twice as hard? I feel like those Alaskan fishermen that work insane hours slogging fish guts. I get home, scarf some food and drop.

This tax stuff is so tedious to me I'm not able to focus on it. Either that or I don't have the finance gene. But I can't let that shortcoming hurt my business. Its clear I need a financial planner. One question--when do I have to do this change? Can it be midway through the year like now, or just at tax time, begining of the year, what?

[Brian and Jenny Blanthorn]

(And one more thought -- taxes are good. If you're paying taxes, you're making money. I wish I paid double the taxes I do.)

Even if you have to work twice as hard? I feel like those Alaskan fishermen that work insane hours slogging fish guts. I get home, scarf some food and drop.

This tax stuff is so tedious to me I'm not able to focus on it. Either that or I don't have the finance gene. But I can't let that shortcoming hurt my business. Its clear I need a financial planner. One question--when do I have to do this change? Can it be midway through the year like now, or just at tax time, begining of the year, what?[/quote]

Life cant B that bad if U can afford 2 eat n have time 2 sleep

[David Williams]

[
Life cant B that bad if U can afford 2 eat n have time 2 sleep[/quote]

Geez it did sound like I was complaining didn't it. my apologies to you and the gods. I have it pretty good. I guess my point is just that, the choice to make more money isn't a "no brainer" neccesarily. You've got your life too.

But, if you can keep more of what you earn, maybe you can get more of your life back which is my idea. Or hire a guy. Or something.

[Brad Walker]

This tax stuff is so tedious to me I'm not able to focus on it. Either that or I don't have the finance gene. But I can't let that shortcoming hurt my business. Its clear I need a financial planner. One question--when do I have to do this change? Can it be midway through the year like now, or just at tax time, begining of the year, what?

You can make a change at any time. If taxes are that big a hassle for you, you ought to get some help.

I should mention here that I am not a big fan of financial planners, especially to help with taxes. I think you'd be better off with a competent accountant. However, it's the quality of the individual, not the job title, that ultimately matters.

Ask around your area to get recommendations from others on financial planners or accountants. You should be able to meet with people for one brief meeting without paying anything. Go with someone who has good recommendations from others and who you feel you can get along with.

Also, as I mentioned earlier, you want to figure out your tax situation with and without any major change, so you know if it's worth the hassle of making the change.

And finally, the key to making taxes less tedious is to keep good records. You may already do that, but if you don't (and don't want to), you can always hire someone to do it for you. That's another thing to discuss with your potential accountants/financial planners.

Good luck.