kimball at kimballlarsen.com
Thu Jul 21 10:35:47 MDT 2005
On Jul 21, 2005, at 10:18 AM, Jeff Schroeder wrote:
> Kimball wrote:
>> 15ish% = raw income tax
>> 15ish% more = Other federal things: Social security, FICA, etc, etc,
>> Now, if you set up an S-Corp, the "Other federal things" category
>> goes away - ie, you pay about 15% less in taxes.
> I'm not sure who your accountant is, but this information is incorrect
> (or else I completely misunderstand you).
> You can't escape the income tax, it's true... you pay that on your
> at the end of the year for all the money you've earned-- both at your
> "regular" job and any side jobs you have. But an S corporation
> definitely pays SSA, FICA, unemployment insurance, filing fees, and so
> on. If you pay yourself via the corporation and take out payroll
> taxes, for every dollar of Social Security tax you report on your
> your company is paying a matching dollar. 6.2% of your income goes to
> the SSA from your paycheck, and another 6.2% comes from your company.
> Thus, I don't understand how you can say the "other federal things" go
> away with an S corporation. Perhaps you're referring to paying
> EVERYTHING as dividends, rather than payroll? That's certainly
> possible, but leads to two issues:
Sort of - accountant calls it an "Owner Draw", not salary, not a
dividend. In my situation, it works ok, as my corp is not making
anywhere near what Hans will be pulling in here, and I am able to
expense a large portion of the corp income (without running into the
moral complications you mention below)
> 1) Since dividends are taxed differently (e.g., no SSA), the IRS keeps
> an eye on companies that pay large dividends but small salaries. In
> other words, if you've earned $30k and pay $25k in dividends,
> that's an
> immediate "red flag" because the remaining $5k "salary" is clearly
> unreasonable for the work you're doing. Hello, Mr. Auditor!
> 2) Any dividends you receive will be taxed on your 1040 as part of
> AGI, and will also be reported by the corporation on form K-1 as
> profits. As a shareholder of the corporation, you will be taxed on
> those profits.
>> Now, since you are going to be running this corp from your home, you
>> can expense a portion of your dwelling as office space, and "rent"
>> it to yourself from the corp.
> Yes, but once you designate a part of your house for business use,
> a lot
> of interesting things happen. You *must* use that area exclusively
> business 80% of the time (or something like that), you have to
> calculate crazy things like percentages of utility bills (how much
> electricity does your office use compared to the rest of the house?),
> and IIRC it creates some weird situations when you sell your house.
> My advice-- backed up by the advice of several realtors and my
> accountant-- is that writing off business use of your house isn't
> generally worth the hassle. YMMV.
True, but I wanted Hans to know it is possible.
>> Further, any other expenses you can
>> dream up for your corp will avoid the 15% of raw income tax, and you
>> get all that money to be used tax free.
> That's true. The general rule is to expense everything you can, of
> course with an eye toward being honest. I've known people who write
> off their vacations because when they were in Aruba they happened to
> mention to some guy at the bar that they run a software company or
> something. "Hey, that's a business conversation, so I can write off
> the whole trip!" Let your conscience be your guide, remembering that
> if you're ever audited you're going to have to justify that expense or
> face back payments and some nasty interest.
> I'm not an accountant, nor a lawyer-- I'm just a Linux geek who owns
> several S corporations. So don't take my words here as gospel, but be
> aware that the tax laws are FAR more complicated than they might seem
> at first. Also, I'm not slamming Kimball's statements, because I
> be misinterpreting what he said, but before you trust a bunch of Linux
> geeks I'd go to an accountant and get the real story. :) In my
> experience, accountants are willing to give you a free one-hour (or
> "consultation" where you can ask this kind of stuff, in hopes that
> get your business in the future. It would be worth asking.
I totally agree with Jeff here. I am also just a skinny little
programmer - no accountant. I can barely add. I've just related in
broad strokes what works for my situation in the hopes that someone
out there will find is useful.
Please consult with a professional accountant before doing anything
with any real money.
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