Self Employment

Kimball Larsen kimball at
Thu Jul 21 09:54:59 MDT 2005

On Jul 21, 2005, at 9:02 AM, Hans Fugal wrote:

> On Fri, 15 Jul 2005 at 16:50 -0600, Sean Kirkby wrote:
>> Whether or not you need a legal entity probably will have to do  
>> with how
>> much part-time consulting work you plan to do.  IANAL, so consult an
>> accountant and/or an attorney for advice.  If it won't be a  
>> significant
>> source of income, it may not be worth the hassle to set up an LLC.
> In this situation, it's going to be a primary source of income while
> going to school, so 10-20 hours a week. So let's say somewhere in the
> range of $20k to $35k of income. I know y'all aren't lawyers and
> accountants, but it's just math... In your experience, are there tax
> savings at that level of income that more than offset the cost of a  
> set
> of these lawers and accountants? If the answer is indubitably yes,  
> then
> I will be happy to go consulting. And of course I'm reading lots of
> stuff on the web and in the bookstore and will in the end make my own
> informed decision.

Rough numbers:
Accountants have told me that taxes work about like this:

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.

And, you only pay the other 15% of the raw income tax on "taxable"  
income - income that is defined as income to the corp that is not  
used as an expense somewhere.

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.  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.

In my case I use that money for the following:

     Mileage - there is an allotted amount you can bill your corp for  
use of a personal car / mile if you have to drive to meet a client,  
to a store to purchase something for the corp, etc.
     Office supplies - paper, toner, printers, computers, hubs,  
routers, etc...
     Phone bill - do you conduct your business using a phone?
     DSL bill - my business cannot operate w/out my dsl connection at  
     Domain registration fees
     Lunches/dinners with clients. ....

All those expenses (with some minor exceptions - you can only expense  
half the bill for a meal, etc) are paid for using money that is  
completely tax free.  Not a dime of it gets to Uncle Sam.

So, to do some math:

If you assume you will generate about $30k of income for the corp,  
the taxes will break down like this:

15% - base federal tax rate:  $4500
15% - extra goop: another $4500
- so you could wind up paying about $9000 in taxes and other uncle  
samish stuff.

Under an S-corp, you will automatically save at least $4500, and  
likely (if you do the expenses right) save a bunch more.

Now, some of the corp income will have to flow straight through the  
corp to your pocket - an "owner draw" if you will... that will be  
taxed the base federal tax rate. So, let's say you manage to expense  
$10000 of the $30000 that you earn, and the other $20000 you use for  
things like groceries, books, pizza, renting movies, anniversary  
getaways, etc.

You would wind up owing taxes on the $20000 only, which would amount  
to about $3000 or so.

So, the difference is potentially around $6k if you don't incorporate  
vs. if you do.

How much does an accountant cost again?  How much is your time worth  
to figure out how to do the books yourself so you don't have to hire  
an accountant?

Remember these are pretty gross oversimplification of the numbers,  
and ymmv, and only an accountant can tell you if I'm lying or have  
any clue what I'm talking about, but this is roughly how it works for  

-- Kimball 

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