Opening An S-corp

[dosaldo]

What is the name of your state? CA

I was offered a job by an old employer. He advised for me to open up an S-corp instead of being under his regular payroll, to help me take the advantages of tax-reduction.

For the sake of my question, my salary will be $52K annually. He will pay my S-corp a weekly check of $1,000. Being that is my sole income, am I allowed to pay the entire amount to me, as the owner?

I am new to this, so pardon my ignorance. I will like to get insights on how will forming an S-Corp be a better avenue than being under his payroll.

Thank you in advance.

 

[tranquility]

To answer your question, generally yes. In fact, you may be *required* to pay yourself the (big bunch of law--let's say fair market value) of your services.

That shouldn't be your question, however. I bet, from your description, *he* will benefit and not *you*.

 

[dosaldo]

Opening S-corp

Thanks for you reply.

What would be his benefit vs. mine?

 

[tranquility]

With an S-corp, based solely on what appears to be your plan, he would not have to pay the employer matching portions of the social security taxes and medicare and you would. You would also have the organizational costs, the costs of filing a return for the corporation and the recordkeeping costs for the corp. These costs would also include payroll returns and reporting requirements and the payment of unemployment taxes.

And that's just off the top of my head.

That does not mean it is bad. It is based only on what it seems like you are planning to do. (Get a 1099 to the corp and pay it all to you in salary.)

 

[clueless3]

I was offered a job by an old employer. He advised for me to open up an S-corp instead of being under his regular payroll, to help me take the advantages of tax-reduction. Being that is my sole income, am I allowed to pay the entire amount to me, as the owner?

From a purely tax standpoint, yes, having your own S-Corp (vs being his W-2 employee) CAN be advantageous IF you make above $X per year. This threshold depends on a number of things; it varies from individual to individual, and your CPA should be able to work it out with you. My rough guess is that if you make "only" $52k a year then it's not advantageous for you. ($52k a year seems like a lot of money, but in CA that's barely above poverty level.)

Being a contractor incurs a lot of costs that formerly were paid by the employer (self-employment tax, unemployment tax, payroll tax, worker's comp, health insurance, life insurance, short-term disability insurance, long-term disability insurance, 2-5 weeks of vacation pay, 401k, employee stock purchase program, saving matching, state filing fees, franchise tax, city tax, professional consultants, on and on). On the other hand, a contractor can deduct things that an employee cannot (hence the tax-deduction "advantage"). You have to work it out the exact math for your situation to see if it's advantageous one way or the other.

Yes, being a contractor would save your employer quite a bit of money (because he shifts some of the costs on to you), BUT you can NEGOTIATE for a higher pay (20% - 40% higher). NEVER agree to be a contractor for the SAME pay as an employee!

 

[bluepiaa]

Remember also, as an S-corp, you are still a Corporation. You will have to pay a tax (minimum is $800), just for the right to be a Corporation (in California).

 

[dosaldo]

Opening an S-Corp

Thank you all for your insights. I guess since the potential of "making" more is still about a few months to a year from now, it would make sense for me to be under payroll for now until I get the ball rolling.

 

[tranquility]

Note the quotes around tax deduction "advantage" in clueless3's post. Deductions are only that, a deduction from income as you used that money to earn income. While some people may cheat and claim more than they are entitled to, generally the amount you deduct is amounts you paid out for the ordinary and necessary expense of doing business. That still does not mean an S-corp is not an advantage for certain situations, but if the plan is to get a 1099 from a single employer where the limited liabliity of the corporation is not needed, it is unlikely you will find benefit from the arraingement. (Well, maybe you could put a little more away tax deferred in retirement in a money purchase plan of some sort.)