I just published a new lens at squidoo on Saving Taxes with S Corporations. While it’s not for everyone, there could be significant savings on self employment tax. The Squidoo lens goes through an example of a business owner with the same income under all the different entity types (S Corporation, C Corporation, Sole Proprietorship, LLC, Partnerships). If you want to check it out, here it is: Saving Taxes with an S Corporation
Single member limited liability companies (LLC) are ignored for federal tax purpose. Thus you will be taxed as a sole proprietor. Adding a limited liability company, however. will offer liability protection. This can be important. You have the simplicity of a sole proprietor but the liability protection of a corporation. If liability is an issue at all, and you don’t have sufficient tax reasons to incorporate, the limited liability company (LLC) is for you.
Since you are treated as a sole proprietor for federal tax purposes, all your income is subject to self employment tax. Self employment tax is 15.3% up to the wage base. The wage base is $102,000 for 2008 (it’s adjusted for inflation). After your net income reaches the wage base, you will pay self employment tax of 2.3% for all net business income that is above the wage base. Self employment tax can be more than your income tax. If your income is significant, you may want to reduce your self employment tax. This can be done with an S Corporation. See my article, Entity Choice (Saving Tax with S Corporations)
Estimated tax payments, as mentioned in my previous post, can be paid based on your current years tax obligation. If using this method, you need to make tax payments equal to 90% of your current years tax obligation. If most of your income comes at the end of the year, you can annualized your income (make smaller tax deposit early in the year, large later) and thereby avoid a penalty.
More on estimated tax payments: You can still end up with a penalty, even if you pay 100% of your estimated tax payment, if you pay it late in the year. Unlike estimated tax payments, withholding is treated as payed evenly throughout the year, even if you significantly increase your withholding at the very end of the year. If you missed estimated tax payments early in the year, consider increasing your withholding rather then increasing subsequent estimated tax payments. listen
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Estimated tax payments that are based on the prior years tax obligation can be 100% of your prior years tax obligation, if last year’s adjusted gross income was less than a $150,000. If your adjusted gross income was more than a $150,000 percent(?) your estimated tax payments need to be 110% of your prior years tax obligation. listen
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Estimated tax payments are due on September 15th. In order to avoid penalties for failing to make estimated tax payments, you need to pay 90% of the current year’s tax, through these estimated tax payments or through withholding or a combination of both. Alternatively, you could pay 100% or 110% of the prior year’s tax obligation. listen
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