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Taxes

Why is it as a small business owner "get" to pay double taxes? For every $10K I make I pay $6K in taxes. I know I can take a draw and net out everything at tax time but when I want to show regular income, like any other employee it costs one arm and kidney. Anybody know a better way?

9 Responses

  • Jan 07, 2010

    President

    Good Morning Ryan. I know that you posed this question some time ago, but I figured I would go ahead and give you a couple answers anyway. The first, and obvious answer would be to get someone to analyze your business to see if a conversion to an S-Corp would be feasible. That way, the company doesn't pay taxes, and they only show up on your 104 through a K-1. Another option would be to bonus out a large portion of the company profits in the form of a paycheck rather than a distribution. You would have withholding taken out so there wouldn't be any real hit to your 1040, and the company can expense out the payroll and reduce it's tax liability. The best thing to do is to hire an accountant who makes sure to keep in contact throughout the year (since it seems yours doesn't do such a great job of it) in order to keep on top of such issues, which benefits both the company and you as an individual.

  • Jan 13, 2010

    President

    Wow this all gets really confusing when we throw around a bunch words with no real analysis. "Double taxation", draw, bonus, S-Corp, 1040, k-1, paycheck vs distribution, withholding, etc.

    Let's take 2 layered look at this and see if we can get some real answers.

    First layer: Grand Scheme, According to US Tax code there are basically only 3 tax paying entities when it comes to businesses, individuals, real corporations and irrevocable trusts that have chosen to be tax paying entities.

    Doing business as a trust is catastrophic. The federal tax rate is 39% on anything over $9600 and a scaled rate up to that. This is by far the worst tax option.

    That leaves us 2 options. Individuals or Real Corporations. What about all the other entities, S-corp, LLC, Sole Prop, Partnerships of all kinds (General, Limited, Limited liability, Limited Liability limited, aka LP, LLP, LLLP)? well these are not tax paying entities and they pass the tax liability to the . . . (that's right) Individual.

  • Jan 13, 2010

    President

    Continued (this forum really limits the size of the post)

    So, if we do business as an individual, or some form of pass through entity we'll be paying individual taxes on all of it.

    What individual taxes?

    Of course the Federal Income tax (15-35%) PLUS the FICA (Social Security, Medicare) and Workers Comp and Unemployment, then there is the State income tax any local municipal taxes. did I mess any? include them in your calculations.

    If you are self employed or take the money as a bonus or a draw then you don't have to pay FICA, you get to pay Self Employment tax (which is the same thing)

    Let's assess, if your business is cashflowing positive and you are in the lower tax bracket earning maybe $50,000 total family revenue for the year, then you will be paying about 31% plus state taxes. If your personal income is about $100,000 and your total family revenue puts you into the next tax bracket you'll be paying about 42% plus local taxes.

    Continued. . .

  • Jan 13, 2010

    President

    For a narrow band of business owners that ar earning between about $70,000 and $108,000 the S c0rp would reduce the taxes some. At most 7.65% of those dollars above $70,000 and below 108k. If your income is above 108k, the percentage drops off, and if you are below 70k the S-corp provides no real benefit.

  • Jan 13, 2010

    President

    So I'm ging to suggest that there are times when a Real corporation can provide tremendous tax advantages. I'll let everyone pop off with comments about double taxation, and excess retained earnings, and paperwork and all the other fear mongering after a few days, I'll come back on to address this "ethereal spector" (heard that phrase used once to describe these points and really liked it, so I use it whenever I can.

    If you can't wait to find out the rest then give me a call.

    Richard Fritzler
    President
    Nevada Corporate Services
    800 658-5105 or 1 702 947-4100

What do you think?

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