When does it make sense to incorporate?
Most small businesses are unincorporated and file a simple schedule C within their personal return thus forcing them to pay income taxes as well as self employment taxes of 15.30%. In effect this could double your taxes. It does pay into your social security fund, but at a tremendous cost and not so great an advantage unless your income is very low. It also puts you into a higher risk for an IRS audit.
If your net business income is over $15,000-20,000 annually, it is possible to save on these taxes and reduce your IRS audit risk. It entails changing to a corporate S form, paying a reasonable salary and paying the net out as dividends which have no self employment taxes upon it. If you at the same time, put those savings into a pension of some type then you would have more in the pension than you would have received in social security. It is a win-win for you. Come talk to us about it.
