Nailed by the Taxman

[dollarshort]

Did my taxes online for free, got nailed pretty good. I'm used to getting refunds while in the corporate world, I guess those days are over, hopefully.

I loaded my business down with expenses such as hosting costs, office supplies, advertising (adwords), consulting, and entertainment (hitting the pub counts right?). It brought my profits down by 30%.

Keeping my fingers crossed.

[Lobo]

It's all part of the game..

[ember]

Are you in the US? If you are a sole prop, you will pay 15% just in FICA taxes. Add to that at least 15% fed tax and 3-5% state tax. The FICA is high because if you are self-employed, you are paying the employee AND employer shares. One way to reduce that is to set-up an S corp (you can do it for $150 online) and then pay yourself a salary. All earnings are still subject to fed and state taxes, but only the salary is subject to the FICA tax.

Have the company pay for everything. You want profits to be low. You want the company to be poor.

[RonS]

Ummmm how would setting up an S corp and paying yourself a salary stop you from having to pay both the employer and employee FICA taxes?

Secondly the extra self-employemnt taxes are somewhat deductable as a sole-proprietor and not as both an employer and employee.

there may be other reasons to "go dorporate" but I don't understand this rationale.

[jetteroheller]

It brought my profits down by 30%.

I bring my profits down by 70%.
But there is also social security to pay in Austria reducing profit.
My car is 90% used for company purpose.
My wife is part time employeed at me for translating my sites.

[ember]

Ron, yes, you have to pay 15% FICA on the salary, but suppose you gross $100,000 a year, and after all expenses, net $50,000. As a sole prop, you pay 15% on the $50,000, but if you are an S corp, you pay yourself a $25,000 salary. You then pay 15% on $25,000, not on $50,000, and cut your FICA tax in half. The other $25,000 is taken as distributions. All $50,000 is subject to fed and state tax, but only half, the $25,000 salary, is subject to FICA tax. And payroll taxes (FICA and unemployment) are deductible.

We've been set up this way for four years and save on taxes every year. It's the whole point of an S corp. You'd want an accountant to do your first filing (due March 15, not April 15), but then Turbo Tax can do it.

[RonS]

Ahhh the other half is taken as dividends you mean.

Interesting approach.

[walkman]

>> Interesting approach.

until IRS nails you for not taking enough $$ as salary. Talk to an accountant first

[ember]

No, not dividends. Distributions. You write a company check for them whenever you need the money. They are essentially the company's profits and flow from the corporate return onto your 1040.

Yes, you have to pay yourself a legitimate salary. You can't pay yourself $5,000 and take $50,000 in distributions. Generally, the salary should be more than half of the profits to keep the IRS happy. The salary is also deductible.

Yes, talk to an accountant first, but S corps are the fastest growing business entity in the U.S.

[walkman]

agree. I have an S-corp myself, and their SOLO-401Ks are the greatest things ever; one can put away up to $42K a year. Depending on the age and luck in investing, you might only need to do this for 4-5 years to be set come pension time :)

[kaethy]

Be careful to pay yourself enough to get something decent from Social Security when you retire. I've talked to lots of people who minimized their self employment income in an effort to reduce tax liability. But when they find out how low their retirement checks will be, why they are JUST SHOCKED!

[ember]

There isn't going to be any Social Security down the road, so I'd rather maximize my savings now and invest that money in a 401K. I've had more than one accountant tell me to plan for retirement without counting on SS.

[RonS]

Sigh...

It used to be the Dems who were doing the SS scare routine (remember the lockbox campaign issue just 5 years ago?), then GWB co-opted the issue and tried to scare everyone that it will be bankrupt.

Technically if nothing is done, income will be less than promised payments. But something can ALWAYS be done.

First off, if we were to do absolutely nothing, a reduction in benefits to 75% of current promises makes the program revenue neutral for the forseeable future. That's not what you have in mind when they say "bankrupt" now, is it?

If we just wanted to raise taxes, we'd need to have a 25% tax just for Medicare! Scarey, right? Well, not when you realize that we're already paying about 15%. So it would be a 10% increas in taxes on all. Not too fun, but not exactly "bankrupt", is it?

OK, so we need to fix it. How?

Raise taxes by 10%?

OWCH!

Cut benefits by 25%?

Some combination thereof?

How could you cut benefits by 25%? How about delaying retirement age by 3 years? I don't know the exact numebrs but 3 more years of payments and three fewer years of withdrawals would seem to me to be close to 25% percent of benefits, without reducing anyone's monthly payment, although it clearly would be delayed by some amount. After all, we're in this problem because people are living longer and having much longer retirements than ever thought possible even just 20 years ago.

If we do it now, we can phase in the increase in retirement age (it's already been raised, sort of, to 67 from 65) over time, so people close to retirement don't have to wait but a few extra months, but youngsters in their 30's might see a 3 year increase, and 40's may see a two year increase and 50's a one year wait.

If we wait, there's gonna be a lot of VERY unhappy seniors at some point. But it's not "Bankrupt".

That said, I don't trust politicians to do the right or sensible thing, and the REAL problem is the rest of the governments fiscal deficits, so I have an old 401(k) or two, I have SS qualification, I have savings, I have real estate, I have life insurance and long term disability policies, I have some stocks, an IRA or two, and AdSense, too :D.

Just my thoughts on it.

Good luck!

[ember]

I agree that SS can be fixed. I don't think, though, that politicians have enough spine to do it until an actual crisis is upon us and then the choices will be drastic. I'd just rather not count on the government for anything. Katrina, Iraq, WMD, illegal domestic spying, FEMA all come to mind...

[seanpecor]

From '97 to the end of '03 I was an S-Corp. I switched to a C-Corp in '04 when my tax bracket hit a point where I would reduce my taxes if profit was shifted over to the corporate side, where the taxable income was lower and the marginal tax rates lower.

Sean

[ronburk]

There isn't going to be any Social Security down the road

Lessee, is that because you believe that all the U.S. workers will be dead? Or did you just not understand the most basic fact about Social Security, that benefits are paid for by taxes on whomever is working right now?

[ember]

Yes, benefits for today's retirees are paid by those of us working now. There are many more of us working than there are retirees, so there is enough of a tax base to pay the benefits. When I retire, that ratio will be 2:1. There won't be enough workers, or taxes, to pay for all the retiree benefits promised. So, taxes rates will skyrocket (doubtful) or benefits will be cut.

If I am wrong, and if SS is there, then I will have that extra cushion, on top of what I have invested. Win win.

[percentages]

>one can put away up to $42K a year. Depending on the age and luck in investing, you might only need to do this for 4-5 years to be set come pension time

Listen to Walkman!

The Self Employed are currently being handed out lots of freebies via the tax code. If you don't take them right now then more fool you. I personally hate retirement plans for numerous reasons (mainly I have to admit I'm getting old), but, they are great tax incentives for SEP's at this time, so bite the bullet and live with it ;)