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Should I become an S-Corporation? Tax ramification?
Posted by admin on Sep 29th, 2008
Sizzle asked:
I was offered a long term (3-5 years) contract position through an agency. I’m currently salary and the position is hourly only, so this is new for me. The agency who placed me, told me if I become an S-Corporation, my hourly rate will be $9/hr more since they will not do any paperwork. This will put me at $90/hr (at 40 hrs a week minimum). This is the only position I will work and will be my sole source of income. I read a little on S-corps but it’s a little confusing to me. I have no clue how my tax breakdown will be. What will my final takehome be after taxes (before any deductions)? Is it worth being an S-corp vs. just a consultant or are there other options? Thanks.
I was offered a long term (3-5 years) contract position through an agency. I’m currently salary and the position is hourly only, so this is new for me. The agency who placed me, told me if I become an S-Corporation, my hourly rate will be $9/hr more since they will not do any paperwork. This will put me at $90/hr (at 40 hrs a week minimum). This is the only position I will work and will be my sole source of income. I read a little on S-corps but it’s a little confusing to me. I have no clue how my tax breakdown will be. What will my final takehome be after taxes (before any deductions)? Is it worth being an S-corp vs. just a consultant or are there other options? Thanks.
theres books like inc. and grow rich, but my best advise is to spend a couple of dollars with the best account in your area to look over everything you have and do to make the best reccomendations. i have three different types myself based on my accountants reccomendations because that is there field of expertise.
There is a good reason they want you to incorporate. If you incorporate you are no longer a W-2 employee to the company you work for. To their bottom line it means no more social security (employer pays half), medicare (employer pays half), and unemployment taxes (employer pays all). There is also workers comp insurance and other state regulated items.
What then happens is you will become a W-2 employee to your own company, so all the taxes (plus you would need to file in my estimate about 14 more tax returns) and regulations will be your problem, plus you also have the recording keeping requirement of any corporation (board meetings minutes, by-laws, etc.) to deal with.
A quick figure of the additional Social Security and Medicare tax alone will cost you $7.00 / hr.
There may also be benefits that you qualify for that you would loss. There is also an issue if you get hurt on the job, who will pay your bills?
This the every day concerns that an S-Corp has and does not include the effort in just doing the paper work to start one up.
If you are seriously considering become an S-Corp for a $9.00 raise talk to a small business attorney and an accountant to see what the true cost to you is going to be.
Sounds to me that whomever is about to hire you doesn’t want to do any paperwork ie., W-2’s or 1099’s. Nor do they want to pay for any health insurance you may be entitled to or any other fringe benefit.
If you are an S-Corporation, the company paying you the money only has to issue a check to your corporation for your services. And all you are is a “subcontractor” to them. Under tax law, and employer is not required to
issue a 1099 to a corporation, unless you provide legal services. And since of course there are no tax withholdings on the monies paid to you, there is no
issue of preparing W-2’s.
Subcontractors are generally corporations or “independent contractors”. Payments to subcontractors are considered normal business activity for any
type of business. Subcontractors are not considered “employees” for the main reason that no one has control over them to complete the job or service.
In that regard, subcontractors are not ever entitled to fringe benefits – health insurance, contributions to 401K plans – Simple IRA’s, etc., and expense reimbursements that the company would normally provide to their employees after they have met certain requirements; length of service, age, etc.
As an S-Corporation, all you do is bill for the services you’ve rendered at your normal billing rate plus any incidental expenses you may have incurred. All the employer does is issue you a check for that.
As an S-Corporation, you will responsible for the payment of personal income taxes, including Social Security, state licensing fees, any other
expenses including your overhead – insurance, telephone, utilities, etc.
And every year, you will have the responsibility to file S-Corporation Tax Returns, both Federal and State and payroll tax returns.
Sound too complicated?
Actually its not complicated at all.
Hire a CPA to set up your S-Corporation. You can do it yourself by purchasing
a corporate kit at your local office supply store, and then going on-line with your State’s Department of Revenue. The process of setting up an S-Corporation is first done with the state that you reside in. After the state gives you a corporate number, then you file an SS-4, application of employer identification number, then you file a Form 2553 – Application for an S.
Let a professional set up your corporation. “Compliance” or the procedures to create the corporation for Federal and State purposes can be complicated
and time consuming.
The cost of setting up an S varies. It can cost at least $ 250, but not more than $ 1,000.