Hello Bing Ellen,
With running a side business, you can either elect to file a Schedule C as a sole proprietor with your tax return, or you can make an election to set up a formal company. The decision really depends on how much volume you are doing in your business.
As a sole proprietor, you would fill out Schedule C and report all of your income. You could also take deductions against that income for expenses incurred in direct relation to that income, such as a use of part of your home as business, mileage expenses if they applied, supplies you purchased, etc. You would then pay income tax on your net income. In addition to state and federal income taxes, you also pay the total cost of social security and medicare insurance on your net business income, which combined is currently 15.3%.
You could save some of those tax dollars by making your business a single employee "S" Corporation. With an S Corporation, the profits flow through to the shareholders (which would be you), and are not taxed at the corporate level. With an S Corporation, you still deduct your business expenses from the corporations income. You also pay yourself a reasonable salary. But the rest you can take as income through cash distributions as dividends. You still pay federal and state income taxes on the dividends, but you do not pay the self employment taxes.
It just really depends on how much income you are making from this business as to how much savings this might be to you, but if your income from the business is substantial, you could save 15.3% on any of the income that you classified as dividends in the S Corp.
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