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Because you are employed and make relatively large wages - your self-employment taxes are relatively low - and your prospective saving from using S-corporation is also low. That is your special circumstances.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
That in general - doesn't depends on the type of legal or taxing entity of your business. So just having S-corporation doesn't provide any additional deductions. As long as you have expenses and these expenses are both ordinary and necessary - they are deducted against your gross business income.
If you have no expenses - could NOT "improve" the deductions by having a separate business entity.
To be honest - there are some differences how expenses are deducted. Just an example - as I mentioned above - using your home for the business. If you are self-employed - your home office expenses may be directly deducted against your business income on schedule C.
With S-corporation - you are an employee - you still may deduct your home office expenses - but as on Schedule A (Form 1040) - that will not affect your employment taxes. You can only claim these expenses as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit.
So this particular deduction - while deductible with either S-corporation and solo proprietorship - is less advantageous in case of S-corporation.
This example illustrates how your special circumstances may affect possible tax saving. Of course - if you do not deduct home office expenses - that issue will not be relevant.
There is no "reasonable" percentages of gross income - all depends on your specific circumstances. Your deductions may be more than your income - but if you report losses for three years - the IRS might question if your activity is a business or that is a hobby. As long as your activity generates net income - there should not be any issue.
You also may not deduct "percentage" - you should have qualified expenses.
I might suggest to come up with the list of all your expenses that "might" be related to the business and analyze if these expenses at least partially satisfy "ordinary and necessary" test - and could be deducted.
As long as you have not made up deductions - I do not see any issues - and there is no reason to be scary of the audit.
In additional, because your self-employment taxes are lower - possible additional tax assessment is less - and the risk of the audit is also lower.
So your situation is not as bad as you might feel...
C-corporation is a separate legal and taxing entity.
While you own shares of C-corporation - it has its own way to deduct business related expenses and will file its own tax return.
To be deductible - that should be C-corporation's expenses - not your expenses - that is very important point.
Unlike S-corporation - C-corporation is not required to pay wages. C-corporation may pay wages and MAY deduct reasonable wages (those you may justify).
As I mentioned above - C-corporation may deduct only its own expenses.
If you are an employee - C-corporation may reimburse your job related expenses under so-called accountable plan. An accountable plan is not taxable to your employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of social security, Medicare, and Federal Unemployment (FUTA) Taxes.
In order to qualify as an accountable plan, your reimbursement or allowance arrangement must require that your employees meet all three of the following rules:
(1) There must be a business connection to the expenditure. This means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his/her 1040 income tax return.
(2) There must be "adequate" accounting by the recipient within a reasonable period of time. This means that your employees must verify the date, time, place, amount and the business purpose of the expenses. Receipts are required unless the reimbursement is made under a per diem plan.
(3) Excess reimbursements or advances must be returned within a reasonableperiod of time. Reasonable depends upon facts and circumstances.
A qualified personal service corporation is taxed at a flat rate of 35% on taxable income. You generally may have taxable income zero and avoid corporate income taxes and dividends all together.
I would still investigate your state corporate tax liability.
A corporation is a qualified personal service corporation if it meets both of the following tests.
-- Substantially all of the corporation's activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
-- At least 95% of the corporation's stock, by value, is owned, directly or indirectly, by employees performing the services listed above, retired employees who had performed such services, any estate of an employee or retiree described above, or any person who acquired the stock of the corporation as a result of the death of an employee or retiree (but only for the 2-year period beginning on the date of the employee's or retiree's death).
You are correct that C-corporation may deduct health insurance premiums paid for employees - but not reimbursment for the cost. That should be plan established under C-corporation. I might suggest to contact your health insurance provider and verify if teh health insurance woudl be established under teh name of your C-corporation - will or will not that affect the cost?
Overhead expenses for filing income tax and employment tax return for C-corporation mioght be a little higher for C-corporation. As a raw estimate - I would put $1k aside for that reducing your projected tax saving.
So as you are currently paying about $450/month - total $5400 in after tax dollars. Assuming you are in 25% tax bracket plus 2.9% self-employment taxes - total ~28% - you need $7500 income - so your possible tax saving would be $2100.
Minus overhead expenses fro keeping C-corporation ~$1000Minus additional employment taxes for your spouse - ?So far - your potential NET saving doesn't look very attractive...
However - you might have other reasons for having C-corporation?
If you were my client - I would recommend to stick with schedule C.
You would only move to a different business structure if ther e are specific reasons or benefits. There is no to complicate things and your tax situation without reasons.
No need to claim your spouse as an employee - there will be additional employment tax expenses with no benefits.
Still you will not be able to deduct her health insurance for above reasons.
If your employer provides with section 125 FSA - you may fund that account and use it for medical expenses including health insurance premiums.
Another option - to have HSA - fund it with pretax dollars and use the money to pay medical insurance.
FICA taxes have two parts - social security and Medicare taxes. Self-employment taxes are equivalent of FICA taxes. Because on your primary job you max social security taxes - your self-employment taxes on additional business income will be lower. That is your advantage of being an employee.
To deduct a certain expense - you need to have that expense. You may not simply claim "write offs" without paying expenses. I still suggest to evaluate all your expenses on subject of their relation to your self-employment activity and verify what may be deducted.
Your understanding is correct - the less possible tax recovery the IRS has - the less your chances to be audited.
How in the world is it that JA is not required to issue 1099's?
That issue was discussed in the forum specifically by Tax experts - there was no clear answer. But the administration did not want that discussion to continue.
Second, why wouldn't they?
I may not say for sure - but I think because there are many non-US users and reporting would create huge and unnecessary overhead.Is there some incentive not to issue them for JA's benefit?
Besides overhead - I do not think there are any incentives.