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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10846
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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If I decided to be incorporated, how will that affect my

Customer Question

If I decided to be incorporated, how will that affect my taxes?
Submitted: 1 month ago.
Category: Tax
Expert:  Lane replied 1 month ago.

Hi.

...

That depends on the type of corporation.

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A Sub - S (referred to many times as an S-Corp) is a pass-through. Doesn't pay taxes on it's own return (the 1120-S), but has a required salary for the "Shareholder-Employee," (which is passed through on a W-2 as any other employee) and then any excess profits above that reasonable Salary and the S-Corp's other expenses is passed to the 1040 on the 1120-S' form K-1, very much like a dividend from a C-Corp but only taxed once, to the shareholder employee.

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If you choose C-Corp taxation (many times referred to as the regular corporation) you still; have that required salary (still an expense of the corporation on the C-Corps return (form 1120) BUT, here, the Corporation pays it's own taxes at corporate rates (the C-Corp is a truly a separate taxable entity).

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The once the C-Corp has paid it's corporate taxes, you can then pass dividends out to the owner(s) on a 1099-Div (which is taxed to the shareholder employee at personal rates on the 1040. (This is the double taxation you hear about with C-Corps).

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Likely the LLC (Limited Liability Company) a hybrid between the sole-propietor (or partnership if there are two owners or more) and the corporation is a good place to start.

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Provides the corporate Liability protection of the corporation with the low cost, and flexibility, of the sole-proprietor/partner.

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The fastest growing entity type out there (partially for those reasons).

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So the ONLY affect on INCOME taxes would be the double taxation for the C-Corp.

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And for the S-Corp, there CAN be some social security and medicare tax savings, depending on profitability levels, and what a reasonable salary would be for what you are doing for the company ... (coming at the COST of the additional administrative overhead, quarterly payroll taxes, paying in FICA at least monthly, payroll accounting, etc)

Expert:  Lane replied 1 month ago.

Please let me know if you have ANY questions at all, before rating me

But if this has helped, and you don’t have other questions, I would appreciate a positive rating (using those stars on your screen – and clicking submit)

That’s the only way JustAnswer will compensate me for the work here.

Thanks,

Lane

I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986