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I own 100% of a C corp which manages contracts for sales representation

with one company (commission only)...
I own 100% of a C corp which manages contracts for sales representation with one company (commission only) AND my contract providing corporate finance advice.

I have a new opportunity to contract either with myself or my company to a new customer at a fixed day rate for 3 months. From a tax perspective, what are the pluses and minuses of 1099 to me as an individual vs. a contract with my company?
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Answered in 1 minute by:
10/19/2013
R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3,375
Experience: Over 20 Years experience
Verified

R. Klein, EA :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

R. Klein, EA :

Thanks you for your tax question this morning.

Customer:

hello?

R. Klein, EA :

The real difference is whether you want all of the money from this contract to go to you, or if you want to push some of this income to the corporation. Without knowing the specifics of the corporation's net income and your tax rate, it is impossible to determine which is better on an after-tax basis

R. Klein, EA :

You should be getting a W-2 from the corporation as an employee as it is.

R. Klein, EA :

This comes down to a business decision much more than a tax decision. Don't let the tag tail wag the dog.

R. Klein, EA :

(that's "Tax Tail wage the dog")

R. Klein, EA :

wag

R. Klein, EA :

can't type this morning

Customer:

If I use the corp. I will pay myself a paycheck and file a W-2. Corporation will likely wind up with near zero income and personally, wife and I will have $140kish gross income, $30k of itemizable deductions.

Customer:

appreciate your comment about the business dog vs. tax tail. What business considerations do you see? The only one I see is better liability protection in the corporation vs. better income protection in the courts (God forbid) if I'm not paid; California courts more likely to weigh in favor of an individual vs. Corp.

R. Klein, EA :

Either way let's you deduct your overhead and expenses before being taxed.

R. Klein, EA :

However, based on your comment, you may not be using the corporation to your best tax effect.

R. Klein, EA :

The corporate tax rate is 15% at income under 50K. Assume you have a $10K profit.

R. Klein, EA :

Your corp pays $1500 tax. You then have 8500 left to distribute as a dividend

R. Klein, EA :

Your personal tax rate is around 25%. Dividends are taxed at 15%.

R. Klein, EA :

So you take a dividend of 8500 and it's total tax is 1275. You have paid a total of 1275+1500 = 2775 on that 10K

R. Klein, EA :

If you take the 10K as a 1099 (after expenses), you have $2500 income tax (25%)

R. Klein, EA :

PLUS 15% more for Self employment tax = 4000 on 10K. 40% versus 27.75% effective tax rate

R. Klein, EA :

Of course, you could set aside 20% of the self employment for retirement. You could not do that as a dividend.

R. Klein, EA :

So, your income tax would go down by (25% * 2000) = 500, and you would have 2000 in an IRA

R. Klein, EA :

everything is relative

Customer:

Mr. Klein, I'm a little confused. Appreciate that everything is relative!

R. Klein, EA :

What are you confused about?

Customer:

Is there a device where I can inexpensively make a tax-deferred retirement contribution from the corp? If so, it seems that the deduction of funding the retirement fund is pre-pre tax, and the employment taxes would only be paid on the W-2 income. Am I missing something

R. Klein, EA :

A retirement contribution by the CORP can only be made based on the wages you are paid from the corporation. This might take the form of a SIMPLE IRA match, or a 401K match,

Customer:

what about a defined benefit plan?

R. Klein, EA :

As a self-employed person, you might select an SEP, a SIMPLE, or hybrid 401k. All of these are based on your net self-employment earnings

R. Klein, EA :

A DB plan is nice too, but again, you are limited to your earnings as an empployee.

R. Klein, EA :

You have to consider whether your "contractors" are truly contractors or if they are really YOUR employees.

R. Klein, EA :

If they are your employees, you have to cut them into any corporate level benefit program to be fair and legal.

R. Klein, EA :

These people may be contrated out and act as contractors to the corproation's customers, but they might be your corproation's employees

R. Klein, EA :

That's a "whole nuther" discussion

R. Klein, EA
R. Klein, EA, Enrolled Agent
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Satisfied Customers: 3,375
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