As an independent contractor, you pay more in social security and medicare costs than you would if your were working for a corporation. The reason for this is that when you work for company, they are required to pay part of the above-mentioned taxes. As an independent contractor, you have to pay 12.4% of your income for Social Security and another 2.9% for Medicare for a total of 15.3%. This can cut into your profits and decrease your tax return when tax season rolls around. If you want to shelter part of your earnings from this self-employment tax, you should consider forming an S-corp.
What Is an S-Corp?
The term S-corporation applies to small business that do not have more than 100 employees and who only offer one kind of stock. Moreover, if a business allows another cooperation to own stock or employs nonresident aliens, it will not qualify as an S-corporation. An independent contractor may elect to be taxed as an S-corp, which can help to shelter some income from the self-employment tax.
How Does It Help to File as an S-Corp?
As an independent contractor, you can contract for work with more than one person or company, and, thus, you stand to gain more than a person doing the same service as an employee of one business. By filing as an S-corp, you can pay yourself a salary based on what other people doing the same service make. For example, if you make $50,000 as a landscaper and employees of landscaping companies make $25,000 a year, you can pay yourself a salary of $25,000. You then only have to pay a self-employment tax on your salary. You will then reduce the amount you owe in taxes from $7,650 to $3,825.
What Is Your Liability as an S-Corp?
As an S-corporation, you can not be held personally responsible for defective products sold or produced by companies that you contract with. In contrast, anyone who is injured by a defective product that you have sold as an independent contractor can sue you directly to recoup their losses. While limited liability is not a benefit when it comes time to file taxes, it can help to protect your earnings.
If you are interested in the benefits you may gain by electing to be taxed as an S-corp, you should talk to an accounting company like Amos Maney & Payne CPA's LLC. They will be able to advise you on whether the election is right for situation as well as instruct you on how to set up your business to take full advantage of the benefits provided by incorporating.
Share22 June 2015
I have always dreamed of opening my own beauty salon, but never seemed to have the money to make that dream come true. I decided that it was time for me to hire an accountant to help me create a savings plan and to assist me in calculating how much money I would need to open my salon. I found out all about what it takes to start a business and a lot of great advice about what I can do to save the money I need to make it happen. If owning your own business is something you are dreaming of, my blog can help.