S Corp Payments

There is a list of questions you can download and answer for yourself on the subject of employee or contractor. Do you and your company a favor and do it right. you will actually save him money in the long run. Right now he pays self employment tax for no reason. It can cost you alot of back taxes later on. I have been there.

 

Have you considered an LLC?

 

An LLC is the state version of being incorporated. The IRS doesn't recognize LLC's when it comes to filing your taxes. If you do nothing after you create your LLC, the IRS will treat you as a disregarded entity. Basically, they just treat you as a sole proprietorship for tax filing purposes.

Or, your LLC also has the option to file S Corp paperwork with the IRS to have them treat you as a S Corp instead. That's what I am, a LLC filing as a S Corp. It gives you the best of both worlds. No corporate income tax and you pay less in Social Security and Medicare versus being a sole prop. I believe these tax advantages are why the OP is contemplating going S Corp.

 

I see. We are an LLC, but so we do not have to file quarterly we chose to be recognized as one. I can still pull a draw like you mentioned earlier. When we sat down with our tax professional it seemed as if it was 6 in one half dozen in the other. If we had employees we would most definitely file as an S Corp.

 

InmanFreight - if you pay less social security now , will it lower the amount that you receive later in life when you start drawing it out ?

 

The short answer is yes.

The long answer is, Social Security is a formula based on your 35 highest earning years and what age you start drawing. The max amount to receive is somewhere around 2600 per month, the last time I checked. It may be higher now, it periodically goes up for inflation. To receive the max amount, you would have to earn around 100K per year most your adult life. If you earned 50K per year, you'd be in the neighborhood of 1800 per month benefits. So yes, If you claim a 50K salary every year instead of a 100K salary, you could lose roughly 800 per month in benefits when you retire.

The flip side of that is: If your S Corp makes 100k per year and you claim a 50K driver salary on your W2, you're FICA withholdings are only based on the W2. You still earn the full 100K but you only pay 7650 to Social Security and Medicare based on the 50K W2. A sole prop making 100K pays 15.3K in self employment tax based on the full amount. A savings of 7650 per year.

Now, if you are serious about funding your retirement, take that same 7K per year you just saved and put it in a Roth IRA or a Roth 401K. ETrade has a pretty good solo Roth 401K, that's where I opened one. Instead of giving that money to Social Security every year for an extra 800 per month benefit at retirement (if it's even still around by the time you retire), that money will grow in the millions depending on your age when you started putting in a Roth. And, a Roth is tax free when you start drawing at retirement, unlike Social Security benefits.