Quote: (05-09-2016 11:40 PM)frozen-ace Wrote:
Sole proprietor (self employed). You get hit hard with SE tax-
Schedule C income $65,000
Taxable income- $50,108
Self employment tax- $9,184
Federal Income tax- $8,325
Total Tax- $17,509
Net take home- $47,491
LLC, taxed as partnership. As owner is not legal to pay yourself W-2 wages (need have S-Corp election to do that)-
Schedule C income $65,000
Taxable income- $50,108
Self employment tax- $9,184
Federal Income tax- $8,325
Total Tax- $17,509
Net take home- $47,491
In this case, your take home is the exact same as above, but you will have to file a tax return for the LLC (additional expense and burden). Only recommend this route for legal protection, otherwise forget it and go sole proprietor.
LLC, with S-Corp election. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is flow through as self employment income (for lack of a better term, a "dividend", even through it isn't. S-Corps don't and can't pay dividends).
On your W-2 wages, you pay SS and Medicare, as does the LLC.
W-2 income $50,000
Schedule C Income $11,175
Taxable Income- $50,085
Federal Income Tax- $8,313
Self Employment Tax- $1,579
However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the LLC paid on your behalf. That has to get added to the total net consideration-
Net take home after ALL taxes- $47,458
C-Corp, with S-Corp election. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is flow through as self employment income (for lack of a better term, a "dividend", even through it isn't. S-Corps don't and can't pay dividends).
On your W-2 wages, you pay SS and Medicare, as does the C-Corp.
W-2 income $50,000
Schedule C Income $11,175
Taxable Income- $50,085
Federal Income Tax- $8,313
Self Employment Tax- $1,579
However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the C Corp paid on your behalf. That has to get added to the total net consideration-
Net take home after ALL taxes- $47,458
C-Corp. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is "qualified" dividend.
On your W-2 wages, you pay SS and Medicare, as does the C-Corp.
W-2 income $50,000
Qualified Dividend from C-Corp- $9,499
Taxable Income- $49,199
Federal income tax- $7,138
This one is the most complicated because the C-Corp pays its own taxes, and the dividends paid to you are taxed at different rate. However, let's look at the NET take home after all is said and done- $48,536
Summary-
Self employed- $47,491
LLC (no S-Corp election)- $47,491
LLC (S-Corp election)- $47,458
C Corp (S-Corp election)- $47,458
C Corp- $48,536
The numbers speak for themselves. If the legal protection isn't really an issue, I don't think I'd bother with an LLC or C Corp at $65K unless you really like tax forms and tax filings. In essence you can take many different paths to the SAME EXACT spot. You don't magically save money by incorporating, the taxes just get shifted around to different spots and who pays. But if you are the sole owner, you pay at the end of the day, so it is six one way or half a dozen another.
If you were making $300K+ then the analysis REALLY changes. Hope that helps.
Hey - great write up, thank you, +1ed you.
Two questions:
1. How are dividends typically taxed? Isnt it at capital gains since its a distribution from capital?
2. You wrote: "However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the C Corp paid on your behalf. That has to get added to the total net consideration" - Do you incorporate the SS and medicare in your analysis above? - As I understand, you included this under your "Federal Income Tax" line. If so, or if not, how much $ (estimated) would these typically be?