Did you know that the IRS has a 15.3% Self-Employment Tax?  That’s right!  If you are not incorporated or otherwise a formal business entity, you are subject to self-employment tax.  Graciously, they allow you to deduct 50% of this amount for your adjusted gross income on your tax returns.  But that is still a lot of money.

Now, what about avoiding this tax altogether.  Isn’t that the same as putting more money in your pocket instantly?  It is!  When you incorporate, you are no longer subject to self-employment tax.  For small or startup computer service professionals, a Class C Corporation is much more of a headache than you will want to deal with and, in reality, a Class C corporation is double taxed.  Once for corporate income, and then you again for personal income.

The two entities that I recommend are Limited Liability Corporations (LLC) and S Corporations.  The only “gotcha” for  LLCs is that the IRS still considers you self-employed unless you elect to treat your LLC as a corporation.  You also have to make this choice when applying for your Employer Identification Number (EIN).  This EIN is the equivalent of a Social Security Number for a company.

Both LLCs and S Corps will allow you to avoid the Self-Employment tax.  Both are very simple to setup and will likely save you thousands of dollars over the years.  You will want a competent CPA or bookkeeper to help you setup your corporation or LLC.  There are certain things in business that you just want to make sure are done correctly and this is one of them.  Pay for it.

Both of these also avoid the double tax problem.  Your corporation or LLC will either have a profit or loss at the end of the year.  That profit or loss flows down to your personal tax return.  So, if you have a gain of $20,000 then your personal income just went up by that much.  If you have a $10,000 loss then you just found an extra tax deduction because your personal income is now $10,000 less.

In addition, you receive some additional protection of your personal property if things don’t go very well.   Write-offs, accounting, banking, and more all become much more black and white making everything easier to manage.  Just like a real business should be.  You can then also get a Sales and Use tax number and/or Reseller number so that you can purchase equipment/items tax-free and then charge sales tax when you sell the item to a client/customer.  This too will help your bottom line.

If you’ve been operating as a sole-proprietor or independent contractor, then stop it now.  You’re missing out on benefits that you really need to be taking advantage of.  Running a corporation is very easy regardless of what others say so go now and incorporate!

-Zachary M. Morvik