Entrepreneurs, Newly formed Companies…a word on Taxes

August 8, 2010

As the tax deadline comes and goes, it is a good time to reflect on and act on proper tax planning for today and the future.

Are your books in order and is your business structured properly? Are you taking all the legal deductions you are entitled to? If not, there is a good chance you are paying more taxes than necessary.

Many new small business owners struggle with whether or not to form a corporation or remain as sole proprietors for their businesses. Forming a corporation allows for some tax benefits that small business owners should know about that could save them a lot on their annual tax bill. Knowing the advantages of forming a corporation for tax purposes can save you tons of money in the long run. And a properly form business entity is an asset that holds it’s value and can be sold for a profit in the future when the business owner is ready to move on.

A major benefit of incorporating your business allows for greater tax deductions for the business, your employees, and potentially for family members of business owners. Even if you’re the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may be deductible. For example, corporations can deduct 100 percent of medical insurance premiums. Incorporating may also eliminate self-employment taxes and lower your payments for social security tax and Medicare tax. Your individual tax liability may also be reduced, as you will become an employee of the corporation.

The following illustration shows how one individual, who has $60,000 per year in revenue, can save almost $7,000 in taxes just by incorporating.

Joe the independent contractor:

*revenue          $60,000

*total tax due   $14,054

Joe the employee of his own corporation:

*revenue          $60,000

*total tax due    $7,280

The difference is in the power of being able to determine what you pay for yourself, what is subject to additional self employment taxes and what stays in the corporation for future expenses of the company.

These kind of benefits of incorporating rather than running their businesses as sole proprietorships is what draws so many people to build a simple corporate image. Not to mention other fringe benefits and lower state income taxes.

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