Are you a legal citizen and permanent resident of the United States? Congratulations. It's likely that your new Florida Corporation can file as an S-Corp rather than a C-Corp. This will not only make taxes a great deal easier on you, but you'll find that this structure is very familiar. In fact, it's quite a bit like your average tax filing session now.
Never heard of an S-Corp? Have you heard of a C-Corp? No? Let's get started. You've got a lot to learn.
What is an S-Corp?
An S-Corp is essentially a way to decide how you're going to pay your taxes and how you will be taxed by the IRS. In many circumstances, company losses are used as a barrier to prevent those involved with the company from being heavily taxed. We'll talk about how this can protect you from enormous self-employment taxes in a moment, but it is a wonderful way to cut your tax rate if you are a self-employed individual (if you can afford the start-up costs).
Many S-Corps are used to prevent heavy taxation on small businesses and sole proprietors. This is completely legal and very, very common. Most self-employed (or small business) profession, it's worth looking into.
Will an S-Corp Benefit Me or My Business?
The answer strongly depends on you and and your business. As mentioned above, if you're raking in pennies rather than dollar bills, it may not yet be worth the endeavor. Keep growing, keep building, and as you approach a taxable income, it's time to look into S-Corps.
When dealing with your personal finances, we recommend speaking with a financial adviser or a CPA before you make any definite decisions. They will be up to date on your local and federal tax laws, making certain that this is the best way for you to move forward.
How does this Differ from 1099 Self-Employment?
A 1099 or any self-employment taxation form (there are a few others out there, but 1099s are the most common) or "contractor" taxation form often leaves you with a great deal of taxes to backpay. you may also be required to file quarterly, even if you aren't paying your dues at that moment. Self-employment taxation starts somewhere between 15 and 20% d
A 1099 or any self-employment taxation form (there are a few others out there, but 1099s are the most common) or "contractor" taxation form often leaves you with a great deal of taxes to backpay. You may also be required to file quarterly, even if you aren't paying your dues at that moment. Self-employment taxation starts somewhere between 15 and 20% (depending on where you live) and goes up from there, often at a steep curve.
This isn't because the IRS wants you to remain a working drone in a larger company. Far from it. They love it when individuals strike out on their own. However, there is simply more to individually filing and the percentage typically makes itself apparent.
Of course, this is where an S-Corp can help you. It works sort of like a tax filter, allowing the company to take the brunt of the taxes rather than your pocketbook. In almost all cases, this leaves you with more money to invest or spend as so desired, often on things that you can claim as expenses for the next fiscal year and save even more off your taxes.
Difference from Florida Corporation
With a standard Florida Corporation, the money is taxed twice over. First, it is taxed as the business's income. Second, it is taxed as the investor or employee's income. Though this is perfectly legal, it can strangle smaller businesses who will miss that extra 10+% off the top.
An S-Corp isn't for everyone, but for those that it is for it can be an incredible tool. Bring your tax paperwork from last year when you speak to a CPA or a financial advisor so that they can double-check your math and do some of their own. This will allow them to discover any problems with your accounting, as well as help to tell you whether or not an S-Corp is right for you. It's important to file any necessary taxes, even if you have dissolved the Florid Corporation.
Indeed, some looking into S-Corps may actually benefit further from becoming a C-Corp. Want to know more?