Operating as a Corporation
A corporation is a separate legal entity. Corporate assets and liabilities are separate from your personal assets and liabilities. If you properly operate as a corporation your personal assets are protected from actions of your corporation.Your business activity should be transacted within your corporation and that includes depositing your income into your corporate checking account and paying your bills and expenses from that account.
You are required to pay yourself salary for operating the corporation and that salary and other corporate distributions of income should be paid into your personal bank account. All of your personal expenses should be paid from your personal bank account. It is important to separate your business transaction from personal transactions.
Operating as a corporation is more structured than operating as self-employed. You are required to file and pay monthly payroll tax deposits, file and pay quarterly payroll tax returns, and pay quarterly payroll tax and employment tax returns, file and pay annual payroll tax returns, W2 forms, 1099 forms and the annual Federal and State corporate income tax returns. It is extremely important to have professional help as there are penalties for late filing or failure to file each return.
Operating as an S-Corp
We suggest your corporation operate as an “S-Corp”. As an S-Corp any income earned in excess of the salary you pay yourself is taxed on your personal account as corporate income and is not subject to self-employment tax. The IRS requires you to pay yourself a “reasonable salary” so you cannot set your salary so low to avoid paying social security taxes. We will file the election for you to be treated as an S-Corp and assist you with setting your salary.
Paying a salary requires withholding FICA, Federal and State taxes and paying these withholdings, plus your matching of the FICA, to the IRS on a monthly basis. You will pay FICA and the matching part only on the amount you set as salary. Any distributions you take out as “Corporate Distribution” is not subject to FICA or any withholdings. We believe that your salary should be approximately 50%-60% of what your earnings are. For example, if you you expect to have a net income of $100,000 your salary should be $50,000-$60,000. However, the amount of your salary is your decision to make and it can be adjusted and changed at anytime.