Self-employed person creating an S-Corp?

[ontheupandup]

(Sorry if there are posts about this elsewhere; I tried to search the forums, but the phrase "S Corp" can't be used as all words entered must be at least 2 letters long!) I am currently self-employed in the performing arts education field, receiving 1099s from primarily 2 employers. A friend recently suggested that I look into creating an S-Corp for potential tax benefits/protection, but I truthfully have no idea what this would look like. After some preliminary Googling, I'm still not clear about what the potential advantages would be.

Any advice on what this would look like and/or the biggest benefits and drawbacks of doing so? (I am in Minnesota, if this helps!) Thank you!

[bacchi]

An S Corp is much like a C Corp and even begins life as a C Corp -- it has shareholders and is Incorporated. Unlike a C Corp (any large company you know is almost certainly a C Corp), all income passes through to the shareholders (= you). This avoids corporate taxes and makes filing taxes somewhat easier.

The big reason that you'd want an S Corp is distributions. The S Corp pays the shareholders a salary. Anything left over after a reasonable salary can then be distributed to avoid the self employment rate (15.3%). This feature of an S Corp generally makes people rub their hands with glee (and greed).

Be careful with the S Corp, though, because the IRS doesn't fuck around with S Corp low salaries + high distributions. In fact, a one person S Corp that makes income from 1099s probably throws up red flags if there's any distribution greater than $0.

An LLC sole proprietorship is also a pass-through entity. You get limited liability with ease of tax forms and most business deductions. It might be a better choice for your situation.


Edit: Distributions avoid the SE tax, not income tax.

[Prepube]

I set up my business as an s-corp about twenty years ago.  It is definitely simple.  All 'profits' pass through to the personal tax return on a k-1 form showing the amount of profit or loss, then that income is added to your w-2 income reported to the irs.  This has worked great for us except in the beginning when I was not withholding enough from my taxes and I failed to make quarterly deposits during an exceptionally good year.  It took me a while to pay off the IRS but I never made that mistake again.  I have liked the way the s-corp is easy to understand and manage, but you should speak with your accountant before making any decisions, and be absolutely positive you know the impact on your taxes of any income that will flow from the business to your personal tax return through the k-1.