Saturday November 21, 2009

smSmallBiz.com - SmartMoney's Small Business Site

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Tax Dilemmas for Small-Business Owners
C or S Corp? Start-up deductions? Cash under the table? We've got answers.
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Steve Kruse Posted: 1:32 PM On November 12, 2009
Mr. Hanley, allow me to clarify some comments. Salary paid to an employee is an expense of a C-corp which the corp uses to reduce profits. There is no double tax on salary paid. The corp only pays tax on profits retained at a max rate of 35% (max rate is really 39%, but it merely serves the purpose of moving up the tax on earlier profits that were taxed below 35% to 35%...overall, no corp pays more than 35% net tax on profits). The salary paid is only taxed by the employee at a max rate of 35%. It is not taxed by the corp. (one could argue that a higher salary causes other phase-outs on the individual's tax return creating a higher effective tax rate than 35%) When the corp pays profits to shareholders, they are taxed again by the individual at a max qualified dividend rate of 15%. So worse case: Salary is taxed at 35% and the total double tax on dividends is 44.75%. (100%-35%)x(100%-15%) = 55.25% At no point is income taxed at 74%.
Michael T. Hanley, CPA Posted: 12:04 PM On July 6, 2009
The biggest concern I have with the C Corporation is the fact that your profits are subjected to double-taxation. The corporation pays tax in the year that you earn the profits (as high as 39% tax rate) and then the owners pay tax in the year they take these profits out through salaries or dividends (as high as 35%). So, you're looking at tax rates as high as 74%. The S Corp is clearly the better choice for just about all small business owners.

Also, to comment on the other comment posted by 'gerald,' be careful where you get your advice from. Gerald is clearly not a tax professional or he would know that S Corporations are just as easy to operate as LLCs AND you pay significantly lower taxes when operating as an S Corp than as an LLC.

Michael T. Hanley, CPA is the Managing Partner of the Smithtown, NY CPA Firm, Merl & Hanley, LLP and the author of Effective Tax Planning for the MicroBusiness (available at bookstores nationwide or online at www.30minutebooks.com).
gerald Posted: 4:10 PM On October 24, 2008
one should think about LLC's instead of incorporating
Easier to run and less taxes
this form of business in my opinion is best for small businesses and also has become common for large businesses closely held
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