Opinions on incorporating please.

[John 19]

Looking for opinions on incorporating before going to work in the sandbox. I understand that by incorporating oneself you are now a company rather than an individual person which may have some benefits regarding taxes and liability. That is about the extent of my understanding of this issue.

Opinions of those who have done it or considered it would be much appreciated.

Also, a general idea as to how many contractors do this would be helpful.

Thanks,

John

[Hacker]

The simple answer is, when you incorporate, the company you contract to (BW, Dyncorp, whomever) pays your company. Your company only pays corporate income taxes on that money: not Social Secrurity, etc. Then your corporation pays you a salary and you only pay your income tax on that salary. My accountant told me a 1/3 - 2/3 split (taking 2/3 as salary and leaving 1/3 in the corporation) is a safe distribution that won't raise red flags with IRS.

I incorporated as an LLC (I'm in Montana) but check with your accountant to see which would be better for you (LLC, S Corp. etc.) The other cool part is, that 1/3 you leave in the company account is what you use to buy all your gear and toys anyway because they're used in the business, AND they're deductible from your company's income that it has to pay taxes on. It makes a big difference deducting gear that way instead of deducting it from your personal adjusted gross.

Some places your accountant can set up the corp for you, some places you have to use a lawyer. All the expenses of setting it up are deductible anyway, so don't balk at some huge lawyer fees. My accountant only charged me $150 so I got off easy. Then you get a corporate federal taxpayer ID number to use on everything where you would normally use a Soc. Save all your expenses and receipts like you normally would but keep everything separate in the company folder and have your accountant file your corporate tax return. No troubles.

If I'm way off base, someone correct me, but that's they way my guy explained it to me. Bottom line-- see your accountant, or get one if you don't have one. LOTS of contractors I met over there do it this way. On my first deployment I hadn't set up the LLC yet and took it all as personal income. (ouch). The second deployment I had it all direct-deposited into the LLC account. I set up a business checking account and got a corporate credit card that I use for travel and gear, etc. Its been worth it.

Hope that helped.

[John 19]

Hacker,

Thank you very much. This is the type of info I was looking for.

If anyone else has any thoughts they would be very welcome.

John

[ExSquid]

John 19:

A good place to begin when starting a business is www.nolo.com. Their mission statement is "to provide do-it-yourself legal solutions for consumers and small businesses." The following quotes are from one of their basic tutorials:

Single-Owner LLCs
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS.

As the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return. Even if you leave profits in the company's bank account at the end of the year -- for instance, to cover future expenses or expand the business -- you must pay taxes on that money.


Hacker, what you described sounds like a S-Corp to me .

D/S

[Cochise]

I did an S-corp as well. Working out well. Sounds a lot like the post above. I am in florida.

Was very easy to set up with the accountant. I think it was 450 bucks. Then 150 bucks to registar for Tax ID number

I would advise not to try anything without an accountant or lawyer. Pay them well to look out for your loot.

[Hacker]

D/S--
You're right. My guy said he set it up as an LLC with S-corp rules or something.
And Cochise is right. Pay an expert. That's why we have great jobs. DoS pays the experts. :D

[John 19]

Cochise,

Roger that on having an accountant or lawyer set this up. I wouldn't even try.

Thanks to all and any more comments are welcome.

John

[Silverbullet]

Depending where you live either a LLC or S corp will work. Just remember a S Corp requires more paperwork and record keeping. The IRS will be on top of you.

Either case you must pay yourself a salary to not have to pay self employment taxes or estimated taxes. A payroll company can take care of that. It's all deductible.

Either way get an accountant and use a business lawyer to assit you in selecting and registering the proper business structure.

[Xdeth]

I did the LLC thing, I had to account for a shi&*load of expenses, something like around half of what I earned in order to avoid paying close to 25%, it's ridiculous. I have another tip for someone interested in saving their money, the Caymans.

[MixedLoad]

Just out of curisoity, but I have just spent a year working as a "at will employee" for my company. This was explained to me as being an employee of the company with the option for both sides to end the commitment at any time, rather than me being an IC. Apparently it was in my interest. Since I just got raped on the tax situation, I am obviously trying to get the most out of this next contract. Would the corporation make any sense for me if I am not an IC? Or what other possible things should I look into setting up prior to deployment?

I appreciate your guys help.

[Heloplt]

Use a CPA and Attorney to set up the business. Remember as a USA based corporation or LLC you do have to file tax returns, pay Social Security, and Federal Withholding taxes, also state returns if your state has income taxes or B and O taxes or the the equivalent.

Sub-chapter S and LLC's pass along any profits as Dividends to you and they have to be reported as personal income subject to State/Federal income taxes....but not Social Security taxes.

You will probably need to file quarterly withholding reports.....

A good CPA can take care of the bookkeeping...you will have to pay for those services. Setting up the company is the attorney's job.

Any equipment, computers, cars, should be purchased by you personally and then leased to the corporation or LLC. You get the expense write off to offset the lease income which is free of Social Security tax. The lease payment is a direct write off for the Corporation or LLC. Maintenance of the vehicle can be written off for all business use....personal use by law should be reported....

The key is using a conservative CPA...one who will cost you a bit of money in lost tax savings but who will keep you squeaky clean come audit time. Fines, penalties, and interest add up quick.

[Viking]

I ran this by a buddy of mine who's doing the IC thing. His take on it:

"Hey bro, my tax advisor told me not to worry about LLCs and their ilk.
Incorporating just complicates tax and accounting issues with no real tax
benefit over a sole proprietor. My accountant told me that the only reason
to incorporate is for liability purposes, either with customers, services,
or employees"


Just thought I'd throw that out there as another take on the situation. Bottom line, like everything else, do your homework (which it looks like you are).

Good luck.

[Guinness]

I'm IC also and did the SCorp setup. I figured out my taxes with my CPA for last year and it appears to have saved me a lot of Money. Now I'll just have to wait and see what the IRS says about it. Arghghghgh. You make the taxes savings on the corporate distributions which are similar to dividends.

[John 19]

Thanks again to all.

If, by chance, anyone knows a good CPA in the Pittsburgh area, it would be appreciated.

[mmalloy]

One of the benefits in setting up a corporation is that you can also set up a sep IRA and contribute up to 41,000 a year and not get taxed on it and you are still able to take money out of that contribution.

M