Why should you start a corporation? The most often heard reason is the legal protection it provides as a business owner. If you were to be sued, the only things that can be part of the lawsuit are things the business owns, not your home and personal savings. There’s another large break you may not know about though, and that is the tax breaks.
Cyberworld Builders Inc is a sub chapter s corporation. There are two owners, who fill the roles of all the officers. IRS law says each s-corp must have one employee who is paid a reasonable salary (make that link to article on reasonable salary) that is subject to payroll taxes. All other income comes through as a company disbursement. Now let’s talk about how that helps you.
After you pick your reasonable salary, you will need to familiarize yourself with the required filings that accompany that. That is discussed here. All profits over that reasonable salary are shown on a K1 form. They are only taxed at your personal tax rate. That means all of your earnings are 100% exempt from the self employed tax!
In 2019 when the new tax law look effect, there were more benefits for s corp owners. 20% of your business earnings are exempt from income tax if you meet the IRS guidelines. For a person who is not married, if you make $157,500 or less you qualify. If you are married and make $315,000 or less, you qualify. This money still counts towards your gross earnings, you just don’t have to pay taxes on it.