Incorporating, and the need for a lawyer

[Michael Andrew Uhl <uhl -at- VISLAB -dot- EPA -dot- GOV>]

Laurel (and other interested TECHWR-Lers),

Subchapter S Corporations do not pay out dividends; all excess money is paid
out as either salary or "draw" and taxed once at the personal level (Form 1040
and attachments). This is the principal advantage of an S Corporation, i.e.,
income is taxed only once, and at the personal rate, which used to be/is lower
than the corporate rate. As an employee of my own corporation, I also took
money out in salary and "draw."  However. you must pay FICA even on this draw.

C Corporations can pay dividends. Dividends are quite different from the
"draw" I mentioned above. They are taxed twice: at the corporate level and at
the personal level. C Corporations do offer some benefits to owners, in health
care benefits, for instance. However. most independent technical communicators
will likely want to go with a Subchapter S Corporation. Contact the IRS for
more information.

--

On a related matter, I disagree with my colleagues who have suggested the
"do-it yourself" approach to the legal and financial matters concerning the
establishment and operation of a corporation. While it certainly hurts to pay
the bill, using a *good* lawyer and accountant is a very worthwhile
investment. Find a lawyer and accountant who specialize in small businesses,
especially small corporations.

Consider this issue in the context of the "professionalism" issue that keeps
popping up on this list. For important technical writing work, hire a good
technical writer. For important legal work hire a good lawyer, and so on.

Cheers.

-Mike

--
Michael Andrew Uhl (mailto:uhl -at- vislab -dot- epa -dot- gov)
Lockheed Martin - U.S. EPA Scientific Visualization Center
Ph. (office) 919.541.4283; 919.541.3716 (lab)
P.O. Box 14365  Research Triangle Park, NC 27709






Laurel Nelson wrote:

> (This information is also US-centric.)
>
> Keith:  I'm a W-2 contractor and have not had to incorporate yet, but one
> of the developers I work with (an independent contractor who is
> incorporated) told me about something he calls the 60/40 rule. He claims 60
> percent of his income as dividends and 40 percent as salary. By doing this,
> he only pays the FICA tax on the 40 percent that he claims as salary.
>
> Because he does this, his social security benefit will not be as large when
> he retires, but he has more disposable income that he can use for personal
> investments or paying down debt. Considering the future of social security,
> I personally feel that following the 60/40 rule is beneficial.
>
> The developer also told me that his accountant advised him to claim the
> opposite--40 percent dividends and 60 percent salary--but apparently his
> accountant wasn't quite sure what the dividing line would be with respect
> to being audited at income tax time.
>
> The developer ended up calling a district court judge to find out how he
> could split his income without being under the threat of being audited. The
> judge told him about the 60/40 rule, which he's been following ever since
> (and has never been audited).
>
> Just thought I'd tell you this. Others on this list may have a different
> opinion, which I would be interested in hearing. Have a good day, Laurel
>
> From ??? -at- ??? Sun Jan 00 00:00:00 0000==

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