Tax Benefits of Incorporating Your Business

Incorporating can provide significant tax benefits, but it's not right for everyone. Here's how to decide.

Sole Proprietor vs. Corporation

Sole Proprietor:

• All profits subject to self-employment tax
• Simpler structure
• Personal liability

Corporation (S-Corp or C-Corp):

• Potential self-employment tax savings
• Limited liability protection
• More complex structure

S-Corporation Benefits

Self-Employment Tax Savings:

• Pay yourself reasonable salary (subject to payroll taxes)
• Remaining profits as distributions (not subject to SE tax)
• Can save thousands in taxes

Example:

• $100,000 profit
• $50,000 reasonable salary
• Save SE tax on $50,000 = ~$7,650 savings

C-Corporation Benefits

Lower Tax Rates (for some income):

• Corporate tax rate: 21% (flat)
• May be lower than personal rates for high earners
• Can retain earnings in corporation

Fringe Benefits:

• Health insurance fully deductible
• Other benefits may be tax-free

When to Incorporate

Consider S-Corp if:

• Profits significantly exceed reasonable salary
• Want SE tax savings
• Comfortable with payroll requirements

Consider C-Corp if:

• Want to retain earnings
• Plan to raise capital
• Need corporate structure

Costs of Incorporating

• Formation fees ($100-$500+)
• Annual state fees
• Payroll processing costs
• More complex tax returns
• Potential double taxation (C-Corp)

Making the Decision

Consider:

• Current and projected income
• Tax savings potential
• Administrative burden
• Long-term business goals

How FileJoy Helps

FileJoy helps you model different business structures to see which saves you the most in taxes, making the decision easier.

Next Steps

1. Calculate potential tax savings
2. Consider administrative costs
3. Consult with tax professional
4. Make informed decision based on your situation

Incorporating can save significant taxes, but make sure the benefits outweigh the costs and complexity.