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Self Employment Taxes and How to Avoid Them

The self employment tax is one of the highest taxes we pay. This may be one of your considerations in deciding on how to form your business. There are three main types of companies, Sole Proprietor, Partnerships and C-Corporations. An LLC is normally a sole proprietor if it only has one owner/member. If there are more then one then it is a partnership unless it files to be treated as a Corporation. Then there is the S-Corporation this is a corporation that has elected to be treated as an S-Corporation.

Income from a sole proprietor  or partnership is shown on your personal returns and is subject to self-employment taxes which is about 15% and you also have to pay your normal income tax on this money which can be as much as 25%. Income from an S-Corporation also shows up on your personal tax return but is not subject to self-employment taxes just income taxes.

You are both an employee and a shareholder when your business is formed as either an S-Corporations or a C-Corporations. When the company has extra money it pays the shareholders a return on their investment into the company. Similar to a dividend. Here is a great graphic that may help.

 

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