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Originally Posted by GatorB
What's not true? Everything I posted was true. His numbers were wrong. First of all the SE tax rate is 15.3% not 15.65%. Secondly. Only income $94,200 and under is subject to that 15.3% above that is subject to 2.9% rate.
I'm not commenting which is better or worse. I'm correcting math errors. If that poster is going to make a case about one being better than the other then that poster needs to at least have his facts straight.
Really it depends on the individual situation. If someone is new to this or only does it for part-time money and only makes $10K a year, it's a bit silly to form a S-corp. What's his salary going to be, the entire $10k?
You say you pay yourself $200K. Well that's great. Do you know how many people here don't even gross that? Fact is if one forms a S-corp and one pays oneself close to minimum wage you can bet the IRS is going to look at that.
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It wouldn't make sense to pay yourself a low wage through an S Corp. In the end, the income all passes through to the owner just the same as if they were a sole proprieter. Passing a decent amount of that income through in the form of a salary serves several purposes. One.. it provides the owner with contributions to both social security and federal withholding which allows for SS payments when you retire and reduces the quarterly estimated payments for personal income tax. There are also benefits in regards to expenses the S-corp can absorb.
In the case of someone with net income near or lower than the social security tax income threshold ($97,500 for 2007), an S-Corp doesn't neccessarily provide a benefit in regards to the medicare portion of the SE tax. For S Corps with income over that limit it certainly can be a benefit. Such a benefit that the laws are being reviewed and may be changed in the case of SCorps with one owner or with an owner that owns a 50% or larger share.
The subject comes up here several times a year and almost always around tax time. Ultimately (and as you said), the decision is based on individual circumstances and it helps to consult an attorney familiar with incorporating and a CPA.
PK