! Then, if Bob takes the remainder of the profits as W2 wages, he will probably be paying more FICA because his wages have increased from what he was paying himself in his S Corp. However, he can set up a profit and pension plan and pay much more into it (thus lowering his taxable income further) then he could when he was paying him self a lower wage.
C Corporations can also have a different tax year. So, if Bob?s Plumbing?s new tax year ended on January 31st, Bob could take a bonus in January. This would defer the taxes on the bonus for one additional year as the income would show up in the next years tax return.
Please note that the IRS frowns on converting an S Corp. back to a C Corp. (your corporation started as a C Corp. before the IRS allowed you to operate as an S Corp.). They definitely don?t want you to switch back and forth. So, check with your tax professional to see if it makes sense for you to do this.
Creating two entities can allow you to split your company?s income between the two entities potentially saving you more taxes by further lowering the taxes charged on the net income.
Example ? Rather than converting Bob?s Plumbing, Inc. into a C Corp., Bob could keep it as an S Corp and create a separate C Corporation. This new C Corporation (we?ll call it Bob?s Plumbers, Inc.) could be hired by Bob?s Plumbing, Inc. for $50,000 per year to provide services. For instance Bob?s Plumbers, Inc. could pay the payroll to all employees of Bob?s Plumbing, Inc. and charge $50,000 per year more to Bob?s Plumbing, Inc. (than its costs) to hire out it?s plumbers to Bob?s Plumbing, Inc.
Please Rate This Article
Current Average Rating: 3.9 (37 Votes)