[quote=flu][quote=no_such_reality]Actually UCGal, you’re close. If he hasn’t, he needs to spend the $700 to incorporate out of state. Contract through the corporation and pay himself and meager but reasonable salary and have the corporation distribute the bulk of his earnings as dividends for the stock he holds in the corporation.
(Note, I’m not a tax attorney so you need to verify)
And I would suggest getting much more serious but deducting your business expenses and identiying them as such.[/quote]
I’m confused. If we’re talking about an s-corp, the dividend paid to shareholders, I believe still gets treated as ordinary income. (What it can do I believe is getting you out of paying self-employment taxes that you would pay receiving instead a salary), But then, even this, you have to pay yourself a reasonable rate.. Also, if you pay out a dividend, it goes to every shareholder.
Maybe I’m missing something.[/quote]
I don’t know about the dividend angle…
However what I do with my S-corp:
* Pay myself a modest salary to limit payroll taxes. I pay myself about what an Indian here on an h1b visa would be paid to do my work. Completely legit as far as I am concerned.
* Contribute the max of that modest salary to my 401k (Keogh).
* Have the company contribute the max to my 401k as a profit sharing bonus.
The second two allow me to divert over $30k annually for retirement, tax free. The first saves me about $7-10k in direct taxes.
Note that there is virtually no tax advantage to incorporating out of state if you live in CA. CA will still tax you even if you are incorporated in NV or DE. There may be other advantages but this isn’t one of them.
For the home office deduction…it’s virtually worthless. However you should have your S-corp purchase everything IN the office.
As to why the home office deduction isn’t really that big of a deal. I have an 1100 sq ft house. My office is 100 sq ft. Let’s round up and call that 10% of the square footage. Let’s say I have a $3000 mortgage so the most I could ‘write off’ a month is $300. However, most of that $3000 is interest which I’m already writing off and I can’t double dip. Say $500 is principle. That means I can write off $50 a month. The same math applies to utilities (cable, electricity): I can write off 10%.
I’ve added everything up and found that the total subject to write off, for me, is only a couple of thousand a year…with a real tax savings of only a couple hundred dollars. The risk of an audit is very high IMO and the bookkeeping/paperwork to support this isn’t worth the effort.
However, I do have my company pay the cell phone bill (and buy the phones) and it pays my medical insurance premiums.
