Tuesday, July 21, 2009

Writers Overpay On Taxes--Part II

Yesterday I talked about reducing taxes for writers earning less than $30,000. Today I will discuss a tax reducing strategy for writers, any business for that matter, with profits into the six figures.

There is a reason accountants and attorneys love LLCs. They were created with service businesses in mind. The beauty of the LLC is with how taxes are handled. An LLC can be treated as a sole proprietor (single member), partnership, corporation, or S-corporation with a simple form submitted to the IRS, Form 8832, sometimes call check-in-the-box. You default to a single member LLC with one member and a partnership (LLP) if there are multiple members.

Once your profits rise to $30,000 and up, it usually makes sense to elect to be treated as an S corporation. Once you elect as an S corp, you are an employee of the company with all required payroll and payroll taxes required. However, what you get paid by the company is determined by you. As long as it is reasonable, a fluid term used by the IRS and the tax court on this matter, it is acceptable. All remaining profit flows to your personal income tax return as ordinary income without FICA or self employment taxes. Taxes saved can exceed $10,000 per year. The goal is to have the lowest reasonable wage allowed.

Always check with a tax professional before taking any action. Your personal situation determines how well any tax strategy works.

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