Reduce your self-employment taxes with a Corporation or LLC
If you're a sole proprietor, you probably pay periodic self-employment taxes on your entire share of your company's profits. Corporations and LLCs, on the other hand, are taxed differently.
A corporation pays its share of employment taxes and withholds certain required income and employment taxes from employees' salaries. Corporations and their workers pay these taxes only on the reasonable salaries paid to employees, not on the total profits of the corporation.
Not Incorporated: Oscar, a sole proprietor, has a net income of $100,000. He pays $15,300 in self-employment taxes.
Incorporated: Oscar forms an S Corporation. He pays himself a reasonable salary of $60,000 and pays the other $40,000 as a shareholder dividend. He pays Social Security and Medicare taxes only on his salary, for a total of $9,180.
By incorporating, Oscar saves:$6,120.