One of the reasons many entrepreneurs or small business owners incorporate themselves is in hopes of reducing the tax burden that they have to pay. Ever since the passing of the 2017 Tax Cuts and Job Acts (TCJA) bill though, it’s left even more people wondering what type of business formation is ideal for them.
Those who are incorporated as partnerships, sole proprietorships, S corporations or who are self-employed may receive a 20 percent pass-through deduction beginning this year. Anyone working in the service industry such as financial planners, doctors or lawyers must earn less than $207,500 if they’re filing individually or $415,000 for married filers in order to qualify for it.
LLCs
Professionals such as landlords who have incorporated themselves as a limited liability company (LLC) are generally eligible to file their taxes as an S corporation, partnership or sole proprietor. This allows its owners to claim both their gains and losses on their individual tax return. Since the LLC serves as a pass-through entity, they may qualify to receive a 20 percent qualified business income (QBI) deduction this tax filing year.
S corps
Professionals such as financial planners and doctors who have incorporated themselves as an S corp can also benefit from its pass-through status as well.
By being incorporated this way, they won’t have to pay taxes on the corporate income that they bring in. They instead just pay any burden they owe on their own individual tax return.
Self-employed
Any business owner, independent contractor or freelancer who receives a 1099 at the end of the year is required to pay both income and self-employment taxes. This often leaves them making double contributions to both Medicare and Social Security.
The highest tax bracket that a self-employed individual qualifies for under TCJA is 29.6 percent, provided that the filer qualifies to receive a 20 percent pass-through deduction. Those who fall within the top tier of this bracket may find that incorporating themselves as one of the other business entities above minimizes their tax burden.
Making sense of ever-changing tax laws is difficult. So, too, is making sense of the pros and cons of incorporating yourself as one type of corporate entity versus another. Understanding how one affects the other is even more complicated. An Atlanta business formation and litigation attorney can assess your current situation and make recommendations as to what may be more financially beneficial for you.