| The whole W2/SCorp thing you are talking about is a commonly held belief, but there are details you are getting wrong that change its efficacy. 1. There is a maximum income for the payroll tax which in 2014 was 117,000. Which means that in your example (making 200k and only paying on 100k), would not save them tax on 100k. They would only have needed to pay on 117k. So they are saving payroll tax on 17k, which isn't worth the trouble. 2. This person has a regular job. Lots of engineers already make more than 117k, so they might already be maxing the payroll tax. In that case, they save nothing. 3. The way that many try to game the system is to try to report that the "reasonable market salary" is low -- which might work if you don't already have a job doing what your 1099 work is. If you do, you might have a hard time explaining that to the IRS. If you only do 1099 work, you can site labor statistics (and the median might be in your favor). The whole SCorp thing that you see recommended works best if you 1. Make near or more than the payroll max (117k) 2. Live in an area of the US where the median developer salary is low, say 50k. 3. Do not have a long salary history of making a lot more than that in that area. In that case, you save the payroll tax on 117k-50k. Even if you make 200k, you only save the tax on 117k-50k. I am not an accountant, and this is not accounting advice. |
One thing upon further thought on the 117k. Self employment and W2 in an Scorp involve paying both the employee portion and the employer portion. ~15%. The 117k limit applies only to the employee side and only to social security (not medicare/OADI).
Beyond payroll taxes, it is possible that the Scorp might be able to have some income below the additional ordinary income on tax rates. (Mostly on true if the Scorp can keep its income below 34% rate (at the ordinary income rate ~ 28% at 90-180k)
I am not an accountant, and this is not accounting advice.