What kind of business entity to form is one of the first choices you’ll need to make if you’re thinking about starting your own company. The S-Corporation (S-Corp) and the Limited Liability Company (LLC) are two of the most popular options for independent contractors. Both provide defense against personal responsibility and pass-through taxation, but due to some distinctions, one may be better suited to your needs than the other.
Let’s start by addressing the fundamental issue: If I am an S-Corp owner, am I self-employed? Yes, it is the answer. Despite being the corporation’s owner, you are still treated as an employee and paid a salary just like any other employee. However, you also earn distributions from the company as the owner, which are taxed differently than your regular wage.
Now, for self-employment, is an S-Corp preferable to an LLC? The response is based on your individual situation. S-Corps are typically preferable for companies with few owners and a high profit margin. This is due to the fact that S-Corps have stricter ownership limitations than LLCs and that the distribution of profits is based on ownership proportion. However, since LLCs do not have the same ownership limits as S-Corps, they are better suited for companies with many owners or more flexible ownership structures.
Whether your S-Corp can cover your mortgage is another connected query. Yes, however there are certain restrictions. You might be able to write off a portion of your mortgage interest and other home expenses as business expenses if your house serves as your main place of business. However, if you are paying your full rent or mortgage through the S-Corp, this could be viewed as an illegal personal cost and lead to tax penalties.
Can you withdraw funds from your S-Corp? Yes, but once more with some restrictions. You can take a salary and get distributions from the company’s profits as the owner. However, you must make sure that you are paying yourself a fair wage in accordance with your job responsibilities and regular industry pay. The IRS may view your situation as tax evasion and apply fines if you accept an unreasonably low wage and receive the majority of your income through distributions.
Can you 1099 yourself in an S-Corp, to finish? No, you are not eligible to receive a 1099 form as an owner-employee. As an alternative, you must get a W-2 for your pay and file a personal tax return to disclose any distributions.
In conclusion, both S-Corps and LLCs provide advantages for self-employed people, but the choice ultimately comes down to your unique business requirements and objectives. To decide which entity is ideal for you, speak with a tax expert or lawyer.