Financial benefits of incorporating: the specifics

Financial benefits of incorporating: the specifics

Incorporating not only provides more protection to you and your business, but it also comes with several financial benefits. You’ll have to be prepared to spend a bit at the beginning for fees, but once you get past the initial setup, you’ll quickly start to reap the financial rewards.

If you’re thinking about incorporating and want to know some specific financial benefits to expect, this article will be helpful. 

Reduce payroll tax through owner’s distributions

Think of owner’s disbursements as the way you pay yourself through your company. As you likely already know, when you are an employee or have a single-member LLC, you have to pay FICA and self-employment taxes, respectively. 

When you incorporate, you only have to pay FICA taxes on the salary you take home as an employee of your corporation. You don’t have to pay these taxes on the remaining profits that get paid out as nontaxable dividend distributions. 

Now, this doesn’t mean that you should run off and incorporate all of your business and side hustle ideas. The IRS requires that you be paid a “reasonable” salary. This means that you can’t just pay yourself $5 and then take the rest of your take-home pay as distributions. 

Access to more tax deductions

Tax write-offs, tax credits, tax deductions – it’s easy to get confused if you’re not a tax expert. To make things simple:

  • Tax write-off: includes tax credits and deductions, and things that you “write off” of your tax return.
  • Tax credit: a set dollar amount that is immediately taken off your taxes owed. For example, if you have a credit of $3,000 and you owe $6,000, after your credit you’ll owe just $3,000. 
  • Tax deduction: reduces the amount you’re required to pay taxes on. For example, if you have a deduction of $3,000 and you earned $60,000 that year, thanks to the deduction you’ll only have to pay taxes on $57,000.

When you incorporate, you can deduct business expenses on your tax return. Do you work from home? That means you can list things like internet charges and office supplies as business expenses. If you ever have to travel for work the money you spend to do so is a business expense too.

Timing of income

You probably never would have considered paying yourself as a business owner, but “timing of income” has the potential to make or break you come tax season. When you incorporate, you’ll be able to control the timing of bonuses, self-employment income, distributions to your retirement plan, and treasury bill income. All of these sources of income have the potential to be taxed. 

Legal protection

Perhaps the most beneficial aspect of incorporating is the legal protection that comes with it. Once you incorporate, you are legally separating yourself from your business. Your business then becomes its own entity, and can thus do all of the things that you could do: buy property, open a bank account, and the like. This also means that if your company fails, you won’t necessarily go down with it.

Photo by Mike Petrucci on Unsplash

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