From: rmac@well.sf.ca.us (Robert J. McIlree)
Subject: Re: Incorporated consultants survey - 34% flat tax
Organization: Whole Earth 'Lectronic Link
Date: Tue, 18 Aug 1992 20:59:16 GMT

In article <1992Aug18.164307.5499@meaddata.com> keves@meaddata.com (Brian Keves) writes:
>In article <l90386INNea2@male.EBay.Sun.COM> agaw@drstrange.EBay.Sun.COM writes:
>>
>>I'm doing some research on Inc'ing, and was curious about the "Personal
>>Service Corporations" regulation which states that the taxable income of
>>certain personal service corps. is taxed at a flat corporate rate of 34%
>>(as opposed to 15%).
>>
>>Does anyone know if computer programming is subject to this?
>
>Definitely!
>
>>Are there any creative ways to legally side-step this?
>
>You don't want to tangle with the IRS on this one. If you incorporate
>you will have to incorporate as a personal service corp. There are basically
>two ways to work this. 
>

The 34% rate doen't apply to S-Corporations, period. If you're a one-person
corporation that doesn't spend much on capital equipment, S-Corp. is the
only way to go. Personal service corp.s. can be S-Corps., so you folks are
worrying about the 34% for nothing. Unless you are going to spend a couple
of hundred thousand dollars on equipment, there is no reason to be a
Subchapter-C corp., one that *would* be subject to the 34% tax.


>I have been successfully using my sole-proprietorship for a number of
>years and since I am usually out of my base city to do my work I get
>tremendous tax advantages. I am considering moving to a corporation to
>protect myself better from liability and taxes, but probably won't until
>I get more work at home. 
>

First, a corporation will not "protect" you from taxes. If anything, you'll
pay a little more, like FUTA, state unemployment, franchise fees,
incorportion and/or foriegn corporation fees to the states you operate in,
etc. Also, consider the paperwork involved - each of these taxes has its own
mindless form to fill out and file.

Next, your "tremendous tax advantages" while you're out on an out-of-town
assignment are no big deal to someone who took that assignment on a W-2
basis and has a per diem. The effect of the latter is that the money
received on the per diem is not taxable as long as the expenses are properly
reported on Form 2106 - Employee Business Expenses, with receipts. You, on
the other hand, take a business expense on your coporate tax form for the
same expenses. Either way - the effect is the same.

I'd think twice about incoroporation as a method to protect from liability.
Recent court actions indicate that officers and directors of corporations
can be held personally liable for corporate actions. Since, as a 1-person
corp., you'd be the sole officer, shareholder, and employee, your liability
would be pretty substantial in the hands of some ambulance chaser trying to
strip you of your assets. Sorry, but its happening, and the liability issue
for corps. ain't what it used to be. It behooves you then, when
incorporating, to have adequate general liability coverage for the business.

>I have been told that the IRS is cracking down on one person corporations.

From what I gather, the IRS is cracking down on 1-person corps. who misstate
or misrepresent income, and those who really should be classified as
employees of the client.

Folks, the bottom line one more time: if you are seriously going to fly
solo, either as a sole proprietor or corporation, GET A CPA AND/OR A LAWYER
AS SOON AS POSSIBLE. You *cannot* rely on the net for explicit advice. If
anything, it could cost you time and a lot of money. Get professional help
here - its well worth the cost!

Usual disclaimers.

Bob McIlree
rmac@well.sf.ca.us
Newsgroups: misc.jobs.contract