I own a photography studio and am thinking about incorporating or forming an LLC. Can forming a business entity help in dealing with self-employment tax?
Sole proprietors (that is, individuals who conduct a business without a business entity) generally must pay periodic taxes on net self-employment earnings. Many of our customers who conduct business as a limited liability company, and who are also a member or owner of the company, are subject to self-employment taxes, generally based on the entire share of the profits of the company even if only a portion of the profits is taken as salary. For customers who conduct business as a corporation, we find that the corporation typically hires the owners as employees and the corporation then pays such employees a reasonable salary. The corporation is responsible for withholding from the employees’ salaries certain required income and employment taxes and, also, paying the employer’s share of the employment taxes. The withholdings and payments, however, are based only on the reasonable salary and not on the profits of the corporation. Therefore, some customers find that this is one factor that
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