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I am the owner of a debris removal company in NJ & my business is set up as a LLC (individual). If I changed to a C Corp. LLC would I be able to lower my income tax(self employment) from my current 20% to 5%? If this is not true, then what method would you suggest for me to be able to lower those taxes? Thank you so much.
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When you have a business and you set up an entity, you'll do so as a C-Corporation, an S-Corporation, or an Limited Liability Company (LLC). S-Corp's and LLC's are both flow-through entities, which means that the entity generally pays no income taxes. Instead, the income "flows through" to your individual tax return, and you pay taxes based on your tax bracket.
A C-corp does pay its own taxes. And the first $50k of profits taxed within the corporation are taxed at just 15%. So that sounds pretty good, right? The problem with a C-Corp is the issue of double-taxation. Once you take the remaining profits out of the corporation, you'll be taxed a second time on that money at your marginal tax rate. That's one reason we see most of our closely held corporate clients electing to be treated as an S-Corp. The government also wants you to pay yourself a reasonable salary out of your corporation. So again, that will cause some of the corporate profits to be taxed at your marginal tax rate. So what should you do to minimize your tax burden? For starters, make sure to claim all of your business expenses against your income. After that, you can also set up a retirement plan, and put away up to $46k in 2008, depending on your income and what type plan you set up. If you have kids, you can put them on payroll, or if you're married, and your spouse isn't covered under a retirement plan at work, you can hire her, and make sure she maxes out her retirement contributions as well. If you're relatively healthy, you can switch to a high-deductible health insurance plan, and couple that with an Health Savings Account. Your business can make pre-tax contributions into an HSA on your behalf. I wrote about a lot of these tax-savings opportunities at: http://www.findagoodcpa.com/2007news/news1207.php. I hope this helps you out. If anyone knows how he can reduce his tax rate to just 5%, please let us know.