Individuals with self-employment income should consider the potential benefits of structuring their business as a corporation. That is because a corporation can provide asset protection and potential tax benefits that are not available to the self-employed individual who files a Schedule C with their tax return.
While there are potential tax savings with a corporate structure in place, it is critical that the corporation be the entity that actually earned the income.
WHAT DOES THAT MEAN?
A fundamental principle of tax law is that income is taxed to the entity who earns it; and any attempts to divert the income away from its true earner are not recognized by the IRS.
If you have self-employment income, you should consider the potential tax benefits of a corporation
AND WHAT DOES THAT MEAN?
It means the corporation (not the business owner) must be the entity that contracts for the services that it will have you (the business owner) provide.
It means the corporation needs to be the entity that gets paid (not the business owner) for the services provided.
It means the corporation must have control over the income it receives. Once it receives the income, it can then direct it to the business owner via payroll or a shareholder distribution.
WHAT ARE THE MAIN TAKEAWAYS HERE?
1. Have your clients or customers write their check directly to the business. Do not accept checks written to you personally. A check made out to you and signed over to the business puts the business owner at risk of double taxation and penalties.
2. Have the corporation pay you a salary for the services you are providing to the corporation.
3. Make sure that all contracts and agreements with clients are between the client and the corporation, not between the client and the business owner.