Here at Independent Contractor Tax Advisors, we make a pretty bold claim: over 70% of independent contractors (IC) pay too much in taxes. ‘Where does this come from’ you ask? Click here to see the report from the Small Business Administration (SBA). For most ICs, taxes are their biggest expense, so it’s low hanging fruit.
The SBA reports that around 73% of small businesses operate as a sole proprietorship. This means that approximately 73% of small businesses (including independent contractors) grossly overpay their taxes and seriously expose themselves to personal lawsuits. It’s ok though, you just hate money right?
While this post focuses on the potential negatives of operating as a sole proprietor, there are some advantages. First, the most obvious reason for operating a business as a sole proprietor is simplicity. Anyone can wake up in the morning and decide that they are a painter and they are in business. That’s it! No paperwork, no entity formations–you’re in business just because you say so.
Second, if you don’t expect your business to make any money (who goes into business expecting to lose money???) then operating as a sole proprietor is a good idea, because you won’t pay taxes anyway. Lastly, if you are waiting for the secretary of state to approve your articles of organization, it might make sense to operate as a sole proprietor in the meantime. This should not be more than 1 – 2 months.
However, there are SIGNIFICANT downsides to operating your business as a sole proprietor. First, if you make money, you WILL pay more in taxes than you would as an S corp. Let us illustrate with an example and we’ll keep it simple. If you make $75,000 in your sole proprietorship, you will pay $11,475 (roughly) in self-employment taxes ($75,000 x 15.3% = $11,475). But, if you instead operate as an S corp and pay yourself $37,500 in wages and take the other $37,500 in distributions, you will save half of the self-employment taxes, or approximately $5,738/year in taxes! If you ask us, saving $6,000 in taxes is worth the effort.
Second, sole proprietors also have absolutely no liability protection. They are not disassociated from their business–in fact, they ARE their business. This is why everything is reported using your social security number. If you get sued by anyone, they can take your business, home, cars, ANYTHING you own. If, however, you operate through an S corp, you are afforded a significant amount of legal protection.
Third, consider for a moment how your customers/clients will view you and your business. Having an entity adds credibility to you as an owner. It tells the world that you’re serious about your business. You’re not in it for the quick buck, but you want to back your products and/or services and be around for the long term. Would you rather hire the house painter who operates as a sole proprietor, who just this morning decided to go into business. Or, would you rather hire the painter who took the time to form an entity and do things right? Who is more likely to get the job done?
Lastly, sole proprietors are audited by the IRS almost 500% more often than owners of S corps. Why? Because the IRS understands that sole proprietors keep horrible records–from their perspective, this is low hanging fruit. The financial and emotional toll of an IRS audit is expensive.
Independent Contractor Tax Advisors, LLC exists to give you all the benefits described above, but without any of the hassle and at a very low cost. How do we provide such a high level of service at such reasonable rates? Simple–this is all we do. We only work with independent contractors to reduce their taxes and we work with a multitude of industries. We’re good at this.
CLICK HERE FOR A FREE TAX CONSULTATION
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