Is It Time To
Incorporate?
All You Need to Know
About Subchapter S Corporations
I’ve worked hard at educating myself on my finances. It didn’t come naturally, and wasn’t
interesting to me at all until I hit my 30’s. That’s when I realized I needed to get out of debt and start
saving my money.
Meeting my Financial
Planner
I was at a commercial callback, paired up with a partner
named Shawn, who kept looking at his watch. I asked him if he had to be somewhere, thinking ‘what could
be more important than booking a national commercial.’ That’s when I found out he was a
financial planner working at a big firm.
He needed to get back to the office for a meeting, and since there were
four couples ahead of us waiting to audition and we’d already been waiting
almost an hour, it was time for him to head out. I admitted that my personal finances were a mess, to which
he responded, “I can help you with that.”
A few minutes later he handed me his business card, got up to go, and
said, “Call me.”
It took me three months to muster up the courage to call
him. I was ashamed of the horrible
shape I was in and embarrassed to talk about it. But, if I was going to get out of the serious debt I was in,
I had to get help. It was weighing
on me, causing a great deal of stress, which manifested in an aching back, lack
of energy, and sleepless nights.
Credit card companies were calling and harassing me, so I’d stopped
answering the phone and started to let my answering machine pick up.
He suggested we meet at Gaucho Grill in Studio City and told
me to bring all of my credit card receipts and any statements with outstanding
debt. I gathered all the bills and
drove to the restaurant, pushing through the shame and guilt I felt over
allowing myself to get in this position.
Shawn took my statements and arranged them in stacks. He took a crayon from the jar that sat
on top of the white paper tablecloth and drew circles around each pile of
bills. Then he numbered them, with
number one being the first set of bills to pay off, number two the second, and
so on. I would pay them off
according to the highest interest rate and largest amount of money owed, down
to the least.
“You’re not in as bad of shape as you think you are,” he
told me.
“Really?” I asked, somewhat shocked.
“Really,” he said.
“If you follow my plan, you’ll have this cleared up in no time.”
I’ve always been a bit too hard on myself, and it was a
relief to hear that I wasn’t the moron I thought I was.
Then he looked at my purse sitting next to me and said,
“That purse was expensive. I know,
because my wife has one just like it.”
It was a beautiful Kate Spade bag.
“No more shopping for the next six months.” I gasped, as my eyes practically bulged out of their
sockets.
“Look in your closet,” he continued. “You’ve got plenty of clothes to
wear. You can mix and match
them.” He knew I had a large
wardrobe because I had a ton of department store credit cards. Plus, I had mentioned that it sucked I
was still having to pay for things that I didn’t even wear anymore.
“You’re going to send me 15% of the gross of every check you
receive,” he said. “We’ll
open a savings account at Morgan Stanley for you, and let it earn interest
until you’re ready to invest.”
I didn’t know how I was going to pay down my debt every
month and give him 15% of my gross
income. But he was confident it
could happen. “And no more credit
card purchases that you can’t pay in full at the end of the month. Keep one card and cut up the
rest.” I’m sure I looked
physically distraught, because my stomach was in knots and I wanted to
cry. “You’ll see,” he reassured
me, “it will feel good to see the money growing in your savings account and
have all your debt paid off.”
Then he asked what I wanted to do with all the money I’d be saving. I hadn’t thought of that since I didn’t
have any money to pay my bills.
“Ummm . . .” I stammered, feeling very vulnerable.
“Would you like to buy a house?” he offered.
“Yes,” I resolved.
“How much do you want to spend on your house?” he prodded.
“I’m not sure, but I want to live on the west side, close to
the ocean.”
“You’ll need at least five hundred thousand dollars,” he
estimated.
“Make it six fifty,” I boldly leaped into the game.
“Okay,” he brightened, sensing he’d gotten through to me. “You’ll need to save 20% for the down
payment.” He wrote some large
numbers on the tablecloth with a blue crayon. “That’s $130,000 on a $650,000 house.”
“Yikes!” I exclaimed.
“When do you want to buy this house? How about a five-year goal?”
“You think I’ll be able to pay off all my debt and save
enough money to buy a house in five years?” I asked in disbelief.
“Yes,” he assured me.
And that’s
exactly what came to pass. I
didn’t even miss shopping that much when I saw my savings account rapidly rising. Shawn was right. I already had plenty of clothes hanging
in my closet. When the six month
shopping moratorium ended, I didn’t rush out to buy clothes. Instead, I found myself getting more
pleasure out of watching my savings account grow and my debt disappear.
Dummies Books
I’m a big fan of the yellow Dummies books. They use simple language that enables
me to understand challenging concepts.
Mortgages For Dummies was very helpful when it came to buying my
home. And, with the exception of
my home, I don’t buy anything I can’t pay for. My credit cards are zero balanced every month. I don’t want to be spending my hard
earned money on high interest rates anymore. And I’ve found that there’s a big difference between what I
want and what I actually need.
When to Incorporate
Incorporating has also helped me acquire knowledge and gain
awareness of my spending habits.
It hasn’t always been easy to wrap my mind around certain ideas, but I
keep persevering, finding another book, person, or website to help me with what
I don’t understand. There’s so
much to know and I have so much more to learn. It’s like putting together a puzzle and I love puzzles. So, for those of you who have been
curious about corporations and what they involve, read on. If you’re not already incorporated, you
may find yourself facing the decision in the not-too-distant future.
There may come a point in your career when your accountant
recommends incorporating. You’ll
know when that time arrives because you will max out your write offs and, more
than likely, be earning six figures.
I was first incorporated in 1989 as Corn Fed, Inc when I was
working on a soap opera in New York City.
I dissolved that corporation when I moved to Los Angeles, and in 2002,
when my earnings increased again, I set up Queen of Everything, Inc. This is what I’ve learned.
Fees and Taxes
The good thing about incorporating is that you’ll receive
the gross amount of all income.
This will give you control of what you actually pay in taxes, and what
you’ll pay in taxes is based on the amount you choose to pay yourself. Since the majority of your expenses
will be business expenses, you probably won’t need to issue yourself a very
large payroll check.
The bad thing about incorporating is the extra fees. Corporate fees will include setting up
your legal paperwork, which will cost you a one-time fee of approximately $500
to $1,500. Expect to pay a
Secretary of State annual tax fee of $25.
You’ll also be required to pay an annual $800 (minimum) tax fee to the
Franchise Tax Board. The S corp
tax rate is 1.5%. So, if your corp
netted $200,000 and you paid yourself a salary of $120,000, the net $80,000
corporate income would be subject to a payment of $1,200, which is 1.5% of
$80,000. *
If you set yourself up using a bank for your payroll and
electronic filing, which I highly recommend, expect to pay between $21.00 and
$50.00 or more every month in bank fees.
You’ll have higher accountant fees as well, since you’re now filing two
sets of taxes, personal and business.
However, all these fees are business expenses, and business expenses are
a write off.
Now, you’re probably thinking, ‘why would I want to
incorporate if I have to pay all these fees?’ But you have to consider that you’ll have more control of
your finances and there are benefits, which aren’t offered to the individual,
such as bonuses and SEP IRA contributions.
Payroll Checks
You’ll have to figure out how much you need to live on per
month so that you can issue yourself a monthly payroll check. For instance, if I set up my payroll at
Bank of America and authorize them to issue a payroll check, withdrawn from my
corporate checking account and directly deposited into my personal checking account,
I will be required to pay federal and state taxes on that amount. The tax amount is calculated by the
bank, and they notify me when payment is required, which I can do with the
click of a button, while sitting at my computer in my pajamas.
Retirement Accounts
At the end of the fiscal year, the government allows
corporations to offset gross income by placing a limited amount of money into a
SEP IRA account, with the maximum contribution being approximately 25% of your
salary. The current maximum
contribution allowed is $49,000. So,
if you’re annual salary is $60,000, the maximum SEP contribution allowed would
be $15,000.* The money won’t be
accessible until you’re retired, but your gross income will be lowered by the
amount you’ve contributed to your SEP IRA. Think of it as paying your future self.
Speaking of investing in your future, if you’ve invested
your SEP IRA wisely, your funds will grow over the years and you’ll have plenty
to live on when you retire, depending, of course, on the amount you’ve
contributed to your SEP IRA account over the years. Some years I put money in, and some years I don’t. When I have a good year, I always
contribute to my SEP IRA.
If everything goes according to plan, I’ll be well provided
for from the age of 65 on. I’ll
have money coming in from Social Security, my SAG Pension Plan, SEP IRA
account, State Farm Life Insurance policies, and more. If one or more of these retirement
investments falls through, I have others to draw from. The way I have it set up, I’ll be
assured to have something rather than
nothing.
Bonuses
Bonuses are determined by your accountant and are based on
earnings. I don’t get a bonus
every year, but when I have a good year, I receive a nice bonus. The better the year, the bigger the
bonus.
Business Tax
Categories
Here are a few of the tax categories that I’ve set up with
the assistance of my accountant and bookkeeper:
Acting Income
Commissions
Business Fees
Business Publications
Business Supplies
Business Gifts
Professional Grooming
Professional Entertainment
Professional Viewing
Marketing & Publicity
Auto/Transportation
Your Financial
Team:
Financial Planner,
Entertainment Attorney, Accountant and Bookkeeper
I highly recommend hiring an entertainment attorney who will assist you in setting up your
corporation, an accountant who will
guide you through the maze of numbers and prepare your income taxes, and a financial planner who is willing to
help educate you in the world of investing. I consult regularly with all of my team members.
I recently hired a bookkeeper
at the suggestion of my accountant.
My bookkeeper taught
me how to use QuickBooks so I can keep better financial records and generate
quarterly profit and loss statements.
Some people choose to allow others to do this work for them, but it’s
important for me to be as hands on as possible with my finances. That way, I can stay on top of them.
Expert Advice from my
Accountant, Dan Delany
All examples with asterisks (*) were provided by Dan.
“There are three general considerations I believe to consider when
incorporating: one, the tax considerations which have been discussed in this
article, the legal considerations which you should always discuss with your
legal advisor, and three, the emotional considerations which you should discuss
with ..........yourself. If keeping track of your personal
finances is overwhelming and you tend to file your personal tax
returns late or at the last minute, you are probably not emotionally ready to
handle incorporating. Just imagine doubling or possibly tripling your
current financial obligations. So, be sure to research all three
considerations with the appropriate professionals and yourself before taking
the plunge.”
– Dan Delaney, CPA,
Willner & Ornedo Accountancy, LLP
