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.
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.
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.
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 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:
Marketing & Publicity
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