Originally Posted by Steve_

It's not obvious.

We've had this thread on here about a gazillion times and then some, yes you can deduct half the payroll tax on schedule SE but generally speaking people don't, what they do is incorporate (in the State where you reside) and file that as an S-corporation on 1120-S.

The reason being that an S-corporation is a flow-through entity so you pay yourself using dividends from the S-corporation and the dividends are subject to income tax on your 1040. The advantage being there is no payroll tax.

It's a good idea to pay some payroll tax so you qualify for Medicare/Social Security so then you have a payroll for the corporation and report on 941 quarterly and you pay yourself whatever you want to pay yourself. Typically people pay themselves about $25,000 on payroll and the rest as dividends.

This is a huge tax loophole, no other country I'm aware of has it, certainly we don't have it here. It costs the Treasury huge amounts in tax avoidance and was the reason for the regular corporation tax rate being so high when they reformed the tax system back in 1986.

So once you get into it from a paperwork standpoint, it can be quite complex, because you've got to file a 1040 for yourself, an 1120-S for the corporation, 941 payroll statements and also the W-2 for the employee (you). And that doesn't include State paperwork.

So then accountants say they'll do it for you, and you end up spending all the savings on the accountant.

You have to be quite careful doing the calculation because it depends on the income to your business, the FICA on the S-corp payroll is the full whack obviously of 15.3%. You could just pay yourself enough to get the Medicare credits which is very little, but then you never qualify for more than a tiny amount of Social Security.

Also you've got the whole pension issue because the contribution limit is based on employment-based income. The current limit is $24,000 for a one-person 401(k) (over age 50) hence the reason people typically pay themselves $25,000 on payroll.

Originally Posted by Nutmegger

For many self employed people the whole rigmarole of incorporating isn’t necessary—the OP should go by the advice of his CPA who is familiar with his personal situation.