It seems I have paid the government more than what was necessary over the past few years. When I first started earning money outside of my primary employer in 2004 or 2005, I assumed it would make the most sense to simply claim that income as self-employment income on Schedule C of the standard 1040 income tax return. It wasn’t such a bad idea; there was not a lot of paperwork involved.
When my business was growing, I decided I should formally accept that I had a business, so I registered as a limited liability company (LLC) and received a employer identification number (EIN) from the federal government. I also registered with the State of New Jersey. Although the business was now formalized, I could file my income tax return using Schedule C. Single-owner LLCs can be considered sole proprietors, too, so I continued using simple paperwork.
A few months ago, I finally got around to meeting with the accountant who had been recommended to me by a friend who has owned his own business since 2000 and who has written guest articles for Consumerism Commentary twice. We talked quite a bit about my situation and my business and he recommended filing as an S-corporation rather than a sole proprietor.
The biggest benefit of the S-corporation is the ability to significantly reduce payroll taxes. From what I understand, as owner of the company, I would not need to take all income from the business as personal income every year. I can withdraw only what I need or want from the business account, use that amount for determining the income tax owed, and leave the rest alone.
By reclassifying my business in 2008 as an S-corporation, the accountant, who charges $500 per year’s return, was able to save me about $10,000 between federal and state taxes. I have not yet received the refunds, however, so my fingers remain crossed. Unfortunately, we could not reclassify the business to an S-corporation for 2007, but the accountant made some other business-related adjustments and we found about $5,000 more.
I received the first refund check from the State of New Jersey for my amended 2007 return yesterday. As long as the other checks come as expected, working with the accountant was very worthwhile.
Photo credit: jekert gwapo