The BizFilings blog covering business tips and trends.
Incorporate To Avoid New ObamaCare Taxes
Published on Jul 19, 2012
Read 'Incorporate To Avoid New ObamaCare Taxes' at 'Time to Start Up,' the small business blog by BizFilings.
By John L. Duoba
With the recent affirmation of the Patient Protection and Affordable Care Act by the U.S. Supreme Court, implementation of the health care law moves forward. Political debates over this law will continue through the election in November. However, in the meantime, business owners have to prepare for the new realities the law will bring. Among them are numerous increases in taxes for 2013.
Of most concern to small business owners are the additional taxes on wages and investment income. In 2013, a new Medicare tax of 0.9 percent will be imposed on those who earn more than $200,000 a year ($250,000 if filing married jointly). Moreover, a new 3.8 percent tax on passive investment income will also be applied to these same income brackets.
In many cases and for many reasons, it usually makes sense to incorporate your business. Incorporation is a well-know tax-minimizing strategy for many small business owners. The good news is that entrepreneurs who choose to incorporate their businesses and select S corporation tax status will have additional flexibility in avoiding these new health care reform taxes.
Here's the bottom line: As owner of an S corporation, you are allowed to take a reasonable salary from your business and then distribute the rest of the profits as dividends. Under this compensation structure, your take-home pay is part salary and part dividends. This split has advantages. This reduced salary structure will expose less of your income to the new Medicare surtax (in particular), saving you on payroll taxes (in general). Meanwhile, as long as you are an active participant in your business, those dividend payments are also shielded from the new investment surtax, which applies only to passive income. As long as you work 500 hours a year in your business, it is active investment income.
Meanwhile, all the usual benefits (tax and otherwise) of incorporation still apply. The limited liability protections alone are incredibly valuable. But now you can add some additional advantages to incorporation. If you plan well, you can avoid (or at least reduce) the new ObamaCare taxes scheduled for 2013.
------------------------------------John L. Duoba is the Publisher/Managing Editor of the newly relaunched BizFilings Business Owner's Toolkit at www.bizfilings.com/toolkit, and he believes the new site will also pay ongoing dividends to those business owners who regularly visit the site and take advantage of the tips, tools, news and views.