Need tax advice for micro small business

[andy_p1]

Hello everyone!
I was wondering if someone could give me some pointers regarding the following situation that I am into:

I have a very small online business that generates about 25K income per Year . As of now I just declare that as my hobby income. However, I want to quite my day job and focus on my business full time.

I can sustain myself and family for an year or so on 25K but I not on less than that (My monthly expenses are about 2K+).

So now my question is this: How should I structure my business so that I can keep as close to 24K as possible after tax?

From what I understand I have two options:

OPTION 1. Form a C-Corporation: If I register a C corp, I can probably show half of may house rent and car payment as expense. Adding a few more expenses, I am still left with about 15K. Now, if I decide to pay the remaining to myself as Salary (and show no profit for the Corp) , the corp will have have to pay payroll tax of 11%. And I have to pay income tax on whatever I get as salary.

OPTION 2: Form an S Corp or LLC or Independent Contractor: In these cases, I have to pay Self Employment tax as well as Income tax.

So in both the options, I am left with less than what I need to sustain myself. I am not sure what to do. I am not averse to paying taxes but if I am not able to sustain myself then I can't focus on the business to make it grow.

Please help.

thank you,
Andy.

[jamesray50]

Hi Andy - Welcome to our forum. I am not a tax advisor so I can't offer any tax advise on how to structure your business. I did write a blog on different entities and the tax implications - Business Entity - What are the tax implications? | Top Notch Bookkeeping (http://topnotchbookkeeping.com/2012/11/business-entities-what-are-the-tax-implications/). It's really just a summary, you can find more detailed information on the IRS website.

But, I will offer you my opinion. I think it's great that you want to grow your business, but quiting a paying job to do something that may not pay what you need is really not a good idea. I don't know what kind of job you have, but can you change your schedule to part time? This would allow you more time to devote to your business.

You also don't say what benefits you are receiving with you pay, but if you have a group health insurance and quit your job, unless you pay for Cobra coverage you will lose your insurance and will need to look into personal plans which are more expensive than the group rate.

How did you come up with 50% deduction for your home? Do you use half of your home exclusively for your online business? You can only use the part of the house that is used exclusively for your business. For example, if you have a desk sitting in the living room, you cannot deduct the living room portion of the house. You would deduct only the portion the desk occupies. This is done by square footage.

My final comment, and I'm not trying to discourage you, but $25K in gross sales is not much money. Even for a single person, it's not much money. But, I guess that could depend on where you live and the cost of living in your area.

Hope this helps and good luck!

[vangogh]

Andy do you need to set up a corporation? There are good reasons for setting up a corporation, but if the most important consideration is the cost at the moment, you could just set up as a sole proprietor. No real cost to set up and your taxes aren't that much different than what you likely pay now. Again there are good reasons to go the corporate route, but a sole proprietor might be an option.

As far as quitting your job goes, I can understand. I think it's smart to hang on to a job when money is an issue, but I also know I never could have built my business without giving it my full attention. If you're making $25k a year as a hobby I would think you'd be able to make more giving your business more time. It's not a guarantee, of course.

[andy_p1]

Thank you for your input. I will think on those lines.

[lanka123]

Hi Andy,

I stumbled on your question and this website accidentally while I was researching questions I had on an S-Corp.

I am a CPA based out of the San Jose/San Francisco area and I help a lot of small business like yours, my suggestion is if you do decide to quit and want to pursue your hobby full time is not to worry too much about incorporation. There are a number of expenses associated with creating any type of corp, a s-corp or a c-corp such as the yearly payment, payroll, additional tax prep-costs. The advantage of a corp is liability it can shield you from specific law suits so if you are doing something that may get you sued then it maybe beneficial. A schedule “C” company which is the most basic and is taxed under your personal tax return is the best for you because it’s the easiest to make and use, you pay 15% for Social security on any profits along with income tax.

From a tax perspective an S-corp is more beneficial then a C-corp if you are a small company and don’t plan to have many owners. With an S-corp you have to take a reasonable wage for your postion and that wage has to pay social security taxes and any remaining profit after all expenses do not pay any Social security.

-thanks
Shay