with Mir Kamin
I'm a freelance writer and mother of two working from home, which theoretically means I can set my own schedule so as to best accommodate my family. In reality, "flexible hours" often equals "working too much." Yes, I'm my own boss; no, that doesn't mean life is easy. It's hard to leave the office when you live there. But I love what I do and feel very lucky. And not just because I get paid to work in my pajamas.
To learn more about Mir, check out her profile on Work It, Mom! or visit her blog at http://www.wouldashoulda.com/
At the behest of my accountant, this year I’m finally doing it.
I don’t mind telling you two things about this decision: First, that I’m still not sure I entirely understand all the ins and outs and why exactly this is the thing to do (though I’m working on that), and second, that it sort of terrifies me. That second item is irrational, and I know it, but there it is.
When I made the decision to freelance, that was terrifying. When I opened my first business bank account, that was terrifying. The first time I turned down a job? Also terrifying. (Apparently, I am easily terrified.)
Basically, I’m not great with change. Especially change predicated on some assumption of success, because OH MY GOSH WHAT IF I FAIL. Yes, beneath my confident freelancer’s heart of steel is a quivery pink middle of neurosis. As it should be, for any good writer. What?
Anyway, let me preface all of this by saying that I am not a tax professional, nor am I an expert on any of this, but I’m sharing my experience for those of you who are wondering if incorporation might be right for you.
First, I heartily recommend this great book if you’re the sort of nerd who likes to do your own research (I am).
Second, please go talk to your accountant. If you don’t have an accountant, get one. Honestly, I hemmed and hawed for so long about hiring an accountant, and now I wonder what took me so long; he’s worth every penny. Not only does he know this stuff inside and out, the money I pay him is a deductible business expense.
Okay, now here are the things that pushed me over the edge:
1) I thought incorporating was only for people making tons and tons of money, but it turns out that you save money by operating as an S-Corp starting at a much lower threshold than I’d supposed. (This is where I remind you to talk to your accountant about your particular situation.) Basically, those of us who are self-employed and not incorporated are paying taxes on our money twice—as personal income and then through self-employment taxes. When you incorporate, you designate your “salary,” and while you’ll still pay taxes on other dividends drawn from the business earnings, you’ll only pay them once.
2) It turns out that S-Corps are audited less often than unincorporated solopreneurs. No, really. If I get terrified about things like opening a bank account, how do you think I’ll fare during an audit? Yeah.
3) I thought that there’s no real reason to “limit my liability” because I don’t make a product (well, other than writing stuff), and who would want to sue me? Well, hopefully no one will (ever) want to sue me, but incorporating does provide a certain amount of legal protection for my family’s assets if that ever happens. And people are crazy, so why wouldn’t I want that protection just in case?
4) As a solopreneur I am limited to my IRA for retirement savings, and the maximum I was allowed to contribute in 2008 was $5,000. Now, given the current economic climate, my IRA is at this moment worth approximately the equivalent of a quarter pounder with cheese; but even assuming that someday my money will grow again, putting aside only $5,000/year doesn’t seem like it will ever be enough for me to comfortably retire. Possibly because it won’t be. As an S-Corp, though, I can open a 401k, and the maximum I could’ve contributed for 2008 was $15,500. Quite a difference, even if I’m not planning to contribute the maximum.
But really, here’s the most important thing on my mind, now: I’m not exactly sure how one celebrates becoming a corporation. I’m thinking it might involve new shoes, though, don’t you think?
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