Self Employment vs Corporation Owner?

Paying for College
1

<p>I've been reading the self employment threads here with great interest, and I was wondering about something (and didn't want to hijack someone else's thread).</p>

<p>Hypothetically, would it not be beneficial for people who are self employed and usually get 1099's for their work (and file Schedule C with their 1040s) to form a corporation?
Their work could be billed by their corporation and they could then pay themselves a salary. They would then get W-2s and file corporate tax forms. Any additional profit from the corporation would also be income. (With Subchapter S corps it goes on a K-1 form and is taxed at your regular income tax rates. I'm not familiar with other corporate forms.)</p>

<p>The benefits to the above are that under FAFSA, at least, the value of the corporation would not be counted an asset. I think Profile schools may also have allowances for assets that are small businesses (??). Also, if you own a service type business, you would probably have little in the way of assets (maybe a desk, computer, vehicle ....)</p>

<p>The biggest benefit is that you can also legally have the corporation pay some of your expenses, such as health insurance. My car is owned by our corporation because it is used extensively for work. (Personal mileage on the car is considered income, though.)</p>

<p>All of the above is hypothetical for me -- we own an S Corp, and my son's school only uses FAFSA for upperclassmen. (RPI -- it's an oddity because it wants Profile for entering freshmen, but only FAFSA thereafter.) I just feel bad for people who are getting hammered because of the way aid is figured for self-employed families.</p>

<p>Am I missing something?</p>

2

<p>I’m in the situation where I’m half-owner of an S-Corp and I do 1099 consulting work as an independent consultant separate from the corporation. So I get both a Schedule C and a K-1. I’ve considered running my consulting work through the corporation, but that would increase earnings of the other S-Corp owner since all earnings are allocated to the S-Corp as a percent of ownership.</p>

<p>The key in reducing FAFSA EFC is to look at ways to reduce AGI. So, if you are self-employed, would incorporating as an S-Corp reduce your overall AGI? It’s not clear, but the math could certainly be done.</p>

<p>Throwing out some more random ideas:</p>

<p>To the extent S-Corps pay salaries, this is W-2 income that appears on the parent’s 1040. The corporate side of withholdings is an added expense to the corporation, which reduces earnings (= less money overall), so S-Corps tend to minimize salaries. There’s always the fear of an IRS audit because salaries can’t be so low as to be unreasonable. Net corporate profit also appears on the parent’s 1040 (as would any 1099/Schedule C income), so all of that adds up to the AGI which is reported on FAFSA. The question to ask is: Is the total AGI the same or lower with an S-Corp?</p>

<p>Expenses such as accountants, attorneys, and additional bank charges add up for an S-Corp, which also reduce earnings. But in the big picture, wouldn’t you rather have that money as income than pay it out to someone else?</p>

<p>Another consideration for whether or not to convert a sole proprietorship to an S-Corp, again relating to financial aid, would be whether or not assets can be “sheltered”. FAFSA doesn’t consider assets such as cars, primary residence, computers, etc, although Profile does consider some of these things. Again, I guess you’d need to do the math.</p>

<p>There’s a parent here who found that her S-Corp was “valued” by one college at something like 2x earnings, even though the earnings were entirely her billable time. In other words, there was no other intrinsic value to the corporation, and this value was assigned somewhat arbitrarily by the college. So creating an S-Corp could possibly backfire if all of the sudden it’s seen as a valuable asset by Profile colleges.</p>

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<p>Not true for S-Corps w/respect to health insurance. For anyone who owns 2% or more of an S-Corp, any health insurance premiums paid by the corporation appear as compensation (the premiums are included in the shareholder/employee’s salary).</p>

<p>There are many legitimate reasons why someone would create an S-Corp, but I’m not sure that it’s a no-brainer decision w/respect to financial aid.</p>

3

<p>Ugh… you are right about the health insurance – I took another look and I realized that our accountant added it back in to our K-1 income.</p>

4

<p>There is book called “Rich Dad Poor Dad” and associated books that encourage people to have their own companies as “companies pay themselves first and IRS later” as opposed to “individuals who pay the IRS first and themselves later”.</p>

<p>I do not subscribe to all the tenets proscribed in that book but what the author says is on lines of what is being suggested here. Owning a company may allow you to save a little bit on taxes but there are other expenses involved in running a corporation.</p>

<p>However, as Vballmom says, it is a double edged sword, it could allow you to shelter some assets (e.g. a car owned by the corporation would be the corporation’s assets not your assets) but could looked at differently.</p>

5

<p>If the corporation is yours, Profile schools will not let you get away with any of this. Your AGI will be much higher than it is for the IRS when they’re done adding everything back. They mostly do value service providers, you become an asset! Crazy but true.</p>