One Reason Business Owners Should Consider Incorporating: Less Audit Exposure

WATAX fields thousands of calls from the public since we began in the late '80's. Thru these calls we can get a solid sense of trends in IRS and State activity. One thing we don't see very often? Corporate audits by the IRS. Almost never. What do see are individual audits - particularly against Sole Proprietors for their form 1040 - Schedule C or audits on the 1040 - Schedule A where itemized deductions like mortgage interest or Employee business expenses are scrutinized.

Why becoming a S - Corporation can make sense:

The fact that:

1. LOW AUDIT RISK. The IRS doesn't audit S-Corporations very often. At least based on our experience.

2. LESS PAYROLL TAXES. Outside of the wages that officers in a corporation must pay themselves, Officers can ALSO pay themselves in dividends which are NOT subject to payroll taxes - which is a 7.65% on income.

3. LIABILITY EXPOSURE REDUCED. Corporations can protect owners from personal liability.

Sole proprietors get

1. Audited more

2. Pay payroll taxes or social security taxes 7.65% on all of their income as they are their own employers!

A pretty bad deal all around.

Becoming a S - corporation also requires you to file the S election. Don't forget that - otherwise you'll be taxed as a C-corporation which can be a giant headache. We at Watax.com also encourage businesses to be LLC's that elect to be S-corporations - simpler paperwork with similar protections.