Small Business Reading Room

Tuesday, January 20, 2004

Should the Self-Employed Incorporate?

It is true that there are many benefits to incorporating. Asset protection is one and lowering taxable income through legitimate business expenses are another. It is widely known that the incorporated entity can benefit here while the sole-proprietorship may not. So what would keep the sole-proprietor from incorporating?

Maybe it is the feeling that incorporating is too expensive, even though it can be done for as low as $188.00.

Maybe it is a fear that it will be too complicated, even though one person can act as the only officer, director and shareholder in Delaware and you can incorporate online.

Still maybe the sole-proprietor is waiting for a little more incentive, such as the IRS to blame them for one-third of $310 billion dollar "tax gap" or to propose a requirement for withholding from contractor payments.¹

It’s true that the days of laissez-faire are over (again) if Nina Olson, the IRS taxpayer advocate has her way. In her latest annual report Ms. Olsen indicates that considerable income earned by self-employed people- such as many construction-trades workers or those who file a schedule C with their tax return- isn’t reported on their W-2 forms, and often not at all. ²

The report states, "Unreported income by sole proprietorships is the single largest component of the tax gap." Among other things, she recommends that employers be required to withhold 5% for taxes on payments made to independent contractors and that congress set withholding rates for other trades and industries.

Talk about complicating matters!

All of that is on top of the requirement already faced by the self-employed that they set aside the funds to meet their federal income tax obligations, and the 15.3 % self employment tax used to fund social security and Medicare.

While incorporating may not necessarily eliminate withholding requirements, it certainly has to look more appealing to the sole-proprietor in light of this recent proposal, particularly if the IRS will begin to put schedule C filers under the microscope.

By taking the steps to become incorporated now, the self-employed may not only be able take advantage of flexibility regarding income distribution to the beneficial owners of a corporation or LLC, they may also enjoy a wider range of legitimate deductions for business expenses for the next tax season. All of that on top of the fact that the very act of incorporating may help to remove the self-employed from the audit pool.

So what are the Self-employed waiting for?

Talk to your accountant now about developing a plan to become incorporated!

- Russell Rozanski

¹ “ Self-Employed Blamed for ‘Tax Gap’ ” - The Wall Street Journal, Personal Finance, Thursday January 15, 2004.
² Read the entire annual report by Nina E. Olson by visiting the IRS website:,,id=119520,00.html

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Delaware Intercorp, Inc.
113 Barksdale Professional center
Newark, DE 19711-3258

"For all the best reasons to incorporate,the best place
is Delaware and the best incorporator is
Delaware Intercorp!"

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