C-corp for side hustle income?

[OncDoc]

Hi,

For those of us phased out by income threshold on pass-through relief, does it make sense to form a C-corp for side hustle income (if we are W2 for our main job?)

[janettebournes]

OncDoc wrote:

Hi,

For those of us phased out by income threshold on pass-through relief, does it make sense to form a C-corp for side hustle income (if we are W2 for our main job?)

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Is it worth running the numbers to see if a C-corp would make sense for your main job?

 

Or would your main job be unwilling to change their pay structure?

[Mochiny]

Depends on your specific situation but it certainly makes a lot more sense.

Federal rate dropping down to 21% makes double taxation much easier to bear.  Example in California:

Old through schedule C or similar:  39.6% fed + 10%+ state = around 50% tax rate.

Old through C-Corp:  35% fed + 8.84% state + 23.6% tax on dividend payout = around 57% tax rate

New through schedule C or similar:  37% fed + 10%+ state = 48%+ tax rate.

New through C-Corp:  21% fed + 8.84% state + 23.6% tax on dividend payout = around 48% tax rate.

At worse the two options appear to be a wash.  With C-Corp you can make shareholder loans to yourself as long as you keep it as arms length transaction (draw up a promissory note and pay interest back to the company) to avoid the tax on dividend payout.  You can retain the earnings to grow the company - think of it as tax deferred growth.  Keep good financial records and you can add leverage (borrow money) using the c-corp to enhance returns.

If you don’t need the income from the side hustle for day to day expenses, you should definitely consider C-Corp.

 

 

[spiritrider]

Mochiny wrote:

Old through schedule C or similar:  39.6% fed + 10%+ state = around 50% tax rate.  49.6+%

Old through C-Corp:  35% fed + 8.84% state + 23.68% tax on dividend payout = around 57% tax rate  67.64%

New through schedule C or similar:  37% fed + 10%+ state = 48%+ tax rate.  47+%

New through C-Corp:  21% fed + 8.84% state + 23.68% tax on dividend payout = around 48% tax rate. 53.64%

At worse the two options appear to be a wash.  With C-Corp you can make shareholder loans to yourself as long as you keep it as arms length transaction (draw up a promissory note and pay interest back to the company) to avoid the tax on dividend payout.  You can retain the earnings to grow the company – think of it as tax deferred growth.  Keep good financial records and you can add leverage (borrow money) using the c-corp to enhance returns.

If you don’t need the income from the side hustle for day to day expenses, you should definitely consider C-Corp.

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[Mochiny]

Dividend is paid out of after tax earnings, so the equivalent tax rate on revenue is only 23.8% of net income instead of revenue.