Setting up two corporations to split profits and reduce tax brackets Let's say I am receiving income in a corp from multiple entities for consulting services and most of the money I make I keep in my company to potentially pay out dividends in future years. Would it make sense to split the income (and therefore the profits) between multiple corporations to keep in the lowest corporate tax brackets? Let's say I have a yearly profit of $120,000. If the current tax brackets for corps are as follows: Taxable income over Not over Tax rate $ 0 $ 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38% 18,333,333 .......... 35% It seems I should set up 3 corporations, have my clients pay each of them about $40,000, and thus each corporation would only get taxed 15%. Thereby saving $12,000-$23,000 in taxes. I could easily imagine creating N number of corps and spreading profits between them all to have the lowest tax rate. This all seems pretty easy and obvious to me, yet I don't see any advice on the subject anywhere on the internet. Is this legal? Am I missing something fundamental? Because otherwise, it seems like a pretty huge tax loophole that I would imagine would be heavily abused.
I have extensive domain knowledge of your question. In short, your plan won't work. Here's why... Corporate Taxation and the double taxation problem Corporations are taxed in the U.S. as separate legal entities (unless they meet certain exceptions described below). Therefore, if your corporation does not avoid being taxed as a separate legal entity, your plan will fail due to the “double taxation” problem. I.e, Your corporation will be taxed first at the corporate level. Then after you pay the corporate tax, YOU WILL BE TAXED AGAIN as an individual, when you take the money out of the corporation via income or dividends. Or if you decide to leave the money in the corporation, there is an excess retained earnings penalty. Subchapter-S election and "flow-through" entities The way to avoid the double taxation problem is to make a &quot;Subchapter-S election” for your corporation. This &quot;S-election&quot; will cause the corporation to be treated as a “flow through” entity for taxation purposes — allowing the owners to be taxed at the individual level only. The IRS imposes additional limitations and restrictions on these &quot;S-corporations&quot; and their ownership structures. Limiting things like the number of owners the corporation can have etc. The problem is that even with this subchapter S election, your concept still won’t work. This is because ALL your income will &quot;flow through” all your corporations (via IRS Form K-1) and accrue to you at the individual level. Therefore, nullifying the “compartmentalization of income” effect you were trying to achieve. Conclusion In short, your plan won’t work. There are too many rules in place to effectively close the loophole you imagined might be. Disclaimer: I am not a lawyer or an accountant. This answer is not legal or accounting advice. Please consult the proper professionals for appropriate professional advice.
It isn't &quot;illegal&quot; but there are negative consequences to doing so. The civil penalties for failure to file a tax return are a percentage of the tax not paid (5% per month up to a maximum amount, plus interest). There is a small penalty for not filing an information tax return (like a 1099) when you have to file one and don't owe money, but there is usually not such a nominal fine for a personal form 1040. The statute of limitation on IRS efforts to audit a tax return or to impose additional tax for additional amounts owed doesn't begin to run until a tax return is filed. Criminal penalties require an intent to deprive the government of money. If he had more withheld than he owed, he probably isn't subject to any realistic significant civil or criminal consequences, but it is highly risky if he actually owed more than was withheld from his paychecks, and it deprives him of an ability to get refunds if too much was withheld (and possibly also stimulus check refunds) after three years. The issue here is really that it is hard to see that the downsides of not filing a tax return are hard to match to the benefits of filing a tax return, which for a wage and salary earning teacher, are very slight (you could pay someone to do it for $100-$300). Also, the lack of tax returns could hurt the teacher if the teacher ever has to apply for credit or get divorced or file for financial aid for the teacher's own kids to go to college. Of course, if he had lots of unreported side income, upon which he has not paid taxes, then there are serious civil and criminal consequences.
The English version of the taxman's web page does not indicate any specific exemption or reduction of taxation due to being under 18, however provision 102.3 says that The monthly taxable income of disabled people of I and II groups (except for veterans of war), persons under age of 18 with limited levels of health from any type employment shall be reduced by the amount of 200 manats. Provision 106.2, about exempt income says that Income tax rate for production enterprises owned by public organizations of disabled people, or children with limited levels of health shall be reduced by 50 percent if not less than 50 percent of employees at such enterprises are disabled people, or persons under age of 18 with limited levels of health. These provisions imply that it is legal for people under 18 to work. The Azerbaijan Labor Code section 42(3) says A person who has reached the age of fifteen may be a party to an employment contract. and 58(6) says that Employees under age of 18 may be allowed to hold multiple jobs if their total daily working hours do not exceed the reduced work hours provided for them in Section 91 hereof. which again implies that those under 18 may work for money. There are a number of other provisions that address employees under age 18. A freelancer is not an employee, so the labor code is technically not applicable to you, but it suggests that it is legal to freelance if you are under 18. Usually, restrictions are placed on people working for others and it is assumed that people can be self-employed relatively freely. One would have to hire a lawyer to be sure, though.
Your framing of the issue is basically wrong. There is an exemption, which varies from state to state, from unsecured creditors (but not creditors that take the goods as collateral) in bankruptcy and in debt collection outside of bankruptcy (not always the same exemption), for tangible personal property owned by the debtor which constitutes the debtor's tools of the trade, but that varies from state to state, is a creature of state statute (and the bankruptcy code), is not universal, and is usually limited in dollar amount. Moreover, the exemption only applies when the tradesman actually owns the tools of his trade which is customary in some professions, but not automatic. It is only the case when the tradesman buys his own tools. There is no generic v. non-generic distinction. In the software field, education and the public domain can always be accessed. But, intellectual property, that can be protected, that is developed for the employer, is usually work for hire and belong to the employer. This default rule is subject to the terms of the agreements between the parties entered into contractually.
If you are the CEO of a public company, this might be a problem if it causes less profits for the shareholders. They could fire you if your actions cost them money. If you are the owner of a business, then the CEO of your company (you) can do anything legal that all your shareholders (you) agree with. Nobody can force your company to deal with anyone, especially with no business, except for existing contracts or if there is illegal discrimination. Now all this is not “your personal opinion” but “the ceo running the company according to the wishes of the shareholders”. You are allowed legally to discriminate against a company whose business practices you don’t like. You have to do nothing, just don’t deal with them. If Facebook sends you a million dollar order, just don’t accept it. Make sure that no sales contract is created. It is remotely possible that you have problems if such a decision causes you to go bankrupt and you can’t pay your taxes or debt, like a debtor could claim you could have paid your debt and want your personal money instead of your broke company’s money.
Offices are normally rented by businesses, so for the tax appraiser, your situation would be quite out of the ordinary. They appear to be stone deaf to the idea that an office may be rented not for business purposes, and so they lump all office renters together. If they do not want to hear you, all you can do is to keep evidence that: You are an employee; You attempted to tell them that you are not liable for the tax because you are not a business — and present that should they ever attempt to prosecute you for tax evasion or similar. Specifically, do: Keep your employment contract, communication with your bosses telling you what to do and records of them paying your taxes; Send a formal letter (not an appeal) to the tax appraiser explaining the situation Should the issue ever be escalated, they will not be able to prove that you were a contractor/business (let alone beyond reasonable doubt), and you will be able to recover costs associated with this headache.
Tim Lymington got it right in the comment. If they don't get a wage, but expect a share of profit and/or loss, they are your partners and would be "members" of the LLC. Then you don't need workers comp or even to pay any salary at all. Of course, they will also be entitled to a share of the business, but from the description it sounds like they should be.
What follows is a broad overview. I'm not an expert in this; I just have a bit of experience in this due to a tax situation my wife &amp; I experienced a few years ago. Please do not rely on this advice except as a starting point for more Googling. Your obligations (and your assistant's) will depend on whether the assistant is an employee or an independent contractor. In general, an independent contractor is someone you hire to "get a job done"; you have minimal control over the manner, time, place, tools, etc., that the assistant uses. An employee, on the other hand, is someone you hire to come to work at a particular time and do the job a particular way. (I'm glossing over some details here; see the IRS link above for more details.) If your assistant is an independent contractor, and you pay them over a certain threshold ($600 for 2020), you must provide them with Form 1099-MISC, and file a copy with the IRS as well. Your assistant will then be liable for income taxes on this amount, as well as self-employment tax (see below.) If your assistant is actually an employee, and you pay them over a certain threshold ($600 for 2020), you are required to provide them with a W-2 form, as well as filing a copy with the IRS. In addition, if you pay them more than a higher threshold ($2200 in a tax year or $1000 in any quarter for 2020), you are responsible for withholding taxes from their paychecks, as well as paying the employer's portion of Social Security, Medicare, and/or federal unemployment taxes. How to figure these taxes is complex, but generally the employee must provide you with a completed W-4, and then you must provide them (and the IRS) with a W-2 at the end of the tax year. See Publication 15: Employer's Tax Guide for all the gory details. The self-employment tax is designed to effectively cover the employer's portion of these taxes for self-employed workers. As you might imagine, employers are often tempted to misclassify employees as "independent contractors", since this means that this tax liability gets pushed from them onto their workers, as well as just making the employer's life easier. The Feds will not take kindly to such misclassification if it is discovered. Finally, for the state of Connecticut, consult the CT 1009-MISC filing guide (if your assistant is an independent contractor) or the Connecticut employer's tax guide (if they are an employee). The distinction is pretty much the same as at the federal level.