The birth of a VAR typically goes something like this: the employee of an IT service provider comes to the realization that he can do the same work himself and collect the profit without having to answer to superiors he might disagree with. The employee quits and calls on a few of the clients he served at the larger company plus some new ones, provides the same services, collects a check and cashes the check.
On April 15 every year many come to a second realization about self employment — the manner in which they cash that check effects how much it they actually get to keep. This past April 18 (income taxes were postponed to April 18 this year to accommodate a holiday in Washington, D.C.), no doubt, many realized they had made a mistake.
A business owner’s tax footprint has less to do with the accounting done at the end of the year than the business structure elected at the beginning of the year. Whether the outfit is a simple business license (commonly called a DBA), LLC, S-corporation or C-corporation — will impact how much of the income stays with the owner and how much goes to Uncle Sam.
“Unfortunately, it’s never black and white until end of fiscal year and taxes are due and you think you should have done this or that,” said Deborah Sweeney, CEO of MyCorporation http://www.mycorporation.com/ Business Services, which advises corporations and business owners on incorporation options. “You learn and grow. You start to figure out which is the best option for you, what is a more reasonable salary. You take more in salary and less for corporate, but pay more self-employment tax. You figure it out.”
Multiple factors will impact a decision on corporate structure, but taxes should be one of them.
Small-business owners like VARs have four primary options to structure their business and there isn’t an easy formula to determine which is the correct option.