While I was at Furry Fiesta, I ran a panel on the business side of art/small business practices. I got a few questions during and after the panel that I couldn’t answer at the time, but I have since found the answer to them! So what the hey, I though I’d go ahead and answer them here.
1.) I thought I read somewhere that if you are an S-corporation, you don’t have to pay the self-employment tax (that is, the other half of your social security tax which your employer normally withholds). Are you sure you have to pay that?
So, the answer is that every person has to pay social security tax. Probably the confusion stems from this: if you are running a sole proprietorship, you and your business are the same entity, and you/your business pays the social security tax. However, if your business is an S-corp, you and your business are not the same entity; your business does not pay social security tax - however, YOU still have to file a 1040 (a personal tax return) and you are responsible for paying your social security tax.
As for trying to say that the business’s income is the business’s assets and not your income, I don’t know. If that’s a thing that can be done, probably refer to question 3, on the drawbacks of appearing to have no income.
Short answer: yes, you are responsible for your social security tax if you have had any income.
2.) Do you think there would be a way for you to make your cats your business’s mascots, so that the big vet bills you’ve had could be a business expense?
I already knew this was a “no” in our case but I wanted to look into the specifics. An animal can count as a business asset, and thus its expenses as a business expense, but only if you can show that the animal is necessary for the day-to-day functioning of your business. This is the case for things like livestock, working farm animals, performance animals (circuses, etc), and recreational businesses that use animals (horse cart rides, pony rides).
3.) (An extended explanation about some method by which a business hides their profits and pays no taxes, which sounded like money laundering or tax evasion and I didn’t understand it at all)
I think the thing being described to me was a method of “zero-ing out” the business’s net profits. Apparently a lot of businesses do this - basically, find a way to make the business’s income minus the business’s expenses equal 0. There are, apparently, ways to do this that are technically legitimate and won’t get you thrown in jail or filing for bankruptcy, but it would be a question for a clever accountant.
That said - and maybe I’m wrong about this, but I can’t figure how else it would work - if you show that your business made no income and thus YOU made no income, yes you would avoid paying taxes. However, I think you would also not be eligible for any kind of credit. When applying for a credit card or loan or refinance, the financial institution will usually look at your debt-to-income ratio for the last two years. If on paper you have no income, you probably aren’t going to be approved for anything (I don’t know how loans based on collateral work, it’s never been an option anytime I’ve applied for a loan).
As a real-life example, I’m hoping I can refinance my mortgage sometime. They’ll want to see a debt-to-income ratio of probably no more than 30%. The lower the percentage, the better the interest rate. So for me, zeroing-out isn’t really a good option, and in fact we’ve found ourselves wrestling with the idea of making our income look better vs. ending up with a bigger tax bill.