The C corporation is a separate legal entity that earns its own money and pays its own taxes.  The C corporation pays salaries to its employees and may declare dividends to its stockholders.

One person may form a C corporation.  One person may own all the stock in the corporation.  Further, the corporation may employ only one person.  That “one person” could be you.

Caution for personal service corporations.  The strategies in this section work best for corporations that are not classed as personal service corporations.  In general, your corporation is a personal service corporation if you are the one who does the work and you do that work in one of the following fields: 

• Health
• Law
• Engineering (including surveying and mapping)
• Architecture
• Accounting
• Actuarial science
• Performing arts
• Consulting

Sales are not consulting.  If your remuneration depends on the consummation of a transaction—as in insurance, financial planning, or real estate—you are not a consultant.  You are in sales, and you may form a corporation without its being classed in the unfavorable “personal service” group.

By having someone who provides no services to the corporation and owns six percent or more of the corporations stock you can get out of the personal service rules.  We will discuss this issue if you decide to incorporate your business.

Meanwhile, let’s say you are a person for whom the C corporation makes the most sense.  You can use the C corporation to save money on your taxes in the following ways:

• Hiding income in the C corporation until you reach full retirement age.
• Hoarding up to $250,000 in the C corporation with no plan for this money.
• Borrowing money from your C corporation so you have the cash you need.
• Keeping your salary at a level that does not trigger taxes on you Social Security.
• Installing a fiscal year that ends in January.
• Adopting a 100 percent medical reimbursement plan for employees (you).
• Adopting group term life insurance on employees.

Planning note. You might make so much money that you don’t care about Social Security.  If that’s the case, consider the C corporation as a possible business structure to cut you overall taxes.

Let’s say you are age 62, would like to earn $70,000, and would like to claim your full Social Security benefit each your for the next four years.  You can accomplish this with the C corporation.

Because you are only 62, you do not want more than $12,000 of earned income.  Thus, have your C corporation pay you a salary of 12,000.

Say the $12,000 salary is too low (i.e., it is not a reasonable salary).  The corporation could pay a low salary now and defer the balance to later, say five years from now.

If the corporation pulls in $70,000 and pays you 12,000, it has $58,000 left.  Let’s say the corporation also pays $8,000 in tax-free fringe benefits to you (for example, medical reimbursement).  On the balance of $50,000 your corporation pays only 15 percent in percent in federal income taxes.

Your C corporation may accumulate up to $250,000 without worrying about the accumulated earnings tax.  Once the C corporation has more than $250,000 accumulated, it can avoid the accumulated earnings tax if it expects to use the money for the reasonable needs of the business.   

If you need cash during the year, you can borrow from the corporation.  When you borrow from you wholly owned corporation, make sure both you and your corporation sign and date the notes, and that you abide by the terms of the notes and make payments on time.

Fiscal year ending in January.  The January year-end provides a deferral mechanism for both you and the corporation.  Remember, the corporation, not you, earns the money and pays the expenses.  If, at the end of its year (now January 31), the corporation decides that you have done a good job and should receive a bonus, you get that bonus in January.  For tax planning, this gives you almost a full year of deferral.

Adoption of a retirement plan.  The sole proprietor’s retirement plan does not produce a tax deduction on the Schedule C of form 1040.  Instead, the retirement plan deduction goes on the front page of IRS form 1040, where it does not reduce earnings from self-employment.  Thus, the sole proprietor cannot use a self-employed retirement plan to avoid the 50 percent loss-of-benefits problem, because the self-employed plan does not reduce his earned income.

On the other hand, a corporation that adopts a retirement plan cuts the income of the corporation.  Accordingly, you can use a C corporation retirement plan to help you accomplish your Social Security benefit-retention goals.

Adoption of 100 percent medical plans, life insurance, and other fringe benefits.  You want every expense possible at the corporate level.  Of course, you pick expenses that you would otherwise incur.  For example, if you do not need or want life insurance, you obviously do not have you corporation buy life insurance.

On the other hand, you definitely want the corporation to pay all your medical expenses.  If the only choices are “you pay” or  “the corporation pays,” make the corporation pay and deduct the medical as fringe benefit for the employee (you).