Is it wise for an independent contractor to avoid corporation tax by planning to only break even each year?
IANAL (and nor am I an accountant), so I can't give a definitive answer as to legality, but AFAIK, what you propose is legal.  But what's the benefit?  Avoiding corporation tax? It's simplistic – and costly – to think in terms like that. You need to run the numbers for different scenarios, and make a plan.  You can end up ahead of the game precisely by choosing to pay some corporate tax each year. Really! Read on. One of the many reasons that self-employed Canadians sometimes opt for a corporate structure over being a sole proprietor is to be able to not pay themselves everything the company earns each year. This is especially important when a business has some really good years, and others, meh.  Using the corporation to retain earnings can be more tax effective. Example: Imagine your corporation earns, net of accounting & other non-tax costs except for your draws, $120,000/year for 5 years, and $0 in year 6.  Assume the business is your only source of income for those 6 years.  Would you rather: Pay yourself the entire $120,000/yr in years 1-5, then $0 in year 6 (living off personal savings you hopefully accumulated earlier), subjecting the $120,000/yr to personal income tax only, leaving nothing in the corporation to be taxed? Very roughly speaking, assuming tax rates & brackets are level from year to year, and using this calculator (which simplifies certain things), then in Ontario, then you'd net ~$84,878/yr for years 1-5, and $0 in year 6. Overall, you realized $424,390. Drawing the income in this manner, the average tax rate on the $600,000 was 29.26%. vs. Pay yourself only $100,000/yr in years 1-5, leaving $20,000/yr subject to corporation tax. Assuming a 15.5% combined federal/provincial corporate tax rate (includes the small business deduction), then the corp. is left with $16,900/yr to add to retained earnings in years 1-5. In year 6, the corp. has $84,500 in retained earnings to be distributed to you, the sole owner, as a dividend (of the non-eligible kind.) Again, very roughly speaking, you'd personally net $73,560/yr in years 1-5, and then on the $84,500 dividend in year 6, you'd net $73,658.  Overall, you realized $441,458.  Drawing the income in this manner, the average tax rate on the $600K was 26.42%. i.e. Scenario 2, which spreads the income out over the six years, saved 2.84% in tax, or $14,400. Smoothing out your income is also a prudent thing to do. Would you rather find yourself in year 6, having no clients and no revenue, with nothing left to draw on? Or would you rather the company had saved money from the good years to pay you in the lean one? "First, point: The CRA wants you to start a business with a ""Reasonable expectation of profit"". They typically expect to see a profit within 5 years, so you may be inviting unwanted questions from future auditors by using a breakeven strategy. Second point: If the goal is to pay as little tax as possible, you may want to consider having the corporation pay you as little as possible. Corporate income taxes are much lower than personal income taxes, according to these two CRA links: How it works is that your company pays you little as an outright salary and offers you perks like a leased company car, expense account for lunch and entertainment, a mobile phone, computer, etc. The company owns all of this stuff and lets you use it as part of the job. The company pays for all this stuff with corporate pre-tax dollars as opposed to you paying for it with personal after-tax dollars. There are specifics on meals & entertainment which modify this slightly (you can claim 50%) but you get the idea. The actual rate difference will depend on your province of residence and your corporate income level.  There is also a requirement for ""Reasonable Expenses"", such that the expenses have to be in line with what you are doing. If you need to travel to a conference each year, that would be a reasonable expense. Adding your family and making it a vacation for everyone would not. You can claim such expenses as a sole proprietor or a corporation. The sole-proprietorship option puts any after-expense profits into your pocket as taxable income, where the corporate structure allows the corporation to hold funds and limit the amount paid out to you.  I've seen this strategy successfully done first-hand, but have not done it myself. I am not a lawyer or accountant, consult these professionals about this tax strategy before taking any action."
When you start at a new job here in the U.S., the default means of payment is usually a paper check. Most folks will quickly set up direct deposit so that their employer deposits their paycheck directly into their personal bank account - the incentive to do so is that you receive your funds faster than if you deposit a paper check.  Even if you set up direct deposit on your first day on the job, you may still receive your first paycheck as a paper check simply because the wheels of payroll processing turn slowly at some (large) companies. A counter example is a self-employed contractor - perhaps a carpenter or house painter.  These folks are paid by their customers, homeowners and such.  Many larger, well established contracters now accept credit card payments from customers, but smaller independents may be reluctant to set up a credit card merchant account to accept payment by card because of all the fees that are associated with accepting credit card payments.  3% transaction fees and monthly service fees can be scary to any businessman who already has very thin profit margins.  In such cases, these contractors prefer to be paid by check or in cash for the simple reason that there are no fees deducted from cash payments. There are a few folks here who don't trust direct deposit, or more specifically, don't trust their employer to perform the deposit correctly and on time.  Some feel uncomfortable giving their bank info to their employer, fearing someone at the company could steal money from their account. In my experience, the folks who prefer a paper paycheck are often the same folks who rush to the bank on payday to redeem their paychecks for cash.  They may have a bank account (helps with check cashing) but they prefer to carry cash. I operate in a manner similar to you - I use a debit card or credit card (I only have one of each) for nearly all transactions in daily life, I use electronic payments through my bank to pay my regular bills and mortgage, and I receive my paycheck by direct deposit.  There have been periods where I haven't written or received paper checks for so long that I have to hunt for where I put my checkbook! Even though I use a debit card for most store purchases, the bank account behind that debit card is actually a checking account according to the bank.  Again, the system defaults to paper checks and you have the option of going electronic as well. Before we judge anyone who doesn't use direct deposit or who prefers to be paid in cold hard cash, consider that direct deposit is a luxury of stability. Steady job, home, etc.  Direct deposit doesn't make sense for a contractor or day laborer who expect to work for a different person each day or week. I don't think this is all that unique to the US.  There are people in every city and country who don't have long-term employment with a single employer and therefore prefer cash or paper check over electronic payments.   I'd be willing to bet that this applies to the majority of people on the planet, actually. "Whenever you do paid work for a company, you will need to fill out some sort of paperwork so that the company knows how to pay you, and also how to report how much they paid you to the appropriate government agencies. You should not think of this as a ""hurdle"" and you shouldn't worry that you haven't been employed for a long time. The two most common ways a company pays an individual are via employee wages, or ""independent contractor"" payments. When you start a relationship with a company, if you are going to become an employee, then you will out a W4 form, and at the end of the year you will receive a W2 form. If you are an independent contractor, (which you would be considered in this case), you will fill out form W9 and at the end of the year you will receive a 1099. This is completely normal and you have nothing to worry about. All it means is that if you make more than a certain amount (typically $600) in a year, you will receive a 1099 in the mail or electronically. The 1099 form basically means that they are reporting that amount to the IRS, and it also helps you file your tax return by showing you all the numbers you need on one form. Please remember that when you are paid as an independent contractor, no taxes are withheld on your behalf, so you may owe some tax on the money you make. It's best to set aside some of your income so you are prepared to pay it come tax time next year." Personally, I'd use my emergency fund first. It is unlikely (though possible, of course) that I will entirely lose my income at the same time I need to replace my roof or my furnace. I'd rather pay my emergency fund back with installment payments than pay off a HELOC to my bank. The lost interest on my emergency fund, which, after all, should be in cash, is much less than the cost of the loan. I could even set up an amortization schedule in a spreadsheet and charge myself interest when paying back into the emergency fund. That said, if I didn't have the cash in my emergency fund, I'd rather borrow against the house than finance with a contractor. If they'd even do that, which is unlikely--I've never dealt with a roofer or heating contractor that required anything but full payment at time of service. Home equity borrowing is generally the cheapest kind. I'm firmly in the camp of those who look at home ownership as a consumption decision rather than an investment. If the value goes up, great, but I just build in about 1% of the cost of building a new house (excluding the land price) into the housing budget each year, right along with mortgage interest, property taxes and basic utilities. Usually, that's enough to cover the major wear-and-tear related repairs (averaged over 3-5 year periods, anyway). As others have pointed out, post-tax dollars are what you'll use.  Just as a quick note, as you'll be using post-tax dollars; in the past, I've refused to take contractor plans because they almost always are inferior to what I've been able to get off the private exchange ehealthinsurance.  A few people have written excellent articles on Get Rich Slowly here and here about them in detail if you want more information. Generally, contractors (and sometimes employees) are offered a few plans (3-4), and this health exchange gives you a little more freedom to pick your plan, which in your situation may help.  It isn't always cheaper, but depending on your needs, you may obtain a better deal. Forgot to add this: this option has also made switching jobs easy as well since I don't have to pay COBRA.  While it depends on the situation, this can sometimes come out significantly cheaper.  For instance, if I were to take the employer health plan next year, I would lose ~$450 a month, whereas the private exchange option is ~$300.  But, if I were to switch jobs, decide to opt for self-employment, or a layoff, the COBRA would be even higher than ~$450. First of all, this is a situation when a consultation with a EA working with S-Corporations in California, CA-licensed CPA or tax preparer (California licenses tax preparers as well) is in order. I'm neither of those, and my answer is not a tax advice of any kind. You're looking at schedule CA line 17 (see page 42 in the 540NR booklet). The instructions refer you to form 3885A. You need to read the instructions carefully. California is notorious for not conforming to the Federal tax law. Specifically, to the issue of the interest attributable to investment in S-Corp, I do not know if CA conforms. I couldn't find any sources saying that it doesn't, but then again - I'm not a professional. It may be that there's an obscure provision invalidating this deduction, living in California myself - I wouldn't be surprised. So I suggest hiring a CA-licensed tax preparer to do this tax return for you, at least for the first year. You have made a good start because you are looking at your options. Because you know that if you do nothing you will have a big tax bill in April 2017, you want to make sure that you avoid the underpayment penalty. One way to avoid it is to make estimated payments. But even if you do that you could still make a mistake and overpay or underpay. I think the easiest way to handle it is to reach the safe harbor. If your withholding from your regular jobs and any estimated taxes you pay in 2016 equal or exceed your total taxes for 2015, then even if you owe a lot in April 2017 you can avoid the underpayment penalty. If you AGI is over 150K you have to make sure your withholding is 110% of your 2015 taxes. Then set aside what you think you will owe in your bank account until you have to pay your taxes in April 2017. You only have to adjust your withholding to make the safe harbor. You can make sure easily enough once your file this years taxes. You only have to make sure that you reach the 100% or 110% threshold. From IRS PUB 17 Who Must Pay Estimated Tax If you owe additional tax for 2015, you may have to pay estimated tax   for 2016. You can use the following general rule as a guide during the year to   see if you will have enough withholding, or if you should increase   your withholding or make estimated tax payments.  General rule.    In   most cases, you must pay estimated tax for 2016 if both of the   following apply. You expect to owe at least $1,000 in tax for 2016, after subtracting your withholding and refundable credits. You expect your withholding plus your refundable credits to be less than the smaller of: a. 90% of the tax to be shown on your 2016 tax return, or b. 100% of the tax shown on your 2015 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers , later).   Your 2015 tax return must cover all 12 months. Reminders Estimated tax safe harbor for higher income taxpayers. If your 2015   adjusted gross income was more than $150,000 ($75,000 if you are   married filing a separate return), you must pay the smaller of 90% of   your expected tax for 2016 or 110% of the tax shown on your 2015   return to avoid an estimated tax penalty. The only way to avoid paying the corporation tax is buying a house for say $100,000 and then letting it burn down by accident. So your money is gone without anything to show for it, your profits are gone, and you pay no corporation tax.  You pay corporation tax on profits. Profits that you invest are still profits. "The heart of the question is: why can't Bill just pay whatever he owes based on his income in that quarter? If Q2 is gang busters, he'll increase his tax payment. Then if Q3 is surprisingly slow, he'll pay less than he paid in Q2. I think what's most interesting about this question is that the other answers are geared towards how a taxpayer is supposed to estimate taxes. But that's not my objective -- nor is it Bill's objective. My [his] real objective is:  In other words, the answer to this question either needs to deal with not overpaying, or it needs to deal with mitigating the underpayment penalty. AFAICT, there are 2 solutions: Solution 1 Figure your estimated taxes based on last year's tax. You won't owe a penalty if your withholding + estimated tax payments in each quarter are 25% or more of your previous year's tax liability. Here's the section that I am basing this on: http://www.irs.gov/publications/p505/ch04.html Minimum required each period.   You will owe a penalty for any 2011 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of: 22.5% of your 2011 tax, or 25% of your 2010 tax. (Your 2010 tax return must cover a 12-month period.) Solution 2 Use the ""Annualized Income Installment Method"". This is not a method for calculating estimated taxes, per se. It's actually a method for reducing or eliminating your underpayment penalty. It's also intended to assist tax payers with unpredictable incomes. If you did not receive your income evenly throughout the year (for example, your income from a shop you operated at a marina was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Emphasis added. In order to take advantage of this, you'll need to send in a Schedule AI at the end of the year along with a Form 2210. The downside to this is that you're basically racking up underpayment penalties throughout the year, then at the end of the year you're asking the IRS to rescind your penalty. The other risk is that you still pay estimated taxes on your Q2 - Q4 earnings in Q1, you just pay much less than 25%. So if you have a windfall later in the year, I think you could get burned on your Q1 underpayment."