Whether you like it or not, you will always encounter various legal and tax risks when opening a massage parlor or working as a masseur in the United States. If you don’t understand the law, you may be prosecuted, have your property confiscated, or even go to jail at any time!

The best way to avoid risks is to set up a legal person, that is, to set up a company, and separate the individual from the company. In addition to being able to avoid risks to the greatest extent, fully understanding legal and tax knowledge can also easily help you save thousands of dollars in taxes a year!

However, most Chinese masseurs do not speak English very well, let alone understand complicated and cumbersome legal provisions. Consulting a lawyer is too expensive and easy to fall into a trap.

As a token of your trust and support for Elbe, in today’s article, I will explain to you in a simple and easy-to-understand way for free:

If a massage parlor owner or masseur wants to open a company in the United States, how should he choose the type of company?

What are the differences between LLC, S Corp and C Corp?

How can you save taxes legally?

If you don’t want to get into a lawsuit or be cheated, and are interested in legal tax savings, be sure to read this carefully!

Ready? Go!

Disclaimer: The content of this article does not constitute legal or tax advice. For actual operations, please consult a professional!

First, let’s talk about the benefits of starting a company, that is, establishing a legal person:

(1) Separating individuals and companies

When a massage parlor/masseuse is sued or faces a huge fine, if you are an individual defendant, your personal property, including bank deposits, houses, cars and all real estate, may be involved in the company’s debt. However, if you are sued as a legal person, the lawsuit will not recover personal assets, and at most the company will go bankrupt.

(2) Setting up a company can also help you save taxes legally

Choosing the right company type based on the number of employees and profits can help you save a lot of taxes legally.

So, how do you choose the right type of company?

Common types of companies in the United States include:

Sole Proprietorship 

Partnership 

LLC 

S Corporation (and)

C Corporation 

Sole Proprietorship is a one-person company, where the individual bears all the responsibilities of the company. Once a legal dispute arises, the individual will bear unlimited liability for the company. Therefore, registering a Sole Proprietorship cannot separate the company and the individual.

If the purpose is to avoid risks, we generally do not choose to register as Sole Proprietorship.

LLC and Partnership, this form of company is divided into LLC for one person and LLC for two or more partners.

The tax return for a one-person LLC is relatively simple. You can file self-employment tax together with your personal tax return. You only need to file Form 1040 and Schedule C. If there are two or more partners, it is a Partnership. When filing taxes, you need to file Form 1065.

If you set up an LLC, you are self-employed and all net profits must be subject to a 15.3% self-employment tax.

 Note: In some states in the United States, such as California and Arizona, an LLC formed by a husband and wife can be treated as an LLC formed by a single person.

So if you are a husband-and-wife business, when applying for a corporate tax number (EIN), you can choose to apply to the IRS as a one-person LLC or a partnership LLC. If you register a partnership LLC, your other half of the K-1 will have to pay a 15.3% self-employment tax.

That is, all net income of LLC is subject to 15.3% self-employment tax . Therefore, in order to save taxes, many mom-and-pop stores will give up LLC and choose to open S Corp.

S Corporation

If you choose to set up an S Corp, then only the portion of wages paid to yourself will be subject to the 15.3% self-employment tax. The rest of the profit can be treated as the company’s ordinary income and does not need to pay self-employment tax. This way, you can save a lot of taxes.

Assumption: Our massage parlor/masseuse has a net profit of 150,000 yuan per year. 

If it is an LLC, then the net profit of 150,000 yuan will be subject to 15.3% payroll tax, so you will need to pay: 22,950 US dollars in taxes per year.

If it is an S Corp, the net profit is still 150,000. Pay yourself 50,000 as salary, and the remaining 100,000 as K1 income for tax. In this way, only the 50,000 salary part needs to pay 15.3% payroll tax, and you only need to pay 7,650 US dollars in payroll tax per year.

The same net profit of 150,000 US dollars, just by registering a different type of company, can legally help you save 15,300 US dollars in taxes. Isn’t it great!

But be careful:

If you choose S Corp, you will have to prepare payroll reports every quarter. If there are mistakes or delays, you will be charged interest and penalties. And you can’t pay yourself a very low salary just to save taxes. The IRS has set reasonable salary standards based on industry standards. If they think that the salary you pay yourself is too low and unreasonable, they will take measures to make you readjust your salary.

In addition, the 15.3% payroll tax is actually composed of two parts: 12.4% social security (pension, survivors and disability insurance) and 2.9% medical insurance (hospital insurance). Therefore, the payment of self-employment tax will affect your retirement and medical insurance, so you need to consider the tax return form comprehensively.

C Corporation

Unlike LLC and S Corp, C Corp is a taxable entity and is subject to corporate tax. Moreover, C Corporation is subject to double taxation . Not only does the company have to pay income tax, but any dividends (profit distribution) received by shareholders are also subject to tax. Therefore, most mom-and-pop shops or massage therapists will not choose to set up C Corp.

However, C Corp also has its own advantages. Since 2018, the tax rate of C Corp has been fixed at 21%, and will not gradually increase with the growth of turnover. Therefore, for larger massage parlors, choosing to set up a C Corp is more suitable in the long run.

How is it? After reading this, do you know how to choose a company form? Do you have any questions about how to avoid risks when opening a massage parlor in the United States? If you have other questions, you can directly add my WeChat ybmblex or call (702) 892-7688 for consultation. We have answers for all your questions!

Join Elbe and start a new life in the United States!