A doctor or dentist incorporates himself because, in the words of one Washington tax lawyer, the benefits of doing so constitute "the ultimat tax shelter."
That ultimate shelter is the doctor's pension or profit-sharing retirement plan and other fringe benefits that are paid for by his corporation. According to experts, there are two main reasons that such benefits are so attractive for tax purposes:
Contributions to retirement plans are not taxable. Nonetheless, such contributions are real money paid for services rendered and, if invested in other ways, would be taxed.
The income earned by the retirement funds is not subject to tax in the years it is earned.
A doctor incorporates himdelf. The corporation has only one asset, the doctor, and only one way of making money, through the doctor's practice - but the income from that practice goes to the corporation, not to the doctor.
The corpostation than pays the doctor a salary. The doctor must pay taxes on that salary just like anybody else, but his salary certainly does not reflect the total that the corporation earned.
The corporation in addition to paying the doctor's salary, pays money into a retirement fund. That contribution is not taxed. The retirement fund can make investments and earn income all by itself that also will not be taxed.
The tax break does not last forever. Presumably the employee (doctor) retires at some point and then begins to draw from his retirement fund. When he draws the money it is taxable, but normally at a much lower rate than it would have been when it was earned.
Self-employed individuals, as oppesed to corporations, can place only the lesser of 15 per cent of their income or $7,500 in retirement plans without paying taxes on it. Most doctors are in a position to sock away more than $7.500 a year for retirement.
If a self-employed individual turns himself into a corporation, it's a different game. Under the old tax laws, according to Internal Revenue Service lawyer Robert Masnik, it theoretically was possible for the corporation to contribute as much money to the actually paid him in salary. If a doctor paid himself $50,000, he theoretically could pay his retirement fund $50,000.
Under a new law that took effect Dec. 1, 1975, the maximum annual tax sheltered contribution to the retirement and is the lesser of (plus a cost of living escalator), according to Masnik.