Have a Tax Question? Ask a Tax Expert
Welcome to Just Answer and thank you for allowing me to be of service to you regarding your tax question. Based on the information contained in your question, you should be a sole proprietor (you have no employees) and include file a Schedule C with your tax return. While it is true that you will be responsible to pay self-employment tax, if you choose to incorporate or form an LLC, there are fees for the incorporation/LLC plus the annual report fee that must be paid each year and the corporation will have to file a tax return. You could form an LLC and be the sole member and elect to be taxed as a sole proprietorship and utilize Schedule C, but again, you would incur costs for having the LLC. Let me know if I can clarify this further for you. Thank you.
The simplest and most cost effective way for you right now would be sole proprietorship utilizing Schedule C.
so there would be no tax savings with any of the 4 entities that i mentioned?
Not at all, plus you would incur costs and have to file tax returns for any of the entities you form (C corp., S corp or LLC).
but an llc does not need to file if it is a disrergded entity which it would be if im filing as a sole propreitor
Correct. The only entity you might consider is forming an LLC with yourself as the sole member, and then you can still utilize Schedule C of your personal 1040 income tax return. However, you will have the cost of forming the LLC, opening a bank account for the LLC and paying an annual report fee to whatever state you form the LLC in.
ok so when do tax savings comes into play?
is it a certain profit amount?
with an entity that is
The tax savings would come into play when you start deducting all of your expenses from your income, and you would pay tax on the net amount rather than the gross amount. This amount would then be further reduced by your standard deduction for whatever filing status you are and the exemption for yourself. The self-employment tax is added to the income tax that you would be required to pay; however, you receive a credit for 1/2 of that amount.
My opinion is that a sole proprietorship utilizing Schedule C on your personal 1040 is the most cost effective and simplest way to handle your situation right now.
and the scenario you just mentioned is for me filing as a sole proprietor w/out the llc?
Oh, to answer another part of your question--you said you wanted to incorporate in Wyoming because they do not have corporate income tax, but you would still have federal income tax.
personal income tax, correct?
I believe sole proprietor is the way to go for you. However, if you feel you may be subject to a lot of liability in your work, you could consider forming an LLC and still filing as a sole proprietor utilizing Schedule C of the 1040. But again, you would have the costs of forming and maintaining the LLC. My opinion is that right now for you it's not worth it to do.
Whether you form the LLC or stay a sole proprietor, remember to keep track of ALL of your expenses that are connected to your work. For the most part, they are all deductible.
For instance, if you're doing internet marketing, the cost of the internet service you utilize to name one.
ok say i had a c corp and paid myself a salary..i would still need to pay the self employment tax correct?
No, but the C corp would be have to file a return and pay tax. So the corporation would pay corporate tax, you would pay income tax, but there would be no self-employment tax. Self-employment tax only comes into play for self-employed (sole proprietor) people.
wouldnt the c corp have to pay the fica stuff?
Yes, if you were the employee of the C corp plus corporate tax when it filed its return.
what if im just a sub contractor of the corp..then i would pay the self employment tax, correct?
Correct, but why complicate it when you can remain a sole proprietor or form an LLC? The corporation would still have to file a tax return and so would you.
well for lawsuits regarding business activites so they wont be able to come after me personally
in that case the LLC would work, correct?
Then the LLC as a sole proprietor is the way to go for you.
ok...on the tax purposes..can you tell me if this scenario is wrong:
LLC with S-corp status
make 50000 a year
corp: pay myself 34,500 at 15% sub contractor rate and the rest 15500 as dividends at the 15% rate34,500 x .15 = 517515,500 x .15 = 2325 Tota = 7500
sely employed pay myself 50000 at the 25% tax rate50000 x .25 = 12500
You cannot elect S corp status because you are the only member of the LLC.
so s member status is available only to LLC's which have more than one member?
s corp status is only available to LLCS that have more than one member?
Correct. Single member LLC's are sole proprietors.
You can form an S corp in and of itself with yourself as the sole, director, officer and shareholder.
and if i do that would the scenario above work?
An S corp is a pass-through entity which means any profit or loss is passed through to the shareholder, which would be you. This profit/loss would be added/subtracted from your income on your personal 1040, and remember, the S corp would have to file its own tax return and issue a K-1 to you before you could file your personal 1040.
Basically, a corporate entity in your case would just serve to complicate matters inasmuch as you would have to file two tax returns, etc.
The tax preparation fee for corporate returns can be quite expensive.
ok but in the scenario above that would save me 5500 in taxes, correct?
You have not taken into consideration the expenses which would offset the $50,000 gross so it is impossible for me to say yes or no. You may gross $50,000 but have $20,000 of deductible expenses.
ok if it was gross, it would save 5500, correct?..actually 6085 when you add the self employment tax
Using your formula, correct, but there are other factors to take into consideration that I do not know. My opinion is sole proprietor or LLC as sole proprietor for you right now.
what other factors may those be?
The expenses alone that you can utilize to reduce your gross income--internet service, advertising, phone, and whatever other expenses you might have that I have no way of knowing.
ok so some of those expenses would be deductiable under a sole proprietor but not under a s corp?
They would be deductible for both, but the S corp would have to file its own tax return, issue a K-1 to you for the profit or loss, and then you would utilize that number in your personal 1040. Why prepare two tax returns when you can utilize one?
well if the cost to prepare 2 tax returns is going to be less than 5500, why not?
I guess that is your decision ultimately. I can only give you my opinion.
gotcha..so in your opinion..what would be your magic number in net profits were your opinion would change to the s-corp?
There is no magic number for me in this instance. You are one person who can utilize a Schedule C with your personal 1040 or form an LLC as a sole proprietorship and utilize Schedule C. I like to keep things simple especially when it involves taxes. Unless you are planning to do everything yourself for the S corp, you may require the services of a bookkeeper throughout the year to track expenses correctly and then require the services of a professional to prepare the corporate return. You will then have to wait for the K-1 to be generated in order to file your personal 1040.
gotcha..ok just a couple more questions if thats ok?
All those "little" fees and costs add up, so in the long run it may not be worth it.
gotcha...if i have a c-corp and i pay myself as a sub contactor, isnt that effectively an s-corp? doesnt it get taxed the same? its basically flowing thru to the sub-contactor, correct?
No. The C corp is paying you as a subcontractor and you would report that income on your Schedule C. The C corp will then file its own tax return and pay tax on any profit. So the C corp and you will pay taxes--kind of double taxation.
what is the c corp has no profit?
Then there is no tax for the C corp but it would still have to file its own return.
so if the c corp has no profit the only difference between that and the s-corp is the extra tax return to file?
As I said earlier, both the C corp and the S corp must file their own tax returns. The only difference is with the S corp being a pass-through entity, whatever profit or loss is passed on to you.
which would be the case if the c-corp didnt have to pay any taxes..so its effectively very similiar, correct?
No. The C corp is in and of itself responsible for itself, i.e., file a tax return, etc. An S corp is a pass-through entity that files a return but never pays any tax because whatever profit it generates gets passed to you.
i get it...the s-corp is better if you have a loss because the loss would deduct from your personal returns..got it
ok one last question
if state corporate taxes can be used as expenses on federal income tax is there really a point to going to a state with 0 corporate taxes if paying state corporate taxes can deducted anyways?
I guess the answer to that is that it's a toss up.
but you get the question, correct?..if i operate in state X..and they charge me 1500 in taxes...those would be deductible from my federal tax return, correct?..so i would get a credit for 1500 basically
You are correct. I understood what you were asking, but it would be your decision.
Right. Keep it simple.
ok one last tihng that came to mind..so for a c-corp..if if has a loss that cant be deducted from my personal returns, correct?
That is correct. A C corp is never a pass-through entity.
perfect..ok you have been alot of help..i appreciate it
do you do any tax work other than here?
It has been my pleasure to chat with you this afternoon. Please remember to rate my service to you so I will get credit for answering your question. I work for H&R Block during tax season--this will be my 15th year. If you have any other questions, please remember to ask for me BKB1956 and I will be happy to assist you. Happy New Year!
happy new year
hope you are well
i was talking to another accountant friend i got and she told me that an LLC with a sole member can file for S-CORP status? I remember you told me that sole member LLC's cannot have S-CORP status, was she mistaken?
Hi, Rich. Thanks for getting back to me. Yes. As a sole member, you can elect S corp status, but remember you will then have to file a tax return for the S corp (1120S) with the profit/loss flowing to you. Let me know your thoughts.
ok she mentioned something about one either the LLC with the S-CORP or the LL no S-CORP having the benefits of additional tax savings when it comes to fica and payroll taxes. do you know what she was referring to?
what are the tax benefits of the LLC-SCORP to the LLC no S-CORP?
If you form an LLC and elect subchapter S status, the LLC would pay you a salary and would be responsible to issue you a W-2. By doing so, the S corp would be responsible for paying its share of payroll taxes and you would pay federal withholding, etc.
If you form an LLC and are a sole proprietor, you would be responsible to pay federal income tax on your ordinary income as well as self-employment tax (ss and medicare). However, you would receive a CREDIT/DEDUCTION for 1/2 of the self-employment tax which reduces your taxable income.
hope you are well.
i ended up incorporating and LLC in Wyoming.
I am getting ready to send over W9 to the companies i am working with.
Im unsure of what info i put on the W9. My info or the LLC info?
ok so i dont have to put my name on the W9.
I did apply for an receive an EIN for the LLC. I DID NOT however apply for any C or S status so its a disregarded entity i believe.
You are correct. Use the LLC name and EIN number for all W-9's.
Congratulations on the formation of your LLC!
ok if im going to use all the LLC data on the W9 then which checkbox do i check where is says "Check appropriate box for federal tax classification"
Yes at this point it is the sole proprietor status.
on another note. i need to get a credit card for my new LLC but cannot get approved.
Can i take out a secured card in my name and use that strictly for the LCC. Will this cause any tax problems?
My opinion is that you can take the card in your name, but as you said, use it strictly for LLC purposes. Keep accurate records for this. Since you are a sole proprietor/LLC, you will be utilizing the 1040/Schedule C when reporting your income and expenses.