Have a Tax Question? Ask a Tax Expert
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If you daughter is self-employed in addition to her job, she can utilize Schedule C (sole proprietor) to report her income and expenses from her self-employment income. As such, she will be required to pay self-employment tax on this income.
She can also form an LLC or S corporation for the self-employment income. An LLC is a disregarded entity for tax purposes by the IRS, so she would utilize Schedule C in this case as well. Forming an LLC would offer her liability protection for herself individually if she feels that may be an issue. An S corporation is a pass-through entity whereby it files its own tax return (1120S) and issues a K-1 to the shareholder (your daughter). She would also be required to pay herself a "reasonable" salary from the S corporation. The information from the K-1 would be included on her personal 1040. As with an LLC, an S corporation would also offer her liability protection for herself individually if she feels that may be an issue.
On a different note, your daughter may want to consider purchasing a house to allow her to take the mortgage interest and real estate tax deductions to lessen her taxable income.
Please let me know if you require additional information or clarification.
Thank you and best regards,
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She is favoring Sub S where she would loan in $10,000 to fund it. Projected initial income in range of $150 a week
Projected expenses about $1200 monthly
This would include car lease, fuel, rent , phone, web site expenses, interest on loan, etc.
It would show loss for the first year or two but then looks like projections would be profitable
These initial losses -- say $6000 to $7000 a year could go against her W2 inclome? Is that correct? Thereby reducing her tax liability quoite a bit
She feels that over a 3 to 4 year period she could build this to about $1000 a week
Thank you for your follow-up question.
If your daughter goes with the S corporation, keep in mind that the S corporation will have to file its own tax return and issue your daughter a K-1 with information to be included on her personal tax return (1040). Based on the information you are giving me, the K-1 may very well show a loss to your daughter initially which will offset her W2 income. As I stated earlier, please keep in mind that the S corporation will have to pay her a reasonable salary (which is an expense for the S corporation) but she will receive a W2 from the S corporation as well.
is it absolutely necessary that she draw a slary as W-2 from this company? specillay in the first year or two
If it must be , can she do it as having company send her a 1099.. rather than all the complexities of a payroll with all withholding, etc
Basically company would have her do services as an independent contrcator on a personal basis.. will that work?
Thank you for your follow-up.
The IRS has gotten very strict regarding the payment of a salary to a shareholder. The issuance of a 1099 will not satisfy their requirement. Based on what you are saying, your niece (my apologies for referring to her as your daughter in my previous answers to you) may do well for the first year or two to utilize Schedule C before making the decision to form an S corporation. She will then be able to evaluate her situation to see if it is truly feasible for her to go through the logistics and expense of forming the S corporation and meeting those requirements, filing a tax return for the S corporation, etc.
Please let me know if I can assist you further.
So to clearly understand this:
IRS requires that she take a salary W-2 at market value for the services she performs for the company to make money for the company? Correct?
If she goes Sub S route then she should best retain an accountant or a payroll service to do al;l the propewr filings for with-holdings on W-2? I guess yes as she has no finance background.. Unless something like Quick Books could make this easy and she would use this anyway
Could she elect NOT to take any salary as an employee? or would the IRS in an audit want the books adjusted to reflect a proper W-2 compensation in each tax year?
The salary should be reasonable for the type of work, geographic location, etc.
Since she will be the only employee, my opinion is that she probably will not have to utilize the services of an accountant or payroll service. QuickBooks would probably be what I would recommend.
She may get by without taking a salary in the first couple of years, but as I stated, the IRS has become very strict in this regard. Basically, the IRS is saying before profits (if any) can be distributed (K-1), the S-corporation must first determine to what extent any of those funds represent compensation for services rendered as an employee (salary).
Once again, Douglas, your "excellent" rating is most appreciated.
Please keep me in mind for any future questions you may have, and extend my best wishes to your niece in her business venture.