How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Barbara Your Own Question

Barbara
Barbara, Tax Preparer
Category: Tax
Satisfied Customers: 953
Experience:  Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Type Your Tax Question Here...
Barbara is online now
A new question is answered every 9 seconds

My niece has a managent position with an MA degree in a medical

Customer Question

My niece has a managent position with an MA degree in a medical firm, earning W2 $68,000 a year. She is 28, single, rents, and has no deductions. She has been doing work at night and weekend with clients on family counciling

Should she fund and start a Sub S coproration . She uses RR to work, and car is mainly for seeing clients. I feel she could be taking advantage of a better tax situation using this sub s. In the first few years as she build this business i am sure she would show losses (funded by loans into firm to capitalize it). These losses would help to offset some of her W2 income and lowe r her overalll income taxes.. We are in Long Isalnd NY

Is this a good idea
Submitted: 9 months ago.
Category: Tax
Expert:  Barbara replied 9 months ago.

Welcome. My name is XXXXX XXXXX it will be my pleasure to assist you with your tax question today.

 

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,

Barb

Barbara, Tax Preparer
Category: Tax
Satisfied Customers: 953
Experience: Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Barbara and 4 other Tax Specialists are ready to help you
Expert:  Barbara replied 9 months ago.

Hi, Douglas.

 

Just a short note to thank you for the "excellent" rating. It is most appreciated. If you have any questions in the future, please feel free to put "for bkb1956 or Barb" in the subject line, and I will be happy to assist you. Recommendations to family, friends and colleagues are also most appreciated.

 

Have a great day!

 

Barb

Customer: replied 9 months ago.

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

Expert:  Barbara replied 9 months ago.

Hi, Douglas.

 

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.

 

Thank you.

Barb

Customer: replied 9 months ago.


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?


 


 

Expert:  Barbara replied 9 months ago.

Hi, Douglas.

 

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.

 

Best regards,

Barb

 

 

Customer: replied 9 months ago.


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?

Expert:  Barbara replied 9 months ago.

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).

 

Thank you.

Barb

Barbara, Tax Preparer
Category: Tax
Satisfied Customers: 953
Experience: Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Barbara and 4 other Tax Specialists are ready to help you
Expert:  Barbara replied 9 months ago.

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.

 

Barb

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.