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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10894
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I'm being hired for a new job. They want to pay me as a 1099

Customer Question

I'm being hired for a new job. They want to pay me as a 1099 consultant. The total amount is $150K. They liked to pay it in 2 installments as a commitment for to me for relocating. The first $75K would be in a week when the contract is finalized. The second would be when I arrive in the new location in 2 months.
Should I open an LLC or S-Corp to accept that money? And pay myself through that. Should I ask for the second installment to come in the new year so the whole $150K isn't all in the same year?
Thanks for any help!
Submitted: 6 months ago.
Category: Tax
Expert:  Lane replied 6 months ago.

Hi. My name's Lane ... I can help here.

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You don't have to do either ... but OF the two, I'd recommend the LLC ... Much simpler to set up and operate, and provides the corporate liability protection of a corporation without the additional administrative overhead.

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With the S-Corp, you'll have to set up a salary for yourself, file quarterly 941 payroll tax returns, create a w-2 for yourself, pay payroll taxes at least monthly, etc.

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With the LLC you simply file the article of organization wit the Sec of state. The articles may be filed online or by mail. The filing fee is $40.

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You'll then (rather than having to file a separate tax return for the S-Corp (1120-s)), simply report your income and expenses on a schedule C. The profit (or loss) from that then flows to line 12 of your tax return.

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No salary, you'll simply live off of your profit.

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And yes, requesting that the second installment come in the next tax year is an excellent thought. Will most certainly keep you in a lower tax bracket for both years)

Expert:  Lane replied 6 months ago.

Don't forget that moving expenses are deductible on the front of the 1040 (an above the line - before AGI - deduction)

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. … Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

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Thank you!

Lane

I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Customer: replied 6 months ago.
Hi Lane,You said I don't have to do either? I was under the impression that opening an LLC and putting the money there besides adding the additional protection would also help me keep more of the income? As in paying less taxes? I know as a 1099 I will need to keep all my receipts and that a few of them will be Business expenses so I can get some of that back. Just seems like a lot of money to just dump into my personal account. How would I pay taxes on that?I guess in short Lane I'm asking what would you do that makes the most sense?
Expert:  Lane replied 6 months ago.

So sorry. no, both the LLC and the S-Corp are what are called passthroughs... With the S-Corp, you are required to pay yourself a salary (which shows up on line 7 of your 1040) and then incremental profit flows to you on a K-1 ... but it all ends up on the 1040. (Line 17)

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With the LLC, it's less convoluted. There's no separate return; you just repport the income and expenses from the business on the schedule c and it ends up on line 12.

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In terms of how you pay taxes ... whatever PROFIT ( income AFTER expense you've deducted on the schedule C - or on the separate s-Corp return) flows to your return as taxable income.

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I would set up the LLC and get a business account (same for the S-COrp) ... a best practice for bookeeping AND preservresw the integrity of a separate entity for any creditor, lawsuit or other liability issues.

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There is one difference on the S-Corp and the LLC for tax purposes (and it has nothing to do with Federal income tax or state income tax ... those are exactly the same (and exactly the same as if you didn't register a business at all and simply defaulted to a sole proprietor - what any business is that hasn't set up a formal entity with the secretary of state).

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With the S-Corp, yIRS requires a reasonable salary for one reason ... so that you'll have to pay into Social Security and Medicare (payroll taxes) ... a sole proprietor, poartner or single member LLC does this on a schedule SE.

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But over and above that salary ... and the other expenses of your business ... also a deduction from profit, the amount of profict that comes to you on the 1120-S' K-1 is no subject to social security and medicare

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SO ... if you can make a case that you profit is well over what a reasonable salary would be (subtracting out your business expenses of course) then you can save on the SS & Medicare portion of your taxes ... on the salary you'd have to withhold and pay in and then pay the employer hale (you) as well.

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So it typically takes (especially given the payroll costs, administrative overhead and tax risk of not getting all those forms filed for the S-Corp) quite a bit of profit voer what you already MUST pay your self in salary from the S-Corp to make the S-Corp make sense.

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Now, CPA's and tax prep folks LOVE to recommend S-Corps (why?) well, doing payroll for companies is many times their bread and butter.

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Expert:  Lane replied 6 months ago.

Short answer is that I'd start with the LLC ... you can always file the 2553 to have it taxed as an S-Corp later, when you get a better feel for the profit ... AND get your arms around what your administrative costs (if farmed out) or time spent, if you do it all, will be.

Expert:  Lane replied 6 months ago.

Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

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Thank you!

Lane

I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Expert:  Lane replied 6 months ago.

My tax law professor in law school said that anyone recommending an S-Corp before knowing more about the business, is guilty of professional neglegence.

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Finance, corporate law and tax law are about tradeoffs.

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Again, the additional administrative overhead, risk of not getting the additional paperwork right (late/non filing fees, late/non payment fees) the time do do payroll, the additional cost if you farm it out, requirement to keep minutes, inflexibility of business structure, and the list goes on) is the tradeoff to POSSIBLY being able to save a little on the social security and medicare part of your taxes.

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It's the corporate liability protection of the corporation along with the simplicity and flexibility of a sole proprietorship - partnership if there is more than one owner - that makes this relatively new hybrid (the LLC) the fastest growing entity type in the nation.

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What do you think your gross revenue will look like once things settle out (yearly)?

Expert:  Lane replied 6 months ago.

Still with me? Did you see that last question?

Customer: replied 6 months ago.
Hi Lane,
Sorry I got called into work early. I apologize. Yearly salary will be $150K plus bonuses. As it's a start up I have no real clue how much that could or would be. I'd estimate conservatively $2,000, if I sell a lot of products and the events go well could be a lot more, but I hate counting money that hasn't been made. So the other option now just offered is be an employee instead of a 1099. I was attracted to the 1099 because I thought it would make the most sense financially. But if the LLC vs W-2 means I'm paying about the same in taxes? Will it make more sense to just be an employee and let the company hiring me to take on all that responsibility?
Expert:  Lane replied 6 months ago.

It almost never makes more sense purely financially, becasue as a business owner (LLC, very simple, just set it up - sole proprietor, even simpler, just start working - S-Corp, more administrative overhead) you get to deduct SO many things before coming down to the part that's taxable - profit.

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HOWEVER, based on what you just said, being a business owner isn't righ for everybody. If you don't LIKE planning, forecasting budgeting, and you have the same income opportunities (although as an emplpoyee you're likely going to pay more in taxes) you might want to consider the emplpoyee path. You can't put a price on keeping you stress lower. That's invaluable (better said, priceless) so what you'r really asking about now is whether it's a personality fit.

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If you'd like I can make an offer to talk this through on a phone consult. I've been proviing business and management consulting for the last 20 years of my career. it's likely that the best answer is in the details... when can likely be handled much better in a conversation.

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Let me know

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

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Thank you!

Lane