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If someone is a 1099 employee can they incorporate and wo…

Hello, if someone is a...
Hello, if someone is a 1099 employee can they incorporate and wo things like a home office, driving and their cell phone? Also how would their employment taxes be handled if the incorporated?
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Answered in 1 minute by:
3/14/2018
Richard
Richard, Attorney
Category: Business Law
Satisfied Customers: 57,233
Experience: 32 years of experience practicing law and a businessman.
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Hi! My name is Richard & I will be helping you today! It will take me a few minutes to type a response to your question. Thanks for your patience!

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Good morning. Yes, the 1099 person can form a limited liability entity and deduct business expenses incurred in connection with earning their income, including home office, car expenses/milegage, and cell phone. But, I would suggest you form an LLC and then elect for it to be taxed as an S Corp.

Finally, the big difference between corporations and LLCs is tax-related. A regular C corporation would probably not be your option due to the fact it's not a flow through entity and could create a possibility of double taxation for you. Both the LLC and the S Corp are limited liability entities meaning your personal assets would not be at risk for the debts and liabilities of your entity. And, both are "flow-through" entities for tax purposes...meaning that the entity does not pay taxes; rather the operations of the entities flow through to your own personal tax return. The LLC is more flexible as it allows for preferential allocations of profits and losses, but if you are a single owner, that probably doesn't make much difference. The LLC also is a bit less cumbersome administratively as your filing requirements. And, unlike an S Corp, the LLC is not required to have formal meetings and keep minutes of those meetings. The biggest issue with the LLC is that as the owner of an LLC, you are considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. With an S Corp, if you work for the entity, you must pay yourself 'reasonable compensation.' Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' Unlike an LLC, where you are subject to employment tax on the entire net income of the business, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is either taxed at a lower rate or or not at all depending upon the particular facts. BUT, as shareholder, you must receive reasonable compensation. If you get greedy by paying yourself a lower salary with the resulting higher distributions, you risk the reclassifying your distributions as wages. Typically, the best solution is to form an LLC and then elect for it to be treated as an S Corp for tax purposes; this results in the best of both worlds...the flexibility of an LLC and the advantageous self-employment tax treatment of an S Corp. :)

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Just following up. My screen indicates that you have not reviewed my response. Please let me know if you did not receive it so I can re-send it if necessary. Thank you!

If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as Good or Excellent (i.e., 4 or 5 stars)(hopefully Excellent/5 stars!). Otherwise, I receive no credit for assisting you today. I thank you in advance for taking the time to provide me a positive rating!

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Customer reply replied 5 months ago
Hello, thank you for the info. If I was just a regular 1099 employee and not incorporated would i still pay the self employment tax?

You're very welcome. Yes, you would.

Richard
Richard, Attorney
Category: Business Law
Satisfied Customers: 57,233
Experience: 32 years of experience practicing law and a businessman.
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Thank you so much for the 5-star rating! I know rating takes an additional step and I truly appreciate you taking the extra time! It's been my honor and privilege to help you with this. If I can help you in any way in the future, I'll be happy to help. For easy access, my bookmark is: www.justanswer.com/law/expert-legalbeacon/ . Or, simply request “Richard only” in the first line of your question.

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