Hello, Because of recent tax reform...
Because of recent tax
reform, does it still make sense to create single member LLC
with S-Corp tax election for an independent IT consultant who works currently on W2 payroll for NYC based company but has an option to switch to corp to corp arrangement? I don’t expect answer to all of the following questions immediately it can be even next week if you need time to do analysis, just let me know if and when you will be able to provide answer.
I live in NJ but I work in NYC and I was planning
to set up single member LLC with S-Corp tax election through online incorporation service that will provide registered agent as well as primary business address in Albany NY. That will allow me to save on foreign
qualification costs had I set up LLC in NJ and also it will save me some costs on NY publication requirements because address is in Albany and not in NYC where publishing costs would amount to few thousands. Based on my own research this is what I understood so far but I need your opinion:
1.Having LLC with S-Corp election, with primary business address in Albany NY but working in NYC for NYC based company, what taxes I would have to pay?:
- LLC doesn’t pay taxes because it is a pass through entity and income
(70% in under the new law
?) is passed to sole owner who reports all profits (or losses) of the LLC on Schedule C
of 1040 tax return
-The 70%/30% rule of business income as a salary doesn’t apply to service based LLCs which would be mine (software
consulting services). Service based LLCs have to pay 100% of business income as a salary? Can you confirm?
-I will have to pay myself reasonable salary on W2 as an employee (or contractor?) (under new tax reform at least 70% or 100% of all business income of the LLC?) and withhold self-employment
tax on this (12.% on the first 127,200 and 2.9 on all 70% or 100?).
-The 70% or 100% of business income would be my salary which I would report on my W2 and file tax return.
-I will have to withhold NY income tax on that 70% but not NJ income tax. I will file regular individual tax return
for NJ as usual and claim credit
for taxes paid in NY.
-The remaining 30% of LLC business income will be passed through and reported on my individual tax return on Schedule C and it will be taxed appropriately. I will save on self-employment tax on those 30% and I will save on NY income tax too?
-There is also the 20% deduction
of allocable share of business income available to S-Corp shareholders
. But the deduction cannot exceed 50% of my share of the W2 wages paid by the LLC. And also this deduction is not available to service based LLCs with taxable income
more than $157,500? Can you confirm I would be eligible for this deduction? And what this deduction actually is? It allows to deduct cost of something up to 20%, what is this deduction for?
2.I found that NYC may impose additional tax on LLC with S-Corp election. Following states
that: “New York City does not recognize the S election. The New York City S-Corp and the S-Corp that earns money in NYC must pay the NYC corporate tax
of 8.85% with respect to any income that is earned in New York City.” Further, with regards ***** ***** without S-Corp election: “New York City imposes an Unincorporated Business Tax
on the single member Limited Liability Company. A special UBT return is required and a tax of 4% is applied. This tax is imposed after the first $95,000 of income.”
-So it appears NYC imposes additional tax on LLC. Can you confirm that?
-For my LLC with S-Corp election registered in Albany NY, but having contract with NYC based company, what NYC tax would I have to pay, if any?
-Would not electing S-Corp treatment and having regular LLC save on taxes (4% Unincorporated Business Tax after the first $95,000 as opposed to 8.85% for S-Corp)?
3.Also, with regards ***** ***** state taxes, I would have to elect S-Corp explicitly (NY state doesn’t recognize Federal
election automatically) and then as a non-resident (I live in NJ) I would have to pay tax on distributions
from my LLC. Can I have S-Corp election for Federal but not for NY state? Then, I would be able to save on the tax on distributions because nonresidents
don’t have to pay it?
4.I also found that in NY state LLC with no S-Corp election pays corporate franchise tax
as C-Corp whereas S-Corp pays fixed minimum tax based on NY receipts. Can you confirm that? Which one to choose then to save on taxes?
5.Can I do anything to save on those NYC and NY state taxes? If not how are those paid, how often? LLC is pass through entity and is not supposed to pay taxes, can you confirm that this is true for NY state as well as NYC?
6.Is there any other Federal NY state, NJ state or NYC tax I need to be concerned about?
7.How to classify business income of my LLC? Should it be consulting income, sales
income or something else? Would I have to pay Federal, state or city sales tax on my services?
8.Would my W2 salary and commute,meals,laptop, apt rent be business expense
and tax deductible