If I'm a 1099 contractor running my own business (i.e. no other employees - I'm a commercial real estate broker), should I be setting up an S-Corp to save on the self employment taxes? I understand that Congress may do away with this concept moving forward, but I'm expecting a large commission this month and may try to set it up by the end of the year.

My understanding is if you set up an S Corp, that you pay yourself a "reasonable" salary and the remainder can be taken as a distribution/dividend, avoiding the self employment taxes (medicaid, social security, fica, etc.)

Does anyone have anything that they can share as to the do's and don't s, as well as whether this is a good idea?

I have earned about $95K (after my 50/50 split with my firm) to date and can make another ~$55K (net to me) this month...

12/7/2012 6:26:26 PM

LLC with an S election.

It's $200/yr but it you don't have to keep records of minutes/bylaws. I've seen the IRS pull s-corp status for that before.

12/8/2012 12:03:34 AM

^I agree, LLC is a better option than an S-Corp for what you're doing. Although keeping meeting minutes is a very simple matter, and bylaws takes an afternoon to draft.

Yes you will avoid self-employment taxes, which in NC are ridiculous. However you will still be liable for the 3.8% Medicare tax even on distributions (because you will be both a shareholder and employee) in NC.

The MUCH better approach if you are going to incorporate is to take an absolute minimal salary, and to LEAVE the rest in holdings within the s-corp. Pay for everything business related directly from the checking/credit of the business. In my years of running my own businesses, I was able to redirect almost 75% of my yearly expenses through the business.

You have to be prudent doing this, you cannot expense everything (which is a very easy temptation), and you will likely be audited within your first 2-3 years taking this approach. But doing so is 100% legal and is a great way to avoid taxation on a significant portion of your gross income since you are talking about <250k a year in gross income.

You should definitely consult with an accountant to determine how much of your current personal expenditures will qualify as business expenses, and you have to take the time to learn the rules to make sure you stay in compliance.

12/8/2012 12:27:55 AM

Quote :

"LLC with an S election"

yep

basically form a single-member LLC with you as the only shareholder, but you'll file a year end 1120S form, as well as a K-1 for 'each shareholder' but that will be the exact same numbers as the 1120S Schedule K since you're the 100% shareholder

12/8/2012 12:28:56 AM

you'll pay self employment tax as an LLC unless you do the s election, in which case you (the company) will be paying a payroll tax since your pay will be a wage instead of a guaranteed payment.

12/8/2012 4:17:19 PM

Has anyone ever done an LLC with the S election? I've never heard of the S election part, which is why I'm asking.

Also, how do you know how much taxes to withhold? I don't want to pay a pay roll company when I"m the sole owner/employee...

12/8/2012 4:38:59 PM

file a form 2553 for the s-election

12/8/2012 4:59:23 PM

^^ You can use this to get an estimate http://www.paycheckmanager.com/FreeCal/free_payroll_calculator.aspx

You will have to register with the state to get a withholding ID. And frankly you should consult with an accountant for ALL of this. Its very easy to get in hot water with the state department of revenue and the IRS for botching this shit up. Paying an accountant for a few hours to get you setup and explain your processes to you is a very minimal and worthwhile cost.

12/8/2012 6:08:42 PM

i'm in a similar, though hardly identical, situation and looking to get SOMETHING set up in the next day or two

i need to form a company of some kind (thinking LLC) in order to take on some contract work being paid by a federal grant...for now, we're not talking enough work to constitute anything close to a living income, and the extra income isn't going to push me into a different tax bracket (i WISH i had that problem )

however, i'm trying to look forward enough to do this right the first time...i suppose there's the potential for me to quit my job and do contract work full-time, but it won't happen for several years

so what are y'all's suggestions? just don't worry about it for now and do the basic LLC for $125? or something else?

and then, while i'm asking questions about an LLC...member-managed or manager-managed? it's just me and i don't (ever) anticipate having any employees or partners

one last question...i assume it's a good idea to set up a separate bank account for business stuff (even if it's not that much money)? if so, who do y'all use? i haven't researched this, yet, but i've heard that business accounts have some annoying check-cashing fees, high minimums, etc...and again, at this small level of income, that's something i'd like to minimize (i mean, who wouldn't?)

1/8/2013 9:47:14 AM

I like First Citizens for my LLC checking account. No fees (up to a certain number of transactions per month). It also is open to sync with Outright.com (which is like Mint.com but focused on businesses).

1/8/2013 10:00:50 AM

^^I just started an LLC through Rocket Lawyer (still processing). If you do it right, you'll only pay the $125. Here's how:

-Opt for the Pro service, which waives the $99 processing fee. You get a 7 day free trial. Cancel immediately.
-File your own EIN, save $40.
-Be your own registered agent. Save $99/year. I'm a little bit nervous about this one, but I don't think its' a big deal.
-Don't select any extra bullshit and when they call you days later, don't buy anything else.

The one thing I'm worried about now is an LLC Operating Agreement. They're not required and I don't know if they make any sense for a single person, but everyone says you basically have to have one to be legally considered an LLC. I don't want to fork out the money for one though.

Also consider you will be paying the $200 annual fee in 3 months, which I think is stupid.

1/8/2013 10:15:18 AM

^ are you in NC? if so, i think you HAVE to have the articles of organization (which is $125): http://www.secretary.state.nc.us/Corporations/Forms.aspx?PItemId=5429715&Type=LimitedLiability%20Company

and is that $125 a fee per year or one-time setup fee? i thought the latter, but you make it sound like it's the former (and i don't claim to know, it was just an assumption on my part)

1/8/2013 10:31:22 AM

^Yes. I'm assuming the articles of organization are what Rocket Lawyer submits for you. Never said they were optional.

The LLC Operating Agreement is something different. You definitely don't have to file it with the state and it's not required to have, but a lot of people online are claiming you should write one. RocketLawyers wants like $400 to give me access to that and several other documents. No.

I was describing the one time $125 fee. The annual report fee is $200 and must be paid starting the April after the company is formed (3 months from now).

Good resource: https://docs.google.com/viewer?a=v&q=cache:yKiYFOeYJu4J:https://www.secretary.state.nc.us/corporations/pdf/LimitedLiabilityCompany.pdf+&hl=en&gl=us&pid=bl&srcid=ADGEESh-465spJgq2ES9clWBRifBG6fpYjIDdV0vHua3MMnCccbLsm09NelhZNsmtOiaZHTnI37F40M6Mw7Q2ESRZwGwFysTI8ej0ZYiNc9hZKWNfOU9ucbuXS-EYB95psnOFCygYKMT&sig=AHIEtbRlMP_MmnLf2wbTHF4LpFuNYYgVMw

[Edited on January 8, 2013 at 1:00 PM. Reason : asdfasdf]

1/8/2013 1:00:01 PM

^ ah, sorry, i read "operating agreement as "articles of organization"

that annual report fee is bullshit (especially only 3 months after filing)...and so is the nearly $80 the city of raleigh requires for you to operate a business out of your home

i wonder what would happen if you set the date on the articles of organization to be after april...would you still have to pay the bullshit $200? doesn't really work for me, as i'll need to use the company before then

1/9/2013 10:58:50 AM

^Ok. I think misread something about when the first report is due. I swear I read it somewhere, but this is what the official document says and it seems to imply if you make it in 2013, the fee is due April 2014.

Quote :

"Annual Report Due Date and Fees The first annual report is due on April 15th of the year following the creation year and every year thereafter on or before April 15th. The annual report may either be filed electronically or a pre- populated annual report may be downloaded online and mailed to the NC Secretary of State’s Office."

You know, in retrospect, $125 for the first year + 3 months is really cheap.

Quote :

"and so is the nearly $80 the city of raleigh requires for you to operate a business out of your home"

wot?

[Edited on January 9, 2013 at 11:19 AM. Reason : derp]

1/9/2013 11:15:07 AM

^ you have to get a raleigh business license if your business is located (or you operate) within the city limits: http://www.raleighnc.gov/home/content/Finance/Articles/BusinessLicenses.html

on the second page of the business license PDF they have on the site (the first is just instructions), it says: "Each business must have a principal location. A business is considered to be Home Based if the principal location of the business is a residence. This includes businesses of a mobile nature such as construction companies, mobile car repair, power washing, repair services, peddlers, etc." and then asks you if your principle location is within the city limits and if it's home-based

if so: "you must obtain a Home Occupation Use Permit from the Zoning Division of the Inspections Department before applying for a Business License"

following that, you go to the raleigh home occupation guidelines site: http://www.raleighnc.gov/home/content/Inspections/Articles/HomeOccupationGuidelines.html

at the bottom, it notes a permit fee of $78

[Edited on January 9, 2013 at 1:16 PM. Reason : links]

1/9/2013 1:06:40 PM

can someone explain the benefit of the s-election for an LLC?

1/10/2013 11:07:24 AM

If I want to deduct expenses from a side business which are > 2% of my agi would I need to set up an S Corp, LLC, or neither?

1/10/2013 1:07:23 PM

S-corp dividends are subject to corporate taxes AND personal income taxes, so you run the risk of double taxation this way.

LLC is more expensive/year but if you are a single entity owner its pretty simple and easy to run

1/10/2013 1:22:05 PM

^ is that response in regards to my question about s-election for an LLC? if so, can i get a concise "vanilla LLC vs LLC with S-election" (in NC, if you know the details) comparison?

i realize i probably SHOULD consult an accountant and/or lawyer about this...but in my case, this isn't going to be my livelihood by any stretch of the imagination and for right NOW, i'd love to get y'all's take on it (since you obviously know far more than i do)...when i eventually DO see a lawyer or accountant, i want to have the basics down...and i'll come back to this thread with anything else i find out

so right now, i understand the differences (and please correct me if i'm wrong) to be:

VANILLA LLC
cost: $125 (SOS filing), $50 (business license), $78 (work from home permit), $200/year
pros: all income can go to me (owner and only member)
cons: income AND self-employment tax (so pay more to the gubment), gotta keep minutes/bylaws?

S-ELECTION LLC
cost: same as vanilla (or is there an additional cost for becoming S-corp?)
pros: no self-employment tax (payroll tax instead?), don't have to keep minutes/bylaws?
cons: can't take all of the money earned (or do i just give myself a "salary" of half and then the other half as dividends?)

1/11/2013 8:49:56 AM

As mentioned, scorp is going to mean potential double taxation, a standard LLC won't. You shouldn't be subject to self employment tax through either.

and here's the thing, yes you can split pay between salary and dividends, but the whole point of creating a company is to act as a shelter between you and another entity. The best option is to leave as much cash as possible IN the business entity. You should spend as much as possible through the business (see my earlier advice) and then only pay yourself the minimum amount necessary.

And if you're talking about more than 5-6k a year, its worth paying a qualified account for an hour or two of consultation time.

1/11/2013 11:53:48 AM

Sales tax in NC when selling software: http://www.dor.state.nc.us/taxes/sales/impnotice0210.pdf

As far as I can tell (I am not a lawyer), the only kind of software that needs to be taxed is consumer software. I was a bit worried until reading that.

1/14/2013 4:29:35 PM

Quote :

"scorp is going to mean potential double taxation, a standard LLC won't."

s corps and LLCs are both pass through entities, so all profits are taxed as income to the owner, no double taxation as with c corps.

that being said, an LLC is probably better

1/14/2013 4:48:37 PM

Can anyone shed some more light on this "pay yourself a salary/dividends" deal. I mean... how the hell does that work, am I then considered my own employee, and do I have to withhold?

1/15/2013 8:53:17 PM

^^ True, I was thinking about payroll tax withholding on salary vs. dividend distributions.

Quote :

"The S-Corporation will pay the employer's share of FICA taxes (7.65%), and the employee will pay the other share of FICA taxes (also 7.65%). Between the S-Corporation and the shareholder, wages are subject to a combined 15.3% payroll tax, plus the shareholder's income tax rate. Profit distributions, however, are not subject to FICA payroll taxes; they are subject only to the shareholder's income tax rate. So all things considered, the shareholder-employee will have a strong preference to pay herself a minimal salary and thereby increase the profit distribution."

Which is why, with an S election, you want to minimize salary and maximize dividend distribution.

1/15/2013 10:03:46 PM

correct, but you could run into issues if/when there are other shareholders. with an s corp, dividends must be paid equally based on ownership shares, whereas you have more leeway with LLCs.

^^with scorps and LLCs, the method by which the profits get to you is really irrelevant for your income tax purposes...I think there are some caveats based on passive vs active income, but as a general rule profits = income to owners. With c-corps, however, you can own all the shares in a company, pay yourself a set salary which would be income then pay dividends based on share ownership which would be taxed as dividends....that's where the double taxation comes in, since youd be taxed at the corporate level, then personally too.

1/16/2013 12:39:55 PM

Quote :

"I like First Citizens for my LLC checking account. No fees (up to a certain number of transactions per month)."

thanks for the recommendation...i opened my account with them a couple of weeks ago

it's pretty basic, but there's no account minimum (they even waived the $100 that's supposed to be required to open it), free debit card, and there first 175 transactions per month are free

3/30/2013 11:06:27 AM

I got them recently also. The only thing is I think they set you up with a $3 monthly fee for paper statements and I can't figure out how to set up an online account without calling in... which I loathe doing. The log in asks for two different IDs and "how do I know my customer ID?" on the log in page is a dead link.

3/31/2013 8:20:15 AM

I discussed this with my CPA a bit.

Regarding my business, he recommended staying an LLC. The costs of the extra administrative and oversight work of an S-corp would really outweigh the benefits.

3/31/2013 8:58:38 AM

Quote :

"The log in asks for two different IDs and "how do I know my customer ID?" on the log in page is a dead link."

the woman at FC set it all up for me while i was there, and it was written in the packet she gave me

the first customer ID is your "company ID" (so something like "mycompanyname") and the second is your specific user ID (you are most likely "admin")

going paperless was a little annoying (their online portal kinda sucks, IMO)...i can double-check the process later and get back with you if you can't find it (i had to poke around a bit)

3/31/2013 10:53:18 AM

Using your advice, I finally got in. Holy shit is it awful. I can't figure out if there any way to transfers to external accounts... it appears not.

4/21/2013 8:35:59 PM

can anyone give me a good reason to keep my LLC? the contract paid out before july and my working situation may be changing so that i can't receive additional contract work, anyway (which will actually be a good thing, i think, so here's hoping!)...i don't anticipate needing the LLC for anything else over the next couple of years

i assume the only drawback is that if i want to set it up again, i have to pay all of the initial fees?

8/22/2013 10:47:12 AM

Yep, basically. Cost of yearly registration versus re-regristration

8/22/2013 2:36:35 PM

anyone have a recommendation for a tax adviser in the area? just want to square some things away before i make some business decisions

9/26/2013 10:23:02 AM

just take your LLC offshore and turn it into a laundry


for money

9/26/2013 6:59:35 PM

I did a S-Corp as I'm an independent contractor and wanted to shelter my income. After consultation with my CPA, they said it makes most sense for me over $110K of income, which I cleared back in June...

9/26/2013 9:27:28 PM

nice brag

9/30/2013 2:00:36 PM

so i have an LLC that, so far, has me as the only employee...the guy administering the contract asked me if i'd be willing/able to funnel a one-time payment for a short-term (1 month) temp through my company as an employee to make his life easier

there's nothing shady in it...they would pay this temp as a contractor using 1099-MISC and not paid any of their FICA taxes...which is all i'm thinking i'd do...it's just that he has more hoops to jump through and was wondering if i could save them the time and money associated with hiring a temp

it's paid out of the same contract i'm paid out of, and i'd be working with this temp, so again, i don't see any problem with it...i just figured i'd check in with y'all and see if any of you have "hired" a person on a short temporary basis and to get an idea of how much work it was

and yes, i have an appointment with my CPA (who actually consulted with me for free when i first set up the LLC), but it's not until the end of next week, so it can't hurt to get y'all's input

2/5/2014 10:07:39 PM

^fuuuck no you shouldn't do it. You could very easily find yourself in a courtroom for employment tax fraud. That sounds shady as hell.

We have corporate compliance and ethics training, and this is a pretty classic case. Normally this happens when the Contractor with the parent company is either a) embezzling money, b) trying to coverup embezzlement or c) trying to shift money around temporarily to cover their asses for some other financial screwup that they think they can sort out with more time.

In all cases, they get caught, fired and in the first two cases, prosecuted. And the contractee who goes along with it gets audited and blackballed as a vendor.

2/6/2014 6:25:07 AM

Quote :

" You could very easily find yourself in a courtroom for employment tax fraud. That sounds shady as hell."

how, though? i'm not necessarily disagreeing with you (like i said, i don't know and i AM asking a professional next week)...i'm just not sure who's being defrauded

the funds are discretionary...they'd pay the temp the same way i would, which puts the tax burden on the temp, so the taxes would be paid the same way

in fact, wouldn't the gov get double the tax money? if i were given the extra money to pay the temp, i have to pay taxes on that and then the temp has to pay taxes on what i pay them (or maybe that's why it's fraud?)

in any case, how would this be any different than if *i* said i wanted to hire a temp (since i'm a contractor with my own "company") and billed them for the extra money?

[Edited on February 6, 2014 at 8:09 AM. Reason : .]

2/6/2014 8:08:44 AM

just pay him under the table

it's easier

2/6/2014 11:37:27 AM

yes, it would be...and in some cases, i wouldn't think twice

but this involves some government money, so i'd rather not risk it

2/6/2014 12:58:28 PM

http://www.taxattorneydaily.com/topics/ch-11-small-business-self-employed.php

The two most common cases I've seen for this are:

1) They are skirting employment laws. The contractor might be legally obligated to be treated as a full time employee. By laundering the 1099, it conceals the contractor status from the IRS. The IRS is incredibly aggressive in enforcing 1099 contractor status.

2) The contractee is attempting to hide, misrepresent, or otherwise "cook the books" with reporting payroll and income tax liability.

In either case (and any other), what you're doing isn't legal. A single entity LLC/S Corp is a special case. Them paying you, to pay another contractor would, by definition, make that person your employee. Which means they can very easily claim no fault in the situation, leaving you with a audit and being forced to pay payroll and unemployment taxes. If they are an independent contractor, then the company has to bill the independent contractor.

https://theaccountspayablenetwork.com/html/modules.php?name=Articles&file=print&sid=556

Read more here about the Middleman Regulation. By those simple rules, you cannot act as the payment source because you aren't the person with principal control over the payment.

2/6/2014 11:12:27 PM