LLC, Corp or Independent Contractor
I apologize if this is touched on before, I am sure it has.. But I wanted to ask specifically has anyone gone from being an independent contractor to an LLC or Corp , making the same amount of money per year and saved on taxes?? Because I have read that When you are an LLC or Corp.. You pay taxes after expenses are deducted, but when you are an self employed (independent contractor you pay taxes based on gross earnings and then you deduct your expenses. But the other is completely opposite you pay taxes on whatever you have left if that is 0 income to your name after expenses then no taxes are due.. Does this make sense what I am saying?? I am thinking about becoming an LLC even though it's just me so there will be no taxes or virtually none to pay. The only thing I do not wanna do is pay all the money it costs to set it up.
Thanks.
I want to hear if anyone has gone through this and what your personal experience was.
Re: LLC, Corp or Independent Contractor
I have saved significantly on taxes via the use of an S-Corp based in a different state which does not levee an income tax. The primary benefit of an S-Corp is the fact that it allows total income to be split into two smaller components, a 'salary' which is subject to ordinary income tax rates, and a 'dividend' which is subject to lower tax rates. In comparison, LLC or unincorporated 'independent contractor' business income is all subject to ordinary income tax rates. And in comparison, conventional C corporations are effectively subject to double taxation i.e. a corporate tax on earnings plus an ordinary income tax on the 'salary' paid out by the corporation. One exception, certain states allow LLC's to elect S-Corp tax treatment, which is the best of all worlds in this circumstance because it provides the same split components tax advantages without the additional paperwork burden of maintaining an S-Corp versus an LLC.
However, forming and maintaining an LLC, an S-Corp or a C-Corp all involve initial setup costs plus ongoing operating costs. Thus an equation is formed where the tax advantages offered by a corporation may or may not exceed the initial and ongoing costs of that corporation. In my own circumstance, the 'break even' point was somewhere around the $60k annual income level versus New York tax rates ... i.e. the 'break even' point varies not only with income level but also with the effective federal + state + local tax rates which apply to ordinary income in the absence of a corporation.
Not wanting to go too far afield, but a new wrinkle will start to apply in 2014 regarding the potential advantage of the split income structure offered by an S-Corp. If you do not have a vanilla job which provides health care benefits, if you are not covered by your parents' health insurance policy etc., and you don't purchase health insurance, in 2014 you will be required to pay a penalty tax of 1% of ordinary income. This penalty rises to 2% of ordinary income in 2015. Thus being able to split your example $75k annual income into a $50k salary and a $25k dividend will potentially save you $250 and $500 in penalty tax in 2014 and 2015 respectively.
Re: LLC, Corp or Independent Contractor
I just filed my LLC but didnt see an option for S-corp when filing in Nevada.
Just a small side question, is it smart to open an account under the LLC to receive all my cam deposits and put dancing money into or is it unnecessary?
Re: LLC, Corp or Independent Contractor
^^^ not only is it a smart idea, it's a legal accounting requirement !!! Under GAAP / IRS standards, all 'revenues' received by the LLC should be deposited into a separate account in the name of the LLC. That LLC account should be used to pay out for anything that is business related ( like buying dance outfits or a new camera or health insurance premiums for the LLC's 'employee' ). That LLC account will in turn pay out money to your personal account ... Nevada allows S-Corp tax treatment for LLC's ( if you file the correct form ), so these payments from the LLC account to your personal account will probably involve a weekly 'salary' payment ( comprising perhaps 65% of your average weekly earnings ) plus a quarterly 'profits' a.k.a. 'dividend' payment ( which squares up any 'surplus' remaining in the LLC account after all business related expenses have been paid for that quarter ). Note also that estimated taxes / annual taxes should be paid out of your personal account, since technically speaking the LLC does not owe taxes, you do as an 'employee' of the LLC.
here's a blurb re S-Corp tax treatment election by an LLC ...
(snip)" LLC as an S Corporation
In this last scenario, the LLC elects to be treated as an S Corporation. The S Corp files an 1120S tax return, but the company’s profits are not subject to corporate income tax like they are in the C Corporation. Instead, individual LLC owners are taxed on their respective shares of the company’s profits (and profits are not subject to self-employment tax). If an LLC owner works in the business, he must be paid a reasonable wage for his activities, and the LLC must pay payroll taxes on these wages. "(snip)
Just to clear up any potential misunderstandings, a self-employed non-incorporated dancer or camgirl winds up paying 15.3% Social Security + medicare 'self-employment' tax on all money earned, plus is subject to high 'ordinary income' tax rates on every dollar her non-incorporated business earns. With S-Corp tax treatment, the LLC winds up paying a 7.65% 'employer's' share of SSI + medicare taxes on the salary portion of your payments, while as the the LLC 'employee' i.e. you personally wind up paying another 7.65% 'employee's' share of social security + medicare taxes on the salary payments you have received. At the bottom line, this winds up amounting to less total tax, because the two payroll tax rates add up to the same rate as the 'self-employment' tax, and also because the 'profit' a.k.a. 'dividend' payments you receive from the LLC are not subject to these taxes. In fact this 'profits' a.k.a. 'dividend' money is treated as investment income subject to a lower income tax rate, and this money is mostly exempt from Social Security taxes.
Re: LLC, Corp or Independent Contractor
So do I need to apply for my EIN so I can open the account with that # not my SS #? SO many angles to cover! Melonie your advice is gold. Thank you so much
Re: LLC, Corp or Independent Contractor
if you wish to elect S-Corp tax treatment, yes your LLC needs to file / bank under a different EIN / SSN than you file / bank under personally.