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Thread: LLCs, dancing and taxes

  1. #1
    Senior Member Pinup Girl's Avatar
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    Default LLCs, dancing and taxes

    Situation:

    - I have an LLC for a non-dancing-related business (for this example, real estate).
    - I pay taxes on a sole proprietor independent contractor basis quarterly for dancing.

    Would I pay taxes twice?
    Or would I have to combine my dancing earnings with the salary/dividends of the LLC?

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    Banned Melonie's Avatar
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    Default Re: LLCs, dancing and taxes

    ^^^ with a single 'owner' LLC the income and taxes track back to your personal Social Security number. With a sole proprietor business the income and taxes also track back to your personal Social Security number. The IRS will also key on your personal Social Security number. Thus you really only need to send in one quarterly estimated tax check under your personal Social Security number reflecting the taxes due on ALL your sources of income combined. Also, figuring taxes due on ALL your sources of income combined is the only accurate way of estimating the taxes due due to the 'progressive' tax rate structure (i.e. the taxes due on a $60,000 combined income are way more than twice as high as the taxes due on two $30,000 incomes reported separately).

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    God/dess VenusGoddess's Avatar
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    Default Re: LLCs, dancing and taxes

    ^ So, she would combine all of her earnings thus far and pay one lump sum, correct? She wouldn't be able to pay taxes on the (fictional) $30,000 income from her "real estate" job and then the $30,000 from her "dancing" job?

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    God/dess Dottie Rebel's Avatar
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    Default Re: LLCs, dancing and taxes

    Melonie--can you advise regarding VG's question? I am curious. I have an LLC separate from my independent contractor dancing job and am puzzled about this. Even if I am a single member, disregarded entity, can I still report the earnings of each company separately so as to stay in a lower tax bracket?

    Another, related item. I've searched about this on SW and the web at large and have not gotten a straight answer: As a dancer, am I better of as an independent contractor or should I form a second, separate, LLC specifically for my dancing "company"?

    Thanks for any input.
    Last edited by Dottie Rebel; 12-06-2006 at 01:32 AM.

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    Default Re: LLCs, dancing and taxes

    ultimately, if you're talking about a single social security number keyed to 'paycheck' income, 'sole proprietor business' income, 'partnership' income, LLC income, subchapter S corporation etc., your total taxable income will be the sum total of all of these individual incomes. Thus your tax bracket will be unaffected by breaking down income sources any farther than is absolutely necessary (but your paperwork burden will increase).

    The only exception is a C corporation, which is essentially considered to be a 'separate entity' by the IRS and are taxed at their own (usually much lower) rate. However, when that C corporation pays dividends or a salary to an individual, those dividends or salary payments add to the total taxable income of that individual. So in the case of a single person C corporation, you are arguably subject to double taxation and need to do the math carefully before going this route. However, the C corporation does have some unique advantages which are of particular value if you are interested in insurance benefits, retirement benefits, etc.

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    Featured Member Katherine's Avatar
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    Default Re: LLCs, dancing and taxes

    Melonie- can you either give a brief run down of those C-corp benefits- or point to a link that will do it?

    Thanks in advance!

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    Banned Melonie's Avatar
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    Default Re: LLCs, dancing and taxes

    well, there is ton of stuff on the net ... try for starters ... but in general ...

    A C-corp has one distinct difference from all of the other business entities ... namely that it is treated as a 'second person' by the IRS. This allows you, as the sole shareholder and 'director' of your C-corp, to split up your actual earnings between corporate earnings and personal 'paycheck' earnings, with two tax returns and two tax payments. If you're in a high tax bracket this can save money on income taxes if done correctly, with the primary savings coming from lower combined SSI/medicare taxes. You can also elect to pay yourself as much or as little as you need from 'corporate earnings' in the form of a salary, allowing the C-corp to retain any 'surplus earnings' which are taxed at a lower corporate rate.

    A C-corp also allows 'retained corporate earnings' to be invested in the name of the corporation, which given the lower corporate tax rate offers some of the advantages of a Roth IRA without many of the potential penalties and future risk factors, and certainly offers a preferable investment income tax picture than paying the full shot personal 'ordinary income' tax rates on interest and dividend earnings. The basic concept is to allow the C-corp to 'retain' and invest money that you don't immediately need, but with the ability to pay yourself a 'bonus' whenever you DO need more money. This is a form of partial tax-deferral since it allows your personal salary income to be officially reduced (which also reduces the effective personal tax rate as well as the amount of SSI/medicare taxes due).

    You can also play a 100% legal game whereby you pay yourself a paltry salary for two years, build up a large amount of 'retained corporate earnings', and then in the third year pay yourself a whopping salary and bonus. Since SSI/medicare taxes are capped at the $87,900 per year income level, if you earn say $80k per year you'd be paying the full SSI/medicare shot annually if you paid it all out as your salary. But if you pay yourself $50k for two years and then $140k in the 3rd year, you'll save a ton on the SSI/medicare tax (i.e. no more SSI tax once the annual payout exceeds $88k)!

    Another sideways benefit for people who live in high tax rate states is that the C-corp can pretty much be located in the state of your choice (with a PO Box address). As such, corporate earnings will not be subject to corporate income taxes levied by your home state. This ability isn't limited exclusively to a C-corp though, S-corps and LLCs can do the same thing.

    A C-corp also allows the corporation to purchase health insurance, life insurance, set up a 401k and make matching contributions, and a whole host of other good stuff WITH PRE-TAX corporation money, which then becomes a mostly non-taxable 'fringe benefit' to the corporate 'director'. This also isn't limited exclusively to a C-corp, but with a C-corp the costs of such fringe benefits are guaranteed to be 100% tax deductible to the C-corp.

    The main drawback of the C-corp is the large amount of additional accounting, paperwork, and 'formalities' necessary to operate it. Generally, the extra time and effort required aren't really worth it if your TOTAL annual income is less than $100K.
    ~
    Last edited by Melonie; 12-06-2006 at 05:12 PM.

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    Featured Member Katherine's Avatar
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    Default Re: LLCs, dancing and taxes

    Awesome. Interesting. Thank you so much!

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    Default Re: LLCs, dancing and taxes

    Yeah, thanks Melonie! You are very generous to share all your knowledge with us stripperfolk.

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    Member Jon_CPA's Avatar
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    Default Re: LLCs, dancing and taxes

    Warning about C-Corps for Dancers:

    Personal Service Corporations

    A personal service corporation is a corporation that furnishes personal services performed by employee-owners. Employee-owners are those who own, directly or indirectly, more than 10 percent of the outstanding stock of the corporation on any day during the company's tax year. If a corporation meets these requirements and also has as its principal purpose the avoidance or evasion of federal income tax by reducing the income of any employee- owner or securing tax benefits for any employee-owner that would not otherwise be available, the IRS may reallocate income, deductions and other tax attributes between the personal service corporation and the employee-owner. The purpose of evading or avoiding income tax can be shown by a reduction in the tax liability of or the increase of tax benefits to, an employee-owner or by any other increase in tax benefits.

    The corporate graduated rates do not apply to personal service corporations. Such corporations are instead taxed at a flat rate of 35 percent of taxable income. Qualified personal service corporations perform services in the fields of health, law, engineering, architecture, accounting, actuarial science, the performing arts, or consulting.

    Accumulated Earnings Tax

    In addition to being liable for regular income taxes, every corporation (other than personal holding companies, tax-exempt organizations or passive foreign investment companies) may be liable for the accumulated earnings tax. The tax is in the form of a penalty and applies if a corporation is formed or used for the purpose of avoiding the imposition of income tax upon its shareholders by permitting its earnings or profits to accumulate instead of being distributed.

    The accumulated earnings tax is 15 percent of the corporation's accumulated taxable income (for tax years beginning prior to 2003, the tax rate was equal to the highest income tax rate applicable to individuals). There is no particular form which a corporation files to compute the tax. Instead, the IRS enforces the tax by reaching a conclusion whether enough dividends were paid during the tax year based on the corporation's filed income tax return. A penalty may apply for any underpayment of the accumulated earnings tax due to. Interest on any underpayment is computed from the date the corporation's tax return is due without regard to extensions.

    State Taxation

    At one time, corporations engaged in interstate commerce were relatively free from liability for state taxation, aside from amenability to privilege taxes in the state of incorporation and ad valorem taxes on property with a fixed location. Gradually, however, the requirement of doing business as a condition to state taxation has diminished. Today, neither the Commerce Clause nor the Due Process Clause of the U.S. Constitution invalidates a state tax on corporate income earned wholly in interstate commerce as long as the tax is not discriminatory, is properly apportioned, is fairly related to services provided by the state and a substantial connection (nexus) exists between the business activity and the state.

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    Default Re: LLCs, dancing and taxes

    Jon I was aware of the personal services corporation's 35% tax rate, but this of course applies to the corporations 'net' income for the current year ... after deducting the costs of the 'employer's' share of SSI tax, after deducting the cost of life and health insurance, after deducting the cost of 401k matching contributions and a host of other legitimate 'business expense' write-offs, as well as writing off the 'salary' paid to the 'director'. Thus while the 35% tax rate sounds high, in point of fact it only applies to a relatively small fraction of the corporation's actual gross earnings. Yes ?

    I was also aware of the 15% tax on corporate income from 'retained earnings' which have been invested by the corporation. But I am not clear how this interacts with the corporation's current year 'earnings'. I assume that if the 'retained earnings' money that was used to make the corporate investment has already been subjected to the 35% personal services corporation tax in the year that it was originally 'earned', that any corporate interest earnings which result from that invested 'retained earnings' money are only subject to the 15% 'retained earnings' tax. Yes ? The objective in mind here is for the corporation to eventually establish enough investments from 'retained earnings' that the interest earned is able to pay for health and life insurance and retirement benefit costs without additional earned income being 'injected' on an annual basis by the 'director'. What are the tax ramifications of that setup ?

    As to state taxes, in states like NY the combined state and city income tax rates can exceed 10%. Therefore registering a corporation in Nevada or Delaware or another state which does not have a state / local income tax effectively exempts corporate earnings from NY state and local taxes, despite the fact that the 'director' resides in NY. Yes ? Obviously the 'salary' paid to that 'director' WOULD be subject to NY state taxes.
    ~
    Last edited by Melonie; 12-07-2006 at 12:15 PM.

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    Member Jon_CPA's Avatar
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    Default Re: LLCs, dancing and taxes

    Quote Originally Posted by Melonie View Post
    Jon I was aware of the personal services corporation's 35% tax rate, but this of course applies to the corporations 'net' income for the current year ... after deducting the costs of the 'employer's' share of SSI tax, after deducting the cost of life and health insurance, after deducting the cost of 401k matching contributions and a host of other legitimate 'business expense' write-offs, as well as writing off the 'salary' paid to the 'director'. Thus while the 35% tax rate sounds high, in point of fact it only applies to a relatively small fraction of the corporation's actual gross earnings. Yes ? ~
    In all non flow through entities the corporations are taxed on net income. The difference is that in a c-corp the first $50k is taxed at 15% versus 35% for a personal service corporation. Using your earlier posted exapmle of a dancer earning $80k, under a c-corp you would want to pass out $50K as dividend income so it is not taxed for SSI at 15.3% versus 15% for corporate income tax and have the dancer earn $30k in compensation, under a Personal service corporation you want the dancer to earn all $80k as compensation and be subject to the 15.3% for SSI instead of being taxed at the 35% corporate rate. The trick is the IRS wants the situation revesed. The IRS will look at what other dancers are earning $50K. For a c-corp the IRS will say that $20k of the dividend is actually compensation and thus subject to 15.3% SSI. For a personal service corporation the IRS will claim that $30k of the compensation is actually dividends and thus subject to 35% instead of 15.3%

    Quote Originally Posted by Melonie View Post
    I was also aware of the 15% tax on corporate income from 'retained earnings' which have been invested by the corporation. But I am not clear how this interacts with the corporation's current year 'earnings'. I assume that if the 'retained earnings' money that was used to make the corporate investment has already been subjected to the 35% personal services corporation tax in the year that it was originally 'earned', that any corporate interest earnings which result from that invested 'retained earnings' money are only subject to the 15% 'retained earnings' tax. Yes ? The objective in mind here is for the corporation to eventually establish enough investments from 'retained earnings' that the interest earned is able to pay for health and life insurance and retirement benefit costs without additional earned income being 'injected' on an annual basis by the 'director'. What are the tax ramifications of that setup ?~
    The accumulated earnings tax is levied by the IRS in situations that you had described in your earlier post. In cases that where you don't distribute the accumulated earnings in order to buildup the cash reserves to make a lump sum payout in excess of SSI thresholds the IRS will hammer you by doing the following:

    1st year $30k earnings not paid as compensation at 35% = $10,500
    Accum RE of at end of 1st yr $19,500 at 15% = $ 2,925
    2nd year $30k earnings not paid as compensation at 35% =$10,500
    Accum RE at end of 2nd year of $36,075 at 15% = 5,411
    3rd year of earnings classified as dividend $30k at 35%= $10,500

    Total tax with out regard to penalty and interest= $39,836

    To avoid the accumulated earnings tax the business must show they have a legitmate reason that would require the earnings accumulation.

    Quote Originally Posted by Melonie View Post
    As to state taxes, in states like NY the combined state and city income tax rates can exceed 10%. Therefore registering a corporation in Nevada or Delaware or another state which does not have a state / local income tax effectively exempts corporate earnings from NY state and local taxes, despite the fact that the 'director' resides in NY. Yes ? Obviously the 'salary' paid to that 'director' WOULD be subject to NY state taxes.~
    No. The courts allow states to tax corporations who do business in their state if they use a systematic means of allocating income to their state. Each state has developed their own means of allocation, most use a weighted factor of revenues earned in the state, payroll paid to individuals employed in the state, and the cost of property and equipment residing in the state. The weights each state applies varies betwen state.

    Example:

    Dancer forms a corporation in Deleware but lives and performs in clubs in the state of New York. All income is earned in New York, All payroll is incurred in New York, there is no fixed assets in the company. The dancer will have to file an information return in Deleware but the corporation will allocate and report its earnings to the state of New York.

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    Banned Melonie's Avatar
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    Default Re: LLCs, dancing and taxes

    ^^^ this all sucks with a capital S ! But, like everything else, it seems that every time a 'legal loophole' is discovered and popularized, rule changes by the IRS quickly follow to close the loophole !

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