Small Business, Tax deductions, LLC, Sole Proprietor, CPA, etc...

[Tonka]

I've been earning some part time money (received via a W-9) and I really do not want to pay a lot of tax on it. While I know my current arrangement won't last for too long, I figured more opportunities will eventually surface and, even if not, I might as well incorporate the family name so I can deduct business expenses for the foreseeable future.

1) I would love to hire a CPA to set it all up. Any good advice for pitfalls, expectations? What can I expect cost wise?

2) Since I seem to move every 1.2 years, does it matter what state I use to register the name? Can I just choose one to avoid state income tax? Do I have to have an address there.

3) Sole Proprietor, LLC, or what? Anything better for veterans?

I'm not looking to get very complicated, just something to knock the tax sting down a little bit... and help/advice/direction would be perfect. Couldn't find anything on this topic in the archives...

Appreciate it.

[Dupe]

You don't need a LLC to deduct the expenses. You are automatically a sole-proprietorship. The reason to get a LLC is to separate your personal liability from that of your company. That said, if it's just you doing the work, it's very easy to "pierce the corporate bubble" and a LLC may not add any protection.

Most attorneys will do an initial consult for free. See one. Don't get a case of the cheaps when you actually go to get the LLC.

For now, I recommend organizing your expenses in the format of the Schedule C, then deducting at the end of the year.

Edited July 2, 2015 by Dupe

[Flaco]

LLC is the most common entity for small businesses. Wouldn't recommend doing anything as a sole proprietor.

1.) Probably $500 - 1000 for a professional (attorney or CPA) to set it up. This should give you the articles of incorporation and an operating agreement which defines how the company will be run.

2.) You could set up as a Delaware or Nevada LLC (business friendly states) and then file as a foreign LLC in the state in which you are actually doing business. When you move, simply file as a foreign LLC in the new state.

Income from an LLC will flow through to your personal 1040, schedule C. You will pay state taxes to the state in which the business is conducted.

3.) Probably an LLC for most businesses. If you start to earn more than $25,000 / year, you will want to look into being electing to be taxed as an S-corp to avoid self-emploment taxes.

[DFRESH]

LLC is the most common entity for small businesses. Wouldn't recommend doing anything as a sole proprietor.

1.) Probably $500 - 1000 for a professional (attorney or CPA) to set it up. This should give you the articles of incorporation and an operating agreement which defines how the company will be run.

2.) You could set up as a Delaware or Nevada LLC (business friendly states) and then file as a foreign LLC in the state in which you are actually doing business. When you move, simply file as a foreign LLC in the new state.

Income from an LLC will flow through to your personal 1040, schedule C. You will pay state taxes to the state in which the business is conducted.

3.) Probably an LLC for most businesses. If you start to earn more than $25,000 / year, you will want to look into being electing to be taxed as an S-corp to avoid self-emploment taxes.

#3 is a very important one. As far as the IRS was concerned, I made no money from Uncle Sam this year (all tax free earnings). However, my small business made over 25K and therefore I owed "self-employment" tax.

[Lumbergh]

You could also use a service like LegalZoom if you're doing an LLC. Like the other poster said, an S-Corp can be beneficial because you can take some salary as "distributions" which isn't subject to self-employment taxes, but I would read up on that before going forward. The IRS will come after you if all of your salary taken as a distribution. You have to be able to justify what you take as a reasonable salary and what can be a distribution/dividend. Get a lawyer and CPA...it'll make your life easier.

[Tonka]

Thanks, I'm starting to figure it out.

Since I am receiving payment via a W-9 do I have to pre-pay tax each quarter? Even if I plan on spending most of what I receive on Business expenses (thus deducting them) throughout the year that won't reduce my tax liability for Social Security, correct? and thus require a pre-pay?

Any big gotchas between: actual money accounting or accrued money accounting... as long as I reduce my account below $400 each year on 31 Dec I should be good with actual?

I looked into LegalZoom, I am a little wary of that type of impersonal relationship... especially if I don't exactly fit the cookie cutter mold.

[Dupe]

Thanks, I'm starting to figure it out.

Since I am receiving payment via a W-9 do I have to pre-pay tax each quarter? Even if I plan on spending most of what I receive on Business expenses (thus deducting them) throughout the year that won't reduce my tax liability for Social Security, correct? and thus require a pre-pay?

Did you mean W-4? This makes it sound like you are an employee and not a contractor. Get a 1099 from your client firm. As a note, the IRS has been cracking down on who is an employee vs who is an independent contractor.

Any big gotchas between: actual money accounting or accrued money accounting... as long as I reduce my account below $400 each year on 31 Dec I should be good with actual?

Asset base (your $400) has nothing to do with cash vs accrual accounting. Most small businesses use cash accounting and recognize revenue when it comes in the door. Accrual accounting is used to recognize revenue when a product/service is delivered vice paid for. For example, if you agree to do some work now and the company pays you next year, you could recognize (and pay taxes on) that revenue in the current year even though the check hasn't come in yet. On the other side, if you take a payment now but don't deliver until next year, the funds you took in would not be recognized as revenue until next year. Costs get matched with revenue: if you recognize the revenue in the next year, then you deduct costs the next year as well. Likely, just going with cash accounting is easier at this phase.

I stand by my opinion that LLCs and other forms of incorporation are not useful for personal services work. Piercing the corporate bubble is ridiculously easy. This all changes if you hire an employee. Go consult with a business attorney - leave Legal Zoom to the landscapers.

Edited July 5, 2015 by Dupe

[Flaco]

I stand by my opinion that LLCs and other forms of incorporation are not useful for personal services work. Piercing the corporate bubble is ridiculously easy. This all changes if you hire an employee. Go consult with a business attorney - leave Legal Zoom to the landscapers.

I think you meant "piercing the corporate veil". Do you have some basis for your assertion that it is "ridiculously easy" to pierce? So you are recommending that the OP act as a sole proprietor?

[Marco]

Depending upon the work you are performing, a LLC and a good liability insurance policy will protect you in most instances. We carry more than the average small business has to, but we're building and flying jets. I have no trouble sleeping at night.

[Dupe]

I think you meant "piercing the corporate veil". Do you have some basis for your assertion that it is "ridiculously easy" to pierce? So you are recommending that the OP act as a sole proprietor?

For now, yes. At the personal services stage, there is little that separates what is done as an individual vice what is done as a company. The OP can deduct business expenses without having to pay for incorporatation fees in each state he operates in.

Once the business grows to having employees, significant assets, or is looking to have financing on its own merits, then it's time to incorporate.

[JS]

For now, yes. At the personal services stage, there is little that separates what is done as an individual vice what is done as a company. The OP can deduct business expenses without having to pay for incorporatation fees in each state he operates in.

Once the business grows to having employees, significant assets, or is looking to have financing on its own merits, then it's time to incorporate.

I would research the crap out of your situation and read a lot on it. Education is key with all the choices out there. Nolo books and the IRS pamphlets on small business deductions and s-corp, LLC, sole prop, etc. make great learning materials.

I agree with most of what Dupe says in that a sole prop is best for personals services, but a lot of it depends on what kind of business you are doing. Tonka, I don't think you mentioned what kind of work. Like said above - if you have people working for you and you are building stuff or something, corporation or LLC might be good. If you are just moonlighting while collecting "consulting" fees, a sole prop is a much better and cheaper bet. A LOT of this depends on the type of work. But Dupe is right, most people think an LLC gives them and their personal assets immunity from all wrongdoing in their industry - it sure as fuck doesn't. Get insurance or get in writing that you are covered under your parent company's policy either way, whatever you are doing.

When you say you are getting paid by W-9, I assume you mean you filled out a W-9 and are getting paid via 1099-MISC from your employer??? Either way, if you pass a certain threshold of tax you will owe at the end of the year, you need to do the quarterly pre-payment thing. Read up on it. But right now you should be receiving checks from your company and then a single 1099 at the end of the year, right? And the W-9 was a one time form that you filled out, right??

My experience is that I spoke with two accountants before my first business - one was very liberal and laid back, the other was a "rule follower" to the T. Taxes and the IRS operate in all kinds of shades of gray. With the small amounts of money involved (10s of thousand, at most) and the basic nature of a lot of my work ("consulting fees"), I wanted to take a very liberal approach to deductions and so on, while operating a little closer to the gray edge. I am not saying to break the law, but I was the kind of guy who deducted most mileage and lunch expenses while discussing my business with colleagues to try and develop new business, if you catch my drift.

Anyway, I went with the liberal thinking accountant. After doing all the legwork and record keeping, I brought him all the paperwork and he did my taxes (LLC) for maybe $300 or so. For my own learning, I went ahead and typed my numbers into a free online tax software and compared the 1040 and Sched C I generated to what I paid him $300 to do, and they were the same. So I have been doing my own taxes since then. Also, my state charged a few hundred to set up the LLC, and I also have to file a Business Privilege Tax each year, even when operating at a loss or if the business is idle (while deployed). I think the min is like $200/year or something. In other words, an LLC has costs associated with it in my state - even if you are not using it. Ultimately, I switched to a sole proprietorship due to its simplicity and that it is totally free.

The main reason why I do my own taxes is not to avoid the $1000 or so of accounting, lawyer, and business privilege taxes each year, but more to keep myself educated and keep my finger close to the pulse of the tax rules that affect me. There are a lot of deductions you can take, and nobody will know your situation better than you. I just use the internet to research deeper accounting questions I have, and have no problem with doing my own taxes each year.

Also, as I think others mentioned, with corporations you have to technically hold annual meetings, take minutes, and account for money that stays in the corporation each year. The record keeping is much more burdensome than the sole prop or LLC because any money made in the sole prop or LLC goes straight to your personal 1040 income tax statement each year. Not so with a corporation. In short, if your business is just a simple one-time 1099 at the end of the year, you can probably get by with running it through as a sole prop or LLC (after doing your quarterly estimated tax payments) without having to set up and maintain a corporation. But again, a lot depends on the type of work and type of money involved.

My personal situation: for a few years I did some software stuff on the side and had the LLC. After letting it fall by the wayside and then sit idle while deployed, I got tired of paying the annual taxes and ultimately dissolved the LLC (for $150). I still got hit with one more year of the state "privilege" tax, however. After that, I worked in the sim and then some other overseas 1099 stuff. That all just was listed as income under "JS Aviation Consulting," which is a sole prop. I add the 1099 under the income section of Turbo Tax, I deduct all my meals, mileage, cell phone, computer, and office expenses under the business expenses Sched C of Turbo Tax, and my overall tax bill is much less at the end of the year.

Again, I was teaching in the sim and then working for a bigger company overseas that I was covered under, so I saw no need to form a corporation or LLC, but your situation might be different. For me, the corp and LLC just added more paperwork and complicated things without adding any benefit. But then again, I did my own taxes and research, which you might not have time to do.

Anyway, let me know if you have any other questions, and I would be curious if you could post here what kind of work you were doing and maybe we could make better suggestions.

[Tonka]

For right now it is a simple contract, I am acting as a consultant on a pre-determined rate/hour (mostly programming.) Yes, I signed a W-9 agreement and being paid as an associate, I haven't seen a 1099-MISC, yet.

For now it sounds like a simple sole prop, but I can definitely see this as expanding when I leave AD. Until then I am probably am not hiring any employees except maybe my spouse if I start getting too busy to handle everything in my off-duty time.

I am going to register a DBA business name (apparently cheapest in Arkansas), create a bank account in the business' name, and see if I can find/hire a reasonable accountant to keep me out of jail. Someone suggested I become a sub chapter S corporation so I don't pay ssn unemployment taxes, income taxes etc. and only take $ as draw against profit (something I need to research a bit more.) For now I am mostly worried about pre-paying to the IRS since I already missed the due date for the 2nd quarter... Thanks for all the advice!

[Check 6]

When you form an LLC, you must obtain a EIN (Employer's Identification Number) from the IRS. You can do this online. You will have to select that you want your LLC to be treated as an S-Corp or a Corporation. In most cases you would not want to be treated as a "Corporation."

I recommend LegalZoom, however I formed my LLC in Florida via the state's website and cut out the middle man. This was after consulting with a business attorney and a CPA. They both said LLC.