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LLCs for Consultants...

After posting Consultants: W-2, 1099 or Corp-to-Corp?, there were a lot of questons about LLCs. I realized I needed a separate page so I just posted Consultants: What about LLCs?

The strange thing about the LLC as a business entity is the IRS doesn't recognize it. So every LLC is actually taxed as a sole-proprietor, partnership or corporation. The good (and bad) news is you have to choose which it will be.

Regardless of how your LLC is treated for tax purposes, it retains its legal status as an LLC.

Your questions and comments are always welcome. They may help someone else, so don't be shy!

L:)

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1099 vs LLC vs S-Corp

Hi Linda - Thank you so much for all of this insightful information!

I currently live in North Carolina. Until recently I was an IT contractor, w-2 employee. Additionally I am a sole proprietor with a company I've dabbled a bit with. Today I received a 1099 offer/opportunity considering I currently have an EIN (I've also gone through the necessary requirements - business license and zoning in my state). I noted all of your information but I think my question is simpler than what's available. In a nutshell, can I remain a sole-proprietor (1099)and be paid in my company's name, to then file a regular tax return at the end of the year (or quarterly), taxed at my individual rate, or are there additional tax ramifications of going this route that would make taking my company all the way through the LLC process more to my advantage? Also, since I am a sole-proprietor, regardless of straight 1099, LLC or S-Corp, do I HAVE to pay myself or can't I simply take the payments received? I left you a voicemail (area code 646). If you get that feel free to call me back.

Schedule C for LLC formed in 2007

Hi Linda,

I formed a LLC in 2007. I did not have any revenue, but had expenses related to running the business.

Here are some of my questions.
1. Should I file Schedule C to show that I operated my business in 2007, even without any revenue.
2. If I do not file Schedule C, how can i show that i operated my business in 2007 for tax purposes.
3. Can I claim any or all expenses as loss in future years when i do have revenue.

Thank you for your time.
Sean

New LLC

Hi Sean,

If you were in business actively trying to get revenue, then #1 is correct approach.

If not, then you accrue the expenses as either organizational or start-up costs that you can either amortize over 15 years or you can elect up to $5K once you start actively engaging in business (aka trying to get revenue, even it you're unsuccessful).

L:)

State income tax

I'm a single owner LLC in the State of MO providing consulting business on a 1099 basis. If I have customers who are in the State of KS do I have to file KS income tax

RTT

Cross State Commerce

Hi RTT,

If you do your work in MO, then no, you shouldn't need to worry about KS. If have an office (aka nexus) in Kansas, then yes, you would need to file a KS return.

Hope this helps.

L:)

Forming LLC as Independent Contract for Computer Networking

Hello Linda,

First off let me say that your blog "Consultants: W2, 1099 or Corp-Corp" is excellent! It was exactly what I needed in one place and the most informative that I have come across. I still have a few questions about LLC vs S-Corp.

My Situation: I am single w/ no dependents. I have a contract that will pay $56/hr for W2 and $64/hr for Corp-Corp. I am leaning towards Corp-Corp for financial reasons, first steps towards independence and flexibility in obtaining other side contracts. I am leaning toward single-owner LLC vs S-Corp because it just appears simpler. I have an accountant for my taxes and he states I can file as a corporation. I am planning on the LLC paying my salary at some lower rate than the LLC's monthly income and then allowing the corporation to pay for health care premiums, business supplies, gas, etc. I have a few questions:

1. As an LLC filing taxes as an Corp, will I avoid 35% PSC(Professional Services Corporation) tax as you mentioned an S-Corp does?

2. Based on the $8 hourly rate increase from W2 to Corp-Corp and expected deductions (Gas/mileage, Technical education/certification cost(est $3000-$5000 yr), Health Care Premiums, Business Supplies, Possible Vehicle Lease/Purchase and IRA/401k plans) to offset the Self-Employment Tax, do you see a cost benefit in going Corp-Corp vs W2 in my situation? If not, what Corp-Corp rate would you look at as a minimum in my situation?

3. In general, is there a reason that you would recommend an S-Corp over an LLC filing taxes as an S-Corp?

4. In reference to Independent Contractor status, do you feel that have a definitive written contract removes the risk of loses this status for the most part? The reason I ask, is that sometimes there is a very gray line between contractor and employee in some positions, especially over longer periods of time.

Thank you for time.

LLC v S Corp

Hi Marc,

I'm glad this site has been helpful to you. :)

Yes, a LLC can be taxed as an S-Corp. Once it makes the election it is taxes as a corporation for all federal income & payroll taxes.

1. Yes. By definition an S Corp cannot be a PSC.

2. The $8/hr is a 14.28% increase over the W-2 rate. That seems ok.

3. Some states have better liability protections than others. A S Corp might be better strictly from a liability protection.

Some state agencies do not recognize the federal corporate election. For instance in California, an LLC opting to be taxed as a corporation will also be so taxed for income tax purposes. However, for employment tax purposes it's still treated as an LLC. So your salaries will be treated in a non-standard way. Technically they're not subject to any taxes or withholding by the EDD but the income tax agencies expects you to receive a W-2 with state income tax withholding. It can be quite confusing but it's possible to work around the inconsistencies.

4. Yes a written contract will help but it's not the only thing that will be considered. If you're concerned about that, I would definitely not go into a straight 1099 situation (or LLC taxed as sole-proprietor). The IRS rarely will reclassify a contract to an employee if the worker is an employee of another corporation and has payroll taxes paid on his/her wages.

Hope this helps.
L:0

Thank you, Linda!! Thank you

Thank you, Linda!! Thank you very much!! :)

Husband/Wife LLCs

My wife and I have an LLC, and we find the tax situation so confusing! Since the new law was passed that allows husband-wife LLCs (partnerships) to elect to be treated as two separate sole proprietors, no one seems to be on the same page yet. This IRS page states that LLCs do not qualify for the election, yet other pages, other websites, and the text of the law say any unincorporated business will qualify. I tried using TaxCut software, and it mentioned the law but didn't support it as I went through the interview to complete our taxes.

Would it be best to just do our taxes ourselves and try filing two Schedule C's or are we asking for an audit?

New Rules for Husband/Wife Partnerships

Hi Kevin,

Yes I agree it's very confusing. And unfortunately, the IRS has not got all their ducks in a row on this one.

The page you link to says the LLC cannot be treated as a joint venture, but IRS Publication 541, Partnerships indicates you can.

A husband and wife who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. A change in reporting position will be treated for federal tax purposes as a conversion of the entity.

A qualified entity is a business entity that meets all the following requirements.

  • The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States.
  • No person other than one or both spouses would be considered an owner for federal tax purposes.
  • The business entity is not treated as a corporation.

I don't think you're asking for an audit. The whole point of this new rule was to reduce the paperwork for family businesses. And if the IRS said you should have file the partnership return, it would have $0 impact on the amount of tax you owe.

I think they're expecting to have a bit of clean up on this after the fact. This is the first year for this treatment & I can already see some problems. Like you had to get an EIN for the LLC, but there's no place to put the EINs on the Schedule C, you're supposed to use your SSNs. There will be problems.

You could file a partnership return for 2007 & wait to see how everything shakes out. You can go from the 1065 to the Schedule C return with out any paperwork, but once you take the Schedule C option, you're stuck with it.

Sorry there's not a clean answer.:(

L:)

what happens to 20%

Thanks so much for your time and response linda-I promise not to take up so much of it this time!- this is a quick question-what happens to the 20% withheld if you do a direct 401k to ira rollover? does the irs keep that money or does the custodian mail it back to you after a period of time? Been looking it up, but no one says where it goes!they just say you have to make it up unless you do a transfer.

401(k) Rollovers

Hi,

I'm assuming the 20% you're talking about is required withholding on 401(k) withdrawals.

If you take direct control of 401(k) rollover funds (ie get a check mailed to you) the custodian is required to withhold 20% of the proceeds and send it to the IRS. At the end of the year you receive a 1099-R that shows the distribution and the withholding. You include the withholding as taxes paid, just like the withholding on your W-2.

The problem with taking the 401(k) funds directly is when you open the new IRA rollover account the withholding is subject to tax and early withdrawal penalties if your under 59.5 years old. Oh, and you only have 60 days to get the 401(k) fund into an IRA to avoid the income tax & penalty on the entire distribution.

You can avoid all these problem by having your 401(k) custodian send the distribution from you 401(k) directly to your IRA custodian. Since you never take control over the funds, there's no withholding and no taxable event. Usually, the IRA custodian will have an transfer authorization form to take care of this.

Hope this helps & answers your questions.
L:)

hello

very cool realy thanks....evden eve nakliyat

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