Any 1099 Contractors?

[onewhippedpuppy]

I’m looking at a possible role where I would be paid as a 1099 contractor, and wondered if anyone else does the same? Specifically I’m interested in ways to structure my “company” for the best tax situation, as in LLC, S-Corp, sole proprietor, etc. If anyone has experience in this department I would appreciate any tips you could provide. Thanks!

[nb6179505]

S Corp and sole proprietor basically the same, pass through, but with the Corp you can be an employee and bonus yourself to avoid fica and Medicare...

C Corp, double tax, once personally and once for the corp

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[kach22i]

I knew someone that tried one of the corporate modes but gave up after a corporate board meeting, he got into an ugly argument with himself.

I do the PLLC same as LLC thing, double boned by SS.

[mepstein]

I did an S corp when I was a real estate agent. There's + & - to each type. I think the reason I mostly did the S corp was I paid taxes on my profit, after all my expenses. But it was a long time ago....

[einreb]

Consult and attorney, accountant,etc but....

Sole prop S corp can really provide some tax advantages once you are making a bit of money. Of course there is a little cost to set up and maintain, have to do payroll, etc.

Per the previous comment, you can pay yourself salary and then 'bonus' money in a tax advantaged way. There are arguments as to what is reasonable but a bonus of up to 50% of salary is not generally considered unreasonable.

The other tool it gives access to is a solo 401k. Relatively easy/cheap to set up and use and you can funnel a good bit of money into it if you want to do that.

[jwasbury]

Originally Posted by nb6179505

S Corp and sole proprietor basically the same, pass through, but with the Corp you can be an employee and bonus yourself to avoid fica and Medicare...

S Corp and Sole Proprietor are far from "same" and "bonusing yourself" as an employee doesn't avoid fica and medicare.

Unless this thing becomes pretty large, I always recommend sole proprietor form of organization for starters. This form has the lowest overhead cost. You can claim expenses vs. the income and attach Schedule C to your Form 1040 for the income and expenses of your business.

Any legal entity will come with overhead costs. Annual filing fees with your state, sometimes minimum taxes...forms and paperwork, etc.

If you want an entity for limited liability protection, single member LLC is taxed as sole proprietor, so maintains some of the simplicity and low admin overhead.

If there's enough money in play to warrant the overhead, then S Corp starts to make sense and there are some potential tax advantages.

[jwasbury]

Originally Posted by einreb

Per the previous comment, you can pay yourself salary and then 'bonus' money in a tax advantaged way. .

Sorry guys...this is my line of work so I feel compelled to educate on the correct terminology. In an S Corp, you must pay yourself a reasonable level of compensation which will be reported on W-2 and taxed in the normal way. Excess S-Corp profits above what you pay out as compensation will pass through to the shareholder's 1040, and are taxed at ordinary income rates (no FICA, Medicare, etc.). Those profits can then be distributed to the shareholder's if desired with no further tax consequences. The distinction is compensation vs. distribution of corporate profit (a.k.a. dividends)

[jwasbury]

Originally Posted by einreb

The other tool it gives access to is a solo 401k. Relatively easy/cheap to set up and use and you can funnel a good bit of money into it if you want to do that.

^this is very true, although there are tax deferred retirement vehicles available to self-employed persons as well.

[VincentVega]

Every situation is different but the only thing I like about it is the SEP. Spend some time reading or at least talking to a tax guy.

[einreb]

Originally Posted by jwasbury

Sorry guys...this is my line of work so I feel compelled to educate on the correct terminology.

I definitely used the wrong terminology. Thanks for clarifying.

[Alan A]

Originally Posted by jwasbury

Sorry guys...this is my line of work so I feel compelled to educate on the correct terminology. In an S Corp, you must pay yourself a reasonable level of compensation which will be reported on W-2 and taxed in the normal way. Excess S-Corp profits above what you pay out as compensation will pass through to the shareholder's 1040, and are taxed at ordinary income rates (no FICA, Medicare, etc.). Those profits can then be distributed to the shareholder's if desired with no further tax consequences. The distinction is compensation vs. distribution of corporate profit (a.k.a. dividends)

So as a rule of thumb roughly what $ number would you want before an S-corp becomes worthwhile?

[GH85Carrera]

For sure find a good CPA, and talk to him about your plans, and estimated revenue levels.

There are so many silly tax laws to follow. Will you be just performing a contract service, or selling an tangible thing? If you need a sales tax license those are cheap to get, but require more filings, usually monthly.

Talk to a CPA and lay out your plans. Take his advise. He will not give you legal advice, just sound accounting plans. Keep a record of everything, and keep it organized and use accounting software. We got audited in our first year. Just lucky I guess. I had to spend a week printing and organizing every expense and several of my CPS's time at and he is pricey. In the end, the IRS said OK, no changes everything is fine. It was possible because I had organized records of everything.

[onewhippedpuppy]

Thanks guys, this would just be me consulting. Looking at the tax burden alone is depressing so I’m just interested in making that as reasonable as possible. I would definitely consult a professional at the appropriate time, this is still in the discussions phase.

[berettafan]

Originally Posted by Alan A

So as a rule of thumb roughly what $ number would you want before an S-corp becomes worthwhile?

I tell clients it starts making sense around $50k in profit. My test is they need to save at least 2.5-3x's what I'm going to charge them for the additional returns (payroll, S corp).

Also depends on the type of business and what 'reasonable compensation' would be. That is to say retail businesses may have a different reasonable comp for a given profit than service businesses.

[jwasbury]

Originally Posted by Alan A

So as a rule of thumb roughly what $ number would you want before an S-corp becomes worthwhile?

I like Berettafan’s answer. Notice he says 50k in profit, not 50k in revenue. That’s profit after making an allowance for what constitutes a reasonable amount of compensation for your efforts.

[onewhippedpuppy]

If the reasonable line is $50k in profit then it’s worth looking into, I will have minimal expenses and this would be a full time level of employment.

[berettafan]

Then find a local Cpa you're comfortable with and talk it out. your focus in discussing this should be what he/she believes reasonable compensation would be for you at a given profit. they can easily show you the math once that is worked out.

Part of what JW is talking about in waiting is there is expense, paperwork and yearly, qtly filing required that doesn't end until you close the corp. I used to have people jump right into an S corp when they started a business and projected better than $50k or so profit but now I've learned to hold off until the business proves viable. nobody feels like dealing with final corp returns if the business doesn't make it. and the penalty for late/unfiled S corps and partnership returns is very, very stiff.

[berettafan]

Here's some rough figures as an example:

Schedule C (sole proprietorship):
Profit: $50,000
Self employment tax: $50k x 15.3% = $7,650.

S Corp
Profit: $50,000
Salary: $25,000
Self employment tax: $25k x 15.3% = $3,825

S corp with same profit before salary of $25k saves you 3800 in SE tax. Income tax is the same in either example. As is the new QBID given certain income assumptions.

I don't mean to suggest $25k is a reasonable comp for this example and really couldn't without knowing the situation. I have some consulting clients that I push to take a much higher % of profit as salary thus changing the math a bit.

Now once you start getting into big figures like say $200k in profit for a consultant things change a bit. You'd probably be taking FICA max for a salary and thus only be saving the 3.9% medicare tax on the difference. At this income level and above we start to see things like retirement saving options (solo K for example) take priority over FICA tax savings and so the decision process is different.

All this is just to illustrate the need for a good CPA and honest assessment of what you expect.

[Craig T]

Matt, I sold my half of the business to my partner in 2014, but stayed on three years as a 1099 contractor. I deducted home office expenses, car miles, meals and entertainment, travel, etc. From a tax perspective, it worked put great for me. My accountant didn't like it. He told me if I was going to continue to earn much longer that I'd better file an S-Corp. He said it would insulated me from some liability and lower my risk of an audit. I knew I was retiring soon so I didn't bother.

[jwasbury]

Statistically speaking, Corp returns are audited less frequently than Form 1040s with Schedule C sole proprietorships. So yes that is a consideration. Do things properly and there shouldn’t be any material audit risk with going schedule C. I speculate, but probably the reason schedule C is audited more frequently than Corp returns is because there are a lot of DIY ‘hacks’ filing schedule C and claiming ridiculous deductions.

If limited liability protection is important, single member LLC gets you that without the admin burden of corporate and payroll tax filings.

Beretta reads me loud and clear. I have seen too many small business people immediately set up a Corp, fail to keep up with filing requirements, then have an audit mess on their hands.