More Questions about LLCs & Corporations

I get so many inquiries about LLCs and corporations that I again feel the need to give some general instruction on question asking and doing a little research on your own.

Were you to search "LLC" on my blog search facility in the upper left corner of your screen you'd get about 20 posts on LLCs. Read them all.

Perhaps the most complete for a general understanding is LLC? Incorporate? It states, as do many other posts: An LLC is not a tax entity. It is a legal entity. And so an LLC may save you from some legal difficulties but an LLC in and of itself will not save you anything on taxes.

So the question, "If I'm an LLC will I pay less tax?" is sort of like asking, "If I have the roof repaired will I still need a new sofa?"

An LLC provides protection against lawsuits. A corporation also provides protection against lawsuits. Insurance protects you if you are sued. So, from what do you need protection? Decide that first. Then choose the appropriate protection.

You wouldn't get auto insurance if you didn't own a car.

If you renege on a contract or miss a deadline are your clients likely to sue you for your house and its contents? If your lawnblower breaks your client's pink flamingo will she sue you for all your landscaping equipment?

Both an LLC and a corporation provide protection against lawsuits. Do you need the expense and hassle of both? Does the coverage overlap? If you are looking for protection against lawsuits then talk with a lawyer to help you decide what's best for your business.

And the question, "Should I incorporate to save on taxes?" always seems to arrive without any other pertinent info. Nothing about whether income is $1,000 a year or 2.5 million a year. Whether there are employees or not. Whether the income is profit or all for services performed.

So: Should I incorporate to save taxes? Probably not. But maybe.

And later this week I'll tell you a little bit about S-corporations.

June Walker

A freelancer's business expense cannot be deducted as an employee's expense.

Hi June,

I am a writer. I have a question about Schedule C deductions versus unreimbursed employee expenses on form 1040.

I'll have a significant amount of charitable donations this year, not to mention all the state tax I paid this year that I understand is deductible on the 1040. But I won't exceed the standard deduction level.

What would one need to do to treat indie expenses as unreimbursed employee expenses? I am, after all, an employee of myself, right? Is this smart or dumb? Legal or not?

Thanks! I love your book. Best $13 I've spent in a while.

Rachel
Alexandria, VA


Hi Rachel,

To set the stage:

• Everybody deducts personal expenses on Schedule A.
• Employees deduct all their business expenses on Schedule A.
• Self-employeds deduct all their business expenses on Schedule C.
• Both Schedule A and Schedule C are part of the Individual tax return Form 1040.

All business expenses may be deducted on Schedule C. Only home office has restrictions based on income.

There are several income restrictions as well as deduction restrictions on Schedule A. Often, depending on income or total expenses, employee business expenses on Schedule A may be lost, that is, you get no deduction.

A deduction on a Schedule C is much more of a tax advantage than the same deduction on Schedule A.

Rachel, to answer your questions:
You cannot deduct self-employed expenses as employee expenses. You may split an expense between employee and self-employed if it is used in both your work situations, a reference book for example.

You say, "I am, after all, an employee of myself, right?" No you are not. You are self-employed. Employees are people on payroll, who have taxes withheld by an employer and receive a W-2 at year-end.

You may be a freelance writer and also have a job on a magazine. In which case you would be both self-employed and an employee.

You might want to read these posts employee vs. self-employed for a better understanding.. better understand

Glad my book is helpful. Please tell your friends and colleagues.

Best,
June

Investing for yourself is not an indie business.

Dear June,

First of all, I'd like to say that your website is wonderful! Especially the blog section - I ran across your website after doing a search on google about day trading and self employment.

I was in the credit/collections line of work for about 7 years. In 2003, I decided to get into the business of trading stocks. As I learned, trading is not considered self employment ! What would make it self employment and if not what would trading (for yourself) be qualified as ?

Not sure, I've made myself clear, but I consider it to be a home based business.

Thank you for your time.
Rita


Dear Rita,

I am not sure what you mean when you say that you are in "the business of trading stocks."

Are you offering your advice and skills to the public? Are clients paying you for your advice? Is your goal to make money from the services you offer? If not then you are not a self-employed in
business.

If you are simply trading -- buying and selling stocks for yourself then you are an investor. Any expenses you have, such as a subscription to the Wall Street Journal, are personal investment expenses.

Glad you like my site. Thanks

-- June

Should I form an LLC?

Many of you know I will be presenting a seminar, Tax Solutions for Creatives, at the Creative Freelancer Conference in San Diego this August. I wrote a Guest Post: LLC? Incorporate? for the Creative Freelancer Conference Blog. A reader asked the following:

June, what are your thoughts on forming a single-member LLC? (As I understand it, essentially still a sole-proprietorship for tax purposes)

Thank you!
Merry


Hello Merry,

I recommend anyone interested in forming an LLC read my posts business entity -- LLC .

Keep in mind that an LLC is a legal entity, not a tax entity.

A sole proprietor may become an LLC and there will be no change in the tax treatment of his or her business. You form an LLC for legal reasons, for instance, asset protection; or for marketing and PR reasons, for instance, LLC after your name gives you some panache.

If you have similar reasons, then consider forming an LLC.

To maintain the veil of protection of an LLC there are strict recordkeeping rules. However, once again, the rules are for legal purposes not because of tax regulations. In tax jargon, a sole proprietorship established as an LLC is called a "disregarded entity."

-- June

Only suckers pay tax!

I sent out the following in my January Ways Through the Maze eLetter. Based on the emails I get, I thought it wise to get it out to all of you again.

SELF-EMPLOYMENT AS TAX SHELTER

In these strained economic times we are again inundated with books that advocate going into an indie business as a terrific way to pay no tax.

Promotions for these worse than worthless and wrongheaded books are all over the web and at supermarket check-outs.

The epitome of this approach to self-employment is a self-appointed money guru who glibly promises that "you can magically turn personal expenses into tax deductions." His on-line bag-of-tricks invariably shows that outsmarting the IRS is a piece of cake and that any taxpayer armed with his book and some wit can't lose.

Writers and pluggers of these books are more interested in tax consequences than in an indie business. That's putting the cart before the horse, at best. At worst it may suggest to gullible readers that they can set up a sham business to cut taxes -- a move that could be a big mistake.

These books advocate self-employment solely as a tax-avoidance device -- promising that with a little ingenuity one can reduce taxes down to zero. I

n more than one book the author's contrivances usually feature a W-2 person who creates a self-employed sideline that allows him to convert personal expenses into business write-offs. As an alternative scenario he has one spouse with a W-2 job and the other spouse fabricates the self-employed job. "Which spouse should create the deductions?" is one of the questions the author asks, exclusively from the point of view of which spouse can generate higher deductions.

In real life, decisions about self-employment are not made that way - one spouse may have a W-2 job for the sake of regular and steady income or health insurance coverage while the other tries a hand at the riskier and more irregular income of self-employment. Don't get me wrong -- I'm for taking every deduction legally possible, but going into business for that purpose is not what made America great or made any business succeed. Do you think Bill Gates or Oprah got started in business in order to deduct their personal expenses?

It's the glib but muddled counsel of the tax shelter promoters that gets the IRS breathing down our necks and gives us legitimate self-employeds a bad name. Remember, for the IRS to consider your activity a business you must have a profit motive not a tax reduction motive!

If you want to learn more, here are some related posts from this blog.

Hobby or Business: Are you a professional artist?

Profit Motive: You're OK as long as you want to make a buck.

Exotic Dancer and more ...

And while we're on the subject of books, here's something to consider.

June Walker

Media Liability Insurance

Hi June,

Great information!

1. I don't have your book yet, Self-employed Tax Solutions. If I purchase edition 2 then I don't need edition 1, right?

How different is this book from the Creative Visual Artist version? I am a freelance B2B Technology Copywriter - Would I want to also or instead look at the Creative version?

2. I currently am a sole proprietor. I am looking for liability insurance. Specifically for copyrighting laws/infringement, blogging, any of the web liability. Does your book cover this type of Insurance? If not can you provide me with a source that I can research?

Thank you for your time.
Deb


Hi Deb,

Glad you like my info. Please tell your indie friends and colleagues . They need as much help as they can get.

This post Self-employed Tax Solutions 1st Edition explains both editions . Other than date changes there really is no difference from one edition to the next. You do not need both. And 1st edition is less money.

Tax Solutions for Creatives is a CD not a book. It covers some of the same info as my book. I use indies in creative professions such as sculptors, writers, musicians in my examples. Indies tell me the CD is really helpful and that just listening is so easy, not intimidating.

My book explains the different types of insurance. It's basic info. Anyone who presents advice and information to the public faces the potential of having someone misinterpret what is said or written. That presents the possibility of a lawsuit. Sounds as if you are seeking media liability insurance. It's a kind of errors and omissions policy and is hard to find and very expensive with quotes starting at $2,500 for sole proprietors. Please, if you find more information from your insurance agent about this kind of insurance, let me know.

Best,
June

A Primer on Estimated Taxes

Hi,

Ive been working as a therapist since the beginning of this year. I know that I will miss today's quarterly taxes filing deadline because Im not sure how to estimate what I will need to pay and afraid I will not have the funds to pay it until my next paycheck. I dont get taxes taken out of my checks because I am an independent contractor but know that/figure that I need to make quarterly tax payments.

Please let me know if you can provide any assistance in helping me file at some point this week or at the least help me figure out how much I owe.

Keida
Bowie, MD


Keida --

Your answer is in this post: Estimated Taxes . It starts out this way ...

I am getting lots of questions on estimated taxes, so I thought an overview necessary.
Here 'tis.Federal income tax, Social Security tax and Medicare tax are pay-as-you-go taxes; that is, the tax must be paid as income is earned. Dennis Dubya-two, shipping clerk for Toys 'n' Things, receives a paycheck every week. Each week Toys 'n' Things withholds all applicable taxes from Dennis’ pay and forwards them to various government agencies. At the end of the year Dennis receives a W-2 which shows income earned and taxes paid.

Self-employeds must follow the same pay-as-you-go method as do wage earners like Dennis. As an entrepreneur brings in income he withholds taxes from himself -- that is, he puts money aside -- and then sends his taxes to the government via estimated tax payments.

Not every self-employed has to make estimated tax payments.
It’s the overall tax liability of a self-employed that determines whether estimated tax payments are required. An indie’s total tax liability is made up of ... continue here