Forum Moderators: phranque
Thanks in advance,
DailyPress
Each discussion revolves around one key point: every situation is different, so you need to discuss your specific situation with your tax advisor and lawyer.
Calling a hobby a business doesn't necessarily make it one as far as the I.R.S. is concerned. And just becuase an expense is business related doesn't necessarily make it fully deductible (meals & entertainment are usually only 50% deductible, some things you have to deptreciate over several years). And you don't necessarily need to form a company in order to write off expenses (lots of people file Schedule Cs without having a formal company). And forming a company won't necessarily save you money in taxes (Franchise Taxes can take a big bite, especially in California, even if you don't make any profit).
But in answer to your original question, we're a C-corp. Although that was actually just a shell company while we were actively running the business in Korea as a jushikhwesa (very similar to a C-corp) until we closed that down and sold the assets to the C-corp. But that's probably more information than you wanted. :)
[edited by: LifeinAsia at 10:14 pm (utc) on Dec. 4, 2006]
and get some help on this.
Every accountant I talked to suggest LLC like it was the best thing since sliced bread... (easy for them to file)
What they don't tell you is say you work full-time aqt another job. and your hobby becomes a business.
As an llc there is a hidden charge for self-employment taxes of 15.2% (yes on top of state income tax, and federal taxes) So watch out. I'm looking into an s-corp or c-corp (inc), since you pay yourself a reasonable salary and then can pass extra profits as a dividend.
This country was build on the c-corp, but its hard to maintain (a lot of paperwork) but if you are growing your business you can keep the first 50k in the business and only have to pay 15% tax on that. where in an llc you pay taxes at your own tax bracket even if you want to leave them in the business...
LLC is fast and dirty way into corparation, and you can change your status later say file as a s or c corp, and remain named as an llc. Also you may want to create an llc for the business, then sell it to another inc.
when you find professional help its best to tell them what you want. Say to grow your buisness and go public, or stay small and pay plenty of taxes.
the governement loves lazy people.....(they pay the most in taxes) remember its your money, and you work hard to get it, why not add a little extra work to keep more of it.
Also you can sock away up to $40k or 25% of your earnings as a business owner for retirement.... great way to cut earnings and lower taxes.
then you could put that into a self-directed ira and use it to get some real estate.
Good luck,
In NJ I pay $50 a year per llc.
Also with 10-15k, you could claim it as a sole-p. and get pretty much the same deductions.
$500-$600 maybe what it cost to file a yearly C-corp
check on, states are getting better with online filing websites.
search for
YOURSTATE llc filing fees
As an employee for someone else (in the United States), you’re already paying 7.65% in FICA taxes (Social Security & Medicare taxes). It’s withheld from your paycheck as “FICA” - this is the “employee” portion of the tax. The “employer” also has to match that amount and remit the taxes in total to the govt. So in a nutshell, when you become self-employed (whether through an LLC or a sole proprietorship) you’re paying BOTH the employee AND the employer portion (you’re now the employer as well).
Here is an example (simplified for illustration purposes):
As an “Employee”:
Gross Pay = $ 1,000
Less: FICA tax withheld $76.50 ($1,000 x 7.65%)
Net Pay = $923.50 ($1,000 – $76.50)
Vs.
As a self-employed individual (LLC or Sole Proprietor):
Gross Pay = $1,000
Less: “Employee” FICA $76.50
Less: “Employer” FICA $76.50
Net Pay $847.00 ($1000 – 76.50 – 76.50)
So in effect, you’re really paying 7.65% more (as opposed to 15.3%) for taxes than you would have if you were an employee for someone else.
a way around the self employment tax is using an s-corp, and paying your self a reasonably salary, then passing the other profits to yourself in the form of a dividend.
you will have to pay the self employment on your salary, but the dividends will not have it.
IMPORTANT: all tax guides state that you must pay yourself a reasonable salary because the IRS could step in and argue this point, and give you what they consider fair.
Also look into retirement plans..... for businesses, a nice way to lower your taxes by up to 25% of your profits...(limited to around $40k)
Also I think that for the employer its a deduction, since it is an expense.
Now, if you don't incorporate and use a Schedule C for your self-employed business, you get to deduct the 15.3% self-employment tax that you have to pay, and this comes off on the front page of your tax return.
