Money/tax benefits of a LLC?

[wanderingback]

Last year I did a little bit of work getting paid through a 1099, but it looks like this year I'll likely be doing more and will continue to do so (while also working a "regular" job and getting a W2). On a physician message board I'm on they talk about the benefits of starting a LLC and using that if you get paid through a 1099. I tried to use google, but what exactly are the tax/money benefits in doing this?

My SO has a LLC because he gets paid through 1099 exclusively and I'm planning to use his accountant this year, but just haven't gotten around to meeting with her since pandemic craziness happened. So I'll definitely talk with her, but wanted to get a little more info from MM as well. 

[scout8]

The tax savings comes from avoiding the self employment tax. When you are a 1099 contractor, you have to pay social security and medicare taxes, but then you get hit a second time because you also pay the employer portion of these taxes. When you are incorporated, you can pay yourself a salary and then the rest as a distribution. You will pay income taxes on all of it, but you will only pay self employment taxes on the salary portion.

For example, let's say a person makes 100K and is incorporated. They may pay themselves a salary of 40K and a distribution of 60K. Income taxes will be based on 100K, but the self employment tax will only be paid on 40K. Keep in mind that your social security benefits will be based on the salary amount so they will be lower.

I believe that being incorporated can also provide some liability protection as well which is probably important in your profession.

I'm not an accountant so I may have some of the terminology wrong, but I'm pretty sure I have the concepts correct.

[wanderingback]

Apr 7, 2020 21:48:25 GMT -5 scout8 said:

The tax savings comes from avoiding the self employment tax. When you are a 1099 contractor, you have to pay social security and medicare taxes, but then you get hit a second time because you also pay the employer portion of these taxes. When you are incorporated, you can pay yourself a salary and then the rest as a distribution. You will pay income taxes on all of it, but you will only pay self employment taxes on the salary portion.

For example, let's say a person makes 100K and is incorporated. They may pay themselves a salary of 40K and a distribution of 60K. Income taxes will be based on 100K, but the self employment tax will only be paid on 40K. Keep in mind that your social security benefits will be based on the salary amount so they will be lower.

I believe that being incorporated can also provide some liability protection as well which is probably important in your profession.

I'm not an accountant so I may have some of the terminology wrong, but I'm pretty sure I have the concepts correct.

Thank you this is helpful!!

[puppylove64]

If you incorporate. You would pay the tax on whatever wages you pay and your company would pay the payroll taxes on the wages. So essentially you still pay payroll taxes on the wages. Incorporating is usually very expensive legally and not usual for a single person 1099 income.

Creating a LLC is just for legal liability, it doesn’t have anything to do with taxes paid. If you receive a 1099, you can deduct business expenses from your income. It is likely your husband does this every year because he is familiar with the 1099 and you did not since it was new.

[archiethedragon]

Apr 8, 2020 5:55:30 GMT -5 puppylove64 said:

If you incorporate. You would pay the tax on whatever wages you pay and your company would pay the payroll taxes on the wages. So essentially you still pay payroll taxes on the wages. Incorporating is usually very expensive legally and not usual for a single person 1099 income.

Creating a LLC is just for legal liability, it doesn’t have anything to do with taxes paid. If you receive a 1099, you can deduct business expenses from your income. It is likely your husband does this every year because he is familiar with the 1099 and you did not since it was new.

Agree with this.   

[scout8]

It was not expensive for me to incorporate when I was a 1099 contractor. I paid my attorney a small amount to set up my corporation, but I could have done it myself. I paid her $100 a year to file the paperwork to stay incorporated each year on top of the $100 filing fees. This was in Illinois so it could be different in other states. I disagree with the poster above, because about half of the real estate brokers I know were incorporated. So I don't think it is unusual for a single person with 1099 income to incorporate.

The main cost for me was that my accountant charged a lot more since I was a business and had to file business tax returns too. Even with that additional cost, it saved me a significant amount of money. I do remember my accountant told me that it only made financial sense to incorporate above a certain income level, but I don't remember the amount. Your accountant will be able to tell you if it makes sense for you.

[archiethedragon]

I think we are confusing two things creating an LLC versus incorporating. They are different.

When creating an LLC you are creating a limited liability corporation. This is not incorporation. In an LLC, the owner and the company are still the same entity. You are the company an the company is you. They are taxed essentially in the same way as if you didn't have an LLC. IE. if your LLC earns money, you earn money. The creation of the LLC give you protection of your personal assets if you get sued while conducting your business.

When incorporating (either a C corp or S corp) you are creating a company which is a separate entity from yourself. You are then a shareholder in the company and an employee of the company. In this case the company can pay its employee (you) a salary If the company earns more money than your salary it can keep the money. This can be advantageous for tax saving, especially as the earnings of the company go up.

[scout8]

Apr 8, 2020 7:13:17 GMT -5 archiethedragon said:

I think we are confusing two things creating and LLC versus incorporating. They are different.

When creating an LLC you are creating a limited liability corporation. This is not incorporation. In an LLC, the owner and the company are still the same entity. You are the company an the company is you. They are taxed essentially in the same way as if you didn't have an LLC. IE. if your LLC earns money, you earn money. The creation of the LLC give you protection of your personal assets if you get sued while conducting your business.

When incorporating (either a C corp or S corp) you are creating a company which is a separate entity from yourself. You are then a shareholder in the company and an employee of the company. In this case the company can pay its employee (you) a salary If the company earns more money than your salary it can keep the money. This can be advantageous for tax saving, especially as the earnings of the company go up.

Thanks. This is helpful. I was incorporated as an S corp so my responses were all relating to S corps. 

[awkwardpenguin]

When you are a sole proprietorship, the LLC does not confer additional tax advantages. With or without the LLC, you get pass through taxation on business income, which means it is taxed only at the individual level. There are other advantages to an LLC, mostly related to personal vs. business liability.

www.legalzoom.com/articles/advantages-of-an-llc

[wanderingback]

Apr 8, 2020 7:13:17 GMT -5 archiethedragon said:

I think we are confusing two things creating an LLC versus incorporating. They are different.

When creating an LLC you are creating a limited liability corporation. This is not incorporation. In an LLC, the owner and the company are still the same entity. You are the company an the company is you. They are taxed essentially in the same way as if you didn't have an LLC. IE. if your LLC earns money, you earn money. The creation of the LLC give you protection of your personal assets if you get sued while conducting your business.

When incorporating (either a C corp or S corp) you are creating a company which is a separate entity from yourself. You are then a shareholder in the company and an employee of the company. In this case the company can pay its employee (you) a salary If the company earns more money than your salary it can keep the money. This can be advantageous for tax saving, especially as the earnings of the company go up.

Thank you!
This makes total sense because I remember on the physician message board them talking about whether they should do a corp or a LLC.
Clearly I need to talk to an accountant to understand which might be the most beneficial for me.
Appreciate the help. 

[genet313]

Wandering, you are a doctor. I forget where you are located but every state will have a special entity form that you will need to use to provide professional services as a licensed MD. You should talk to a corporate lawyer to figure out what entity you need to use.

For example, in NJ a doctor can perform services through a PC, a professional corporation, or a PLLC, a professional limited liability company. Either entity may suit your needs and a lawyer can help you figure out which is best.

I wouldn’t try to do this without at least some benefit of counsel because of your MD status. If you PM me Your location I may be able to make a rec.