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Self-employment tax structure strategies (W-2 vs. 1099)
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deuce Offline
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Post: #1
Self-employment tax structure strategies (W-2 vs. 1099)
I've been working as an independent contractor since early 2011. I've already realized the myriad of everyday purchases that can be legitimately written off when working as an IC, but I would like to hear some tax avoidance (not evasion) strategies people are willing to share.

I have set up an S corporation and pay myself as a W-2 employee through the corporation. I am sure to pay myself "reasonable compensation" pursuant to IRS guidelines.

Is the W-2 status hurting me, even though my compensation, while reasonable for my career field, is quite a bit less than my total revenue? Or am I on the right track using the S corporation to avoid the taxation associated with filing as a 1099?

Please be sure to think about what you post in the clear. Thanks!

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02-12-2014 02:55 PM
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RX2 Offline
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Post: #2
RE: Self-employment tax structure strategies (W-2 vs. 1099)
Just to clarify, I'm not an attorney so don't take what I say to the T. But I do own my own business and have gone through quite a bit of legal and tax education for business owners.

In regards to the wage and net-income planning, my attorney encourages to allocate at least 1/3 of your net-income to 'wage earnings' and the remaining amount can flow out as a 'dividend' or 'net-income' not subject to Self Employment tax. Just make sure you do proper payroll planning with quarterly reports as they're required but the system can be simple and affordable.

I would suggest consulting an attorney though as tax and legal planning depend on the type of business you're involved in. Yes, they're expensive but the ROI on getting one as far as saving money in taxes can be ten fold.
02-12-2014 04:53 PM
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Richiavelli Offline
Robin
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Post: #3
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-12-2014 02:55 PM)deuce Wrote:  I've been working as an independent contractor since early 2011. I've already realized the myriad of everyday purchases that can be legitimately written off when working as an IC, but I would like to hear some tax avoidance (not evasion) strategies people are willing to share.

I have set up an S corporation and pay myself as a W-2 employee through the corporation. I am sure to pay myself "reasonable compensation" pursuant to IRS guidelines.

Is the W-2 status hurting me, even though my compensation, while reasonable for my career field, is quite a bit less than my total revenue? Or am I on the right track using the S corporation to avoid the taxation associated with filing as a 1099?

Please be sure to think about what you post in the clear. Thanks!

The S Corp is a flow through entity, I don't really understand what you are trying to do (Besides limit liability? I think S-Corps can't do this...).

You either make it schedule C and write off everything (and pay self employment, but some of it you can take as a FOR AGI expense anyway) or create a flow through entity to pay yourself.

I'm a tax accounting but I do taxes for hedge funds (used to do it for super rich people but it's a career limiting field.)
02-14-2014 01:31 AM
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Richiavelli Offline
Robin
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Post: #4
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-12-2014 04:53 PM)RX2 Wrote:  Just to clarify, I'm not an attorney so don't take what I say to the T. But I do own my own business and have gone through quite a bit of legal and tax education for business owners.

In regards to the wage and net-income planning, my attorney encourages to allocate at least 1/3 of your net-income to 'wage earnings' and the remaining amount can flow out as a 'dividend' or 'net-income' not subject to Self Employment tax. Just make sure you do proper payroll planning with quarterly reports as they're required but the system can be simple and affordable.

I would suggest consulting an attorney though as tax and legal planning depend on the type of business you're involved in. Yes, they're expensive but the ROI on getting one as far as saving money in taxes can be ten fold.

Interesting. It would be classified as different tax attribute income. Are you the sole owner of the business?
02-14-2014 01:33 AM
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RX2 Offline
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Post: #5
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-14-2014 01:33 AM)Richiavelli Wrote:  Interesting. It would be classified as different tax attribute income. Are you the sole owner of the business?

I flow all my income from ventures through it.

Look at the video below, he (Mark Kohler) explains it a lot better than I can in less than 2 mins.



02-14-2014 09:49 AM
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Harvey Specter Offline
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Post: #6
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-12-2014 02:55 PM)deuce Wrote:  I've been working as an independent contractor since early 2011. I've already realized the myriad of everyday purchases that can be legitimately written off when working as an IC, but I would like to hear some tax avoidance (not evasion) strategies people are willing to share.

I have set up an S corporation and pay myself as a W-2 employee through the corporation. I am sure to pay myself "reasonable compensation" pursuant to IRS guidelines.

Is the W-2 status hurting me, even though my compensation, while reasonable for my career field, is quite a bit less than my total revenue? Or am I on the right track using the S corporation to avoid the taxation associated with filing as a 1099?

Please be sure to think about what you post in the clear. Thanks!

If you pay yourself reasonable comp compared to others in your field in a similar situations (not just job title, but equity position as well) then you are fine.

(02-12-2014 04:53 PM)RX2 Wrote:  In regards to the wage and net-income planning, my attorney encourages to allocate at least 1/3 of your net-income to 'wage earnings' and the remaining amount can flow out as a 'dividend' or 'net-income' not subject to Self Employment tax. Just make sure you do proper payroll planning with quarterly reports as they're required but the system can be simple and affordable.

An attorney gave you this advice? This is not good advice and it could possibly cost you big if you were ever audited. If that is advice that you paid for I would get a new attorney or CPA.
02-14-2014 02:09 PM
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RX2 Offline
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Post: #7
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-14-2014 02:09 PM)Harvey Specter Wrote:  An attorney gave you this advice? This is not good advice and it could possibly cost you big if you were ever audited. If that is advice that you paid for I would get a new attorney or CPA.

Yes, my attorney/CPA gave me that advice.

I can see where if you're doing a low salary / high dividend split could trigger red flags and in case get you audited. Haven't had any issues so, I'll keep you updated I guess. Everything has been done, recorded and all that so honestly I'm not concerned. We shall see.
02-14-2014 03:19 PM
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Harvey Specter Offline
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Post: #8
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-14-2014 03:19 PM)RX2 Wrote:  
(02-14-2014 02:09 PM)Harvey Specter Wrote:  An attorney gave you this advice? This is not good advice and it could possibly cost you big if you were ever audited. If that is advice that you paid for I would get a new attorney or CPA.

Yes, my attorney/CPA gave me that advice.

I can see where if you're doing a low salary / high dividend split could trigger red flags and in case get you audited. Haven't had any issues so, I'll keep you updated I guess. Everything has been done, recorded and all that so honestly I'm not concerned. We shall see.

Do whatever you want, you aren't my client so it makes no difference to me. I am just telling you that you got bad advise, a google search will tell you the same thing.
02-14-2014 03:26 PM
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Richiavelli
anonymous123 Offline
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Post: #9
RE: Self-employment tax structure strategies (W-2 vs. 1099)
I will start with all the usual disclaimers (I'm not your CPA, tax attorney, etc...I don't know your situation...all that stuff). From my experience as a business owner:

- use an LLC, when you generate an invoice for new customer/client/account have your W9 form handy to give them
- you can set forth "Target Base Compensation" for tax purposes. You shouldn't be putting yourself on a w2 (and if you start making dough this will get flagged)
- understand that you will get hit with self employment tax...but, this is no diff than if on w2
- you will get a K-1 for your taxes if more than one owner
- if sole proprietor it will just roll straight through to you as if personal

From my experiences, it is a rare case these days to not use an LLC
02-14-2014 05:27 PM
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Onto Offline
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RE: Self-employment tax structure strategies (W-2 vs. 1099)
I'm curious, why would you use a LLC vs. an S-Corp? Onto is by himself and an S-Corp and his accountant keeps his taxes (Fed and State) to around 20% total or less. Smile

Take a salary (w2) but most income comes from the dividend (no SS/Medicare tax on that). Of course you write of all the expenses at the corp level before anything passes through.

Also you can create a self-directed pension for yourself and contribute much more (tax deductible) than you could if you were an employee of some company.

I don't know how LLC's work, but my accountant does and he says S-Corp for a single person is the way to go.

Total tax 20%. 'Nuff said.
(This post was last modified: 02-14-2014 06:18 PM by Onto.)
02-14-2014 06:18 PM
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anonymous123 Offline
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Post: #11
RE: Self-employment tax structure strategies (W-2 vs. 1099)
What has been explained to me is that there is zero difference in tax rate if an LLC vs S-corp, because both roll up to the individual anyway. The LLC does give you more flexibility if things change. I don't think a lot of people use S-corps anymore on the other side of the popularity of the LLC.

But, I'm not a CPA and don't know this particular situation. I do set up a number of new entities, and in most circumstances the LLC seems to be what makes sense.

With the LLC you take all of your revenues and expenses at the business level, and any operating profit would pass through as an individual and taxed as ordinary income. But, again, this is after all expenses paid at business level. I don't think there is any way to keep tax to 20% under any scenario. (Otherwise we would all find ways to keep our tax rates at 20%).
02-14-2014 06:32 PM
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anonymous123 Offline
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Post: #12
RE: Self-employment tax structure strategies (W-2 vs. 1099)
Oh, and with an LLC you still qualify to set up an SEP, which allows for $49k a year to be treated like a 401k. I don't think there is a lot of difference between an S-corp and an LLC for individuals...but the S-corp is becoming a much more rare choice.
02-14-2014 06:35 PM
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Onto Offline
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Post: #13
RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-14-2014 06:32 PM)anonymous123 Wrote:  I don't think there is any way to keep tax to 20% under any scenario. (Otherwise we would all find ways to keep our tax rates at 20%).

I do have additional deductions from investment properties, child and such so I know that contributes to the 20% total tax that other people might not have. Also it really depends on your tax bracket when it's all said and done. Sounds like you may make a significant amount more money than I do.

Does an LLC allow you to take a dividend? That's a huge tax savings when 2/3 or your income isn't subject to SS/Medicare
(This post was last modified: 02-14-2014 06:56 PM by Onto.)
02-14-2014 06:40 PM
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Richiavelli Offline
Robin
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RE: Self-employment tax structure strategies (W-2 vs. 1099)
(02-14-2014 03:26 PM)Harvey Specter Wrote:  
(02-14-2014 03:19 PM)RX2 Wrote:  
(02-14-2014 02:09 PM)Harvey Specter Wrote:  An attorney gave you this advice? This is not good advice and it could possibly cost you big if you were ever audited. If that is advice that you paid for I would get a new attorney or CPA.

Yes, my attorney/CPA gave me that advice.

I can see where if you're doing a low salary / high dividend split could trigger red flags and in case get you audited. Haven't had any issues so, I'll keep you updated I guess. Everything has been done, recorded and all that so honestly I'm not concerned. We shall see.

Do whatever you want, you aren't my client so it makes no difference to me. I am just telling you that you got bad advise, a google search will tell you the same thing.

Yeah I'd personally be worried also, but it's up to you. If there isn't a lot of money flowing through, maybe you'll never get audited.

What some of the posters did say here though rings true - LLC's are much more flexible and S-Corps are practically archaic. There are reasons you would want to use both though (EX: you would never use an S-Corp to hold investments)
02-14-2014 11:34 PM
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