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Self-employment tax structure strategies (W-2 vs. 1099)
02-12-2014, 02:55 PM
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?
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Self-employment tax structure strategies (W-2 vs. 1099)
02-12-2014, 04:53 PM
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.
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Self-employment tax structure strategies (W-2 vs. 1099)
02-14-2014, 05:27 PM
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
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Self-employment tax structure strategies (W-2 vs. 1099)
02-14-2014, 06:32 PM
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%).
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Self-employment tax structure strategies (W-2 vs. 1099)
02-14-2014, 06:35 PM
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.