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Old 06-05-2015, 09:03 PM
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Consulting - individual or business

Hello all, great forum, lots of useful info!

I've been searching here and other places for a while but cannot seem to find an answer (or even if there is an "easy" answer at all) to my constant tax dilemma/confusion.

Is there a rule of thumb for when it makes sense to start a consulting business vs receiving payment as an individual work-for-hire? In other words, would there be tax benefits if I started a consulting business instead of getting paid in my name?

Married, filing jointly (spouse does not work), two kids, my income from the regular job is $85,000, plus the consulting gets ~$30,000.

If I start a consulting business and get paid under the business name, would I be able to take advantage of any tax benefits? Is there a quick way to tell or does it need to be a comprehensive financial advisor type of analysis?

Thanks in advance for any advice!



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Old 06-06-2015, 06:29 AM
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Is there a rule of thumb for when it makes sense to start a consulting business vs receiving payment as an individual work-for-hire? In other words, would there be tax benefits if I started a consulting business instead of getting paid in my name?=============>>>>>>>I guess hard to tell easily.it depends on many variables. In general, you are free to conduct your business under your own name. It is a common practice that entrepreneurs choose their own name as denomination of their company;however, when beginning a business, you need to decide what form of business entity to establish for tax benefits. So, the first things you need to do when you start your business is to choose a legal entity,Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corp. A Limited Liability Company is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure. Your business entity–such as a corporation or LLC–can provide protection of your personal non-business assets.In the case of a sole ownership, the business are legally viewed as the same entity, a sole proprietor carries with it certain financial risks and limitations. The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they will list business information and figures within their individual tax return. This can save additional costs on accounting and tax filing. The business will be taxed at the rates applied to personal income, not corporate tax rates. While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees. if you choose your biz form as an S corp, then, by electing S-Corp status, your company can eliminate the disadvantage of "double taxation" of corporate income and shareholder dividends associated with the C-Corp tax status. You, as an Owner of S corp, need to report your share of profit and loss on your 1040; An S corp election allows you, a business owner , to avoid self-employment taxes on a portion of the business profits;







Married, filing jointly (spouse does not work), two kids, my income from the regular job is $85,000, plus the consulting gets ~$30,000. If I start a consulting business and get paid under the business name, would I be able to take advantage of any tax benefits?==============>>>>>>>>>As mentioned above I guess it is not so simple to say which option is absolutely advantageous / disadvantageous since there are a variety of taxation situations; taxes may be the least favorite topic for small business owners, but it's one of the most important.











Is there a quick way to tell or does it need to be a comprehensive financial advisor type of analysis?=============>>>>>>>In the case of S corp, the giant tax saving loophole associated with S corps flows from the way S corps let shareholder-employees avoid employment taxes. That’s the big thing you want to focus on when you think about making a Subchapter S election for a corp or LLC over sole ownership /SMLLC which is similar to a sole proprietorship .In reality, When you, as an individual, outgrew a proprietorship, either an S corp or a C corp used to be the norm; If you, as a biz owner, are more comfortable with the corporate form than with an LLC, an S corp can be a good choice for you.I guess you may contact an IRS Enrolled Agent/a CPA in your local area for more info in detail



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Old 06-07-2015, 02:49 PM
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Quote:
Originally Posted by Wnhough View Post
=============>>>>>>>Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corp. A Limited Liability Company is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure. Your business entity–such as a corporation or LLC–can provide protection of your personal non-business assets.In the case of a sole ownership, the business are legally viewed as the same entity, a sole proprietor carries with it certain financial risks and limitations. The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they will list business information and figures within their individual tax return. This can save additional costs on accounting and tax filing. The business will be taxed at the rates applied to personal income, not corporate tax rates. While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees. if you choose your biz form as an S corp, then, by electing S-Corp status, your company can eliminate the disadvantage of "double taxation" of corporate income and shareholder dividends associated with the C-Corp tax status. You, as an Owner of S corp, need to report your share of profit and loss on your 1040; An S corp election allows you, a business owner , to avoid self-employment taxes on a portion of the business profits;

=============>>>>>>>In the case of S corp, the giant tax saving loophole associated with S corps flows from the way S corps let shareholder-employees avoid employment taxes. That’s the big thing you want to focus on when you think about making a Subchapter S election for a corp or LLC over sole ownership /SMLLC which is similar to a sole proprietorship .In reality, When you, as an individual, outgrew a proprietorship, either an S corp or a C corp used to be the norm; If you, as a biz owner, are more comfortable with the corporate form than with an LLC, an S corp can be a good choice for you.I guess you may contact an IRS Enrolled Agent/a CPA in your local area for more info in detail
Thanks a lot for taking the time to provide the info and answers. It sounds like I need to read about different business entities and determine which one works best for me. A few more questions based on the info you provided:

1. When I say "tax benefits", I was hoping to determine if starting a business would get me any benefits as compared to being paid as an individual. I would not be changing anything about the consulting that I am doing, which is, more precisely, teaching exam prep courses. I would not be expanding, employing people, or anything else. My main goal is to pay less taxes on that additional income ($30k from consulting) and gain any other benefits that might be available IF I had a business instead of being paid as an individual. If it does not make much difference, I can just stay being paid as an individual and pay individual income tax. My thinking was that under the business, I can claim deductions and expenses, and also at the same time reduce my individual income (because that consulting income would be for the business), therefore lowering my taxes. I do realize that I might be missing important things in my "analysis" and this might not be the way it is done...

2. Can I have an S-corp where I am the owner and only employee? Does that even make sense?

3. Since my second job is consulting (teaching prep courses), I do not see where "protection of personal non-business assets" would be important, does that mean I do not need LLC or corporation status?

4. As for the sole proprietorship, would my income be reported as $30k or the total that I made as an individual? Basically, would the self employment tax be applied on $30k or the total income?

5. In general, is there a quick way to tell if $30k of additional income is even worth exploring all these "options"?

Thanks again in advance for any advice!



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Old 06-07-2015, 02:52 PM
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Join Date: Jun 2015
Posts: 3
Thanks! Few more questions ->

Quote:
Originally Posted by Wnhough View Post
=============>>>>>>>Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corp. A Limited Liability Company is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure. Your business entity–such as a corporation or LLC–can provide protection of your personal non-business assets.In the case of a sole ownership, the business are legally viewed as the same entity, a sole proprietor carries with it certain financial risks and limitations. The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they will list business information and figures within their individual tax return. This can save additional costs on accounting and tax filing. The business will be taxed at the rates applied to personal income, not corporate tax rates. While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees. if you choose your biz form as an S corp, then, by electing S-Corp status, your company can eliminate the disadvantage of "double taxation" of corporate income and shareholder dividends associated with the C-Corp tax status. You, as an Owner of S corp, need to report your share of profit and loss on your 1040; An S corp election allows you, a business owner , to avoid self-employment taxes on a portion of the business profits;

=============>>>>>>>In the case of S corp, the giant tax saving loophole associated with S corps flows from the way S corps let shareholder-employees avoid employment taxes. That’s the big thing you want to focus on when you think about making a Subchapter S election for a corp or LLC over sole ownership /SMLLC which is similar to a sole proprietorship .In reality, When you, as an individual, outgrew a proprietorship, either an S corp or a C corp used to be the norm; If you, as a biz owner, are more comfortable with the corporate form than with an LLC, an S corp can be a good choice for you.I guess you may contact an IRS Enrolled Agent/a CPA in your local area for more info in detail
Thanks a lot for taking the time to provide the info and answers. It sounds like I need to read about different business entities and determine which one works best for me. A few more questions based on the info you provided:

1. When I say "tax benefits", I was hoping to determine if starting a business would get me any benefits as compared to being paid as an individual. I would not be changing anything about the consulting that I am doing, which is, more precisely, teaching exam prep courses. I would not be expanding, employing people, or anything else. My main goal is to pay less taxes on that additional income ($30k from consulting) and gain any other benefits that might be available IF I had a business instead of being paid as an individual. If it does not make much difference, I can just stay being paid as an individual and pay individual income tax. My thinking was that under the business, I can claim deductions and expenses, and also at the same time reduce my individual income (because that consulting income would be for the business), therefore lowering my taxes. I do realize that I might be missing important things in my "analysis" and this might not be the way it is done...

2. Can I have an S-corp where I am the owner and only employee? Does that even make sense?

3. Since my second job is consulting (teaching prep courses), I do not see where "protection of personal non-business assets" would be important, does that mean I do not need LLC or corporation status?

4. As for the sole proprietorship, would my income be reported as $30k or the total that I made as an individual? Basically, would the self employment tax be applied on $30k or the total income?

Thanks again in advance for any advice!



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Old 06-07-2015, 06:36 PM
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Thanks a lot for taking the time to provide the info and answers. It sounds like I need to read about different business entities and determine which one works best for me. A few more questions based on the info you provided:=======>> Agreed; this is exactly what I want you to do to make wise decision for tax savings.

1. When I say "tax benefits", I was hoping to determine if starting a business would get me any benefits as compared to being paid as an individual. I would not be changing anything about the consulting that I am doing, which is, more precisely, teaching exam prep courses. I would not be expanding, employing people, or anything else. My main goal is to pay less taxes on that additional income ($30k from consulting) and gain any other benefits that might be available IF I had a business instead of being paid as an individual. If it does not make much difference, I can just stay being paid as an individual and pay individual income tax. My thinking was that under the business, I can claim deductions and expenses, and also at the same time reduce my individual income (because that consulting income would be for the business), therefore lowering my taxes. I do realize that I might be missing important things in my "analysis" and this might not be the way it is done... ===========>>basically, whether you have a business instead of being paid as an individual or not, or whether you've purchased an existing business or want to start a new company, you must first decide which form of organization or business entity as said , is best for you. There are several business types, and each has advantages and disadvantages. That is why you need to consult with your tax attorney / an IRS enrolled Agent or a CPA about which type of business is most beneficial for your particular situation before making a final decision.

2. Can I have an S-corp where I am the owner and only employee? Does that even make sense?=====>>Of course; that is exactly what S corp is ;as said, S corps are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders/employees or owners for federal tax purposes. As a SH/EE/ or owner of an S corp, you need to report the flow-through of income and losses on your 1040(as S corp does not pay income tax )and are assessed tax at your tax bracket.. This allows an S corp to avoid double taxation on the corporate income UNLIKE reg C corp. Generally, an officer of a C or S – corp is an employee of the corporation. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. S corp officer/shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes.So as an S corp shareholder/owner/employee, you usually receive wage ;y our Sch K-1 of 1120S income is your distributive share of corporation profit increasing the S corp’s AAA and your shareholder basis . Your salary, reported on your W-2 is an expense that reduces the corporation profit reducing the amount on the K-1 so it only gets reported once. An S corp, like any other business, must pay Social Security and Medicare taxes on behalf of its employee, you in this case. The obligation for Social Security and Medicare taxes is divided equally between you, the employee, and the S corp, the employer. In most cases, you as an EE pay 6.2 percent of your wages in Social Security taxes and 1.45 percent in Medicare taxes, for a total of 7.65 percent. The employer, the S corp, then pays an equal amount out of its own pocket. Although it's typically the employer's responsibility to collect "both sides" of these taxes and send them to the government, it can claim a deduction for the taxes it pays out of its own pocket on 1120S line 12,

.

3. Since my second job is consulting (teaching prep courses), I do not see where "protection of personal non-business assets" would be important, does that mean I do not need LLC or corporation status? =========>> you can deduct only the portion of an item that you use for businessGenerally, you can deduct business assets only if you have Sch C business income relating to them. For example, you can’t deduct the purchase of a computer that you also use for doing some work at home for your employer. You can deduct an item as a business asset if the item must be used in your business or to produce income; it must be expected to have a useful life of more than one year; that useful life must be limited: At some point, it wears out, breaks, is used up, or becomes obsolete. No matter what method you use, the IRS requires you to document your use of certain items that can be used for personal as well as business use, even if you use the item 100 % of the time for business. These types of items are called listed property and include:Any passenger automobile or other property used for transportation; Cell phones; Any property that is generally used for entertainment, recreation, or amusement, such as photographic and video equipment; Computers and related equipment.

4. As for the sole proprietorship, would my income be reported as $30k or the total that I made as an individual? Basically, would the self employment tax be applied on $30k or the total income?======>>SECA tax for self employer filing Sch C of 1040 is imposed on your net earnings reported on Sch SE line 2 / 3(aslongas the amt on Sch SE line 2, 3 is $400 or exceeds $400) . If your net earnings are less than the minimum set each year, no SECA Tax is payable. SECA tax rates are 12.4 percent for Social Security and 2.9 percent for Medicare, or 15.3 percent overall. An additional Medicare tax of 0.9 percent applies only to high-income earners and increases their Medicare tax rate to 3.8 percent. You need to multiply net earnings by 15.3 percent to find the amount of SECA taxes due. When figuring your seca tax you owe, you get to reduce self-employment income by half of the seca tax before applying the tax rate. Say, for example, that your net self-employment income is $50K on Sch C lione 29 / 31. That's the amount you report as taxable for income tax purposes on Form 1040.But when figuring your seca tax on Sch SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Not paying the 15.3 percent tax on $3,225 difference in this example saves you $493. You can claim 50 % of what you pay in seca tax as an income tax deduction. For example, a $1k seca tax payment reduces taxable income by $500. In the 25 percent tax bracket, that saves you $125 in income taxes. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions on your Sch A of 1040.As President Obama signed the act into law , that will change. Persons who are self-employed will be able to deduct the cost of health insurance premiums from income before calculating SE tax. That results in a savings of nearly 15% over the cost of those premiums: Social Security tax is payable at a rate of 12.4% and Medicare tax is payable at a rate of 2.9% ,a combined rate of 15.3%.

5. In general, is there a quick way to tell if $30k of additional income is even worth exploring all these "options"?
====>.As I said it is hard to tell ; not easy. It depends on many variables.



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