Forming a LLC for a 1099 job?

[Dred Pirate]

So I have the opportunity to do some consulting work as a side gig (IRB work)- income in the neighborhood of 20k with likelihood to increase as I desire.

My question is - this is 1099 work, and would there be any advantage in forming a LLC - i know several of you do 1099 sidework and wondering if you all have LLC? From a tax perspective, I don't think there is any advantage (since it would be a single member LLC). I also would not have any real expenses to deduct (work from home, so no travel, etc)

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[deleted813736]

you can still deduct expenses even if you dont form the LLC. really the only benefit i believe is the 20% pass through tax deduction for that income but only if you don't make more than 164,900 total including your W2 job.

Btw expenses can include: the home office that you will work from at home, your laptop/computer that you use, food, etc. theres always deductions if you try hard enough

 

[Dred Pirate]

you can still deduct expenses even if you dont form the LLC. really the only benefit i believe is the 20% pass through tax deduction for that income but only if you don't make more than 164,900 total including your W2 job.

Btw expenses can include: the home office that you will work from at home, your laptop/computer that you use, food, etc. theres always deductions if you try hard enough

thanks - ya - so make more than that - deductions will be limited since it is just a few meetings here and there and prep work, but any thing to save a dollar I will take.

 

[JacobMcCandles]

There's no reason to in this situation.

 

[sloh]

I'm a 1099 and originally had an LLC. Did away with it bc it's not worth my cognitive bandwidth.

 

[Dred Pirate]

There's no reason to in this situation.

sounds good, I didn't think so, but wanted to check with others. I have two colleagues that do this exact same thing - one has an LLC and one doesn't - the one who does has a bunch of other consulting side work - he says it helps for tax purposes (not sure if it does) and liability protection (again, from what I read a single person LLC isn't really treated much differently than a single proprietorship.

 

[JacobMcCandles]

sounds good, I didn't think so, but wanted to check with others. I have two colleagues that do this exact same thing - one has an LLC and one doesn't - the one who does has a bunch of other consulting side work - he says it helps for tax purposes (not sure if it does) and liability protection (again, from what I read a single person LLC isn't really treated much differently than a single proprietorship.

He's mistaken on the liability protection and likely mistaken on the tax part. But, I'm sure his accountant suggested otherwise.

 

[oldtown]

The tax advantage of forming a LLC, if you classify it as a S Corp is if you pay yourself a W2 income, you don’t have to pay the Medicare tax (3.8% I believe) on the business profits (Total business income minus W2 income that you pay yourself).

You have to pay yourself a reasonable W2 income though, and you are still responsible for social security taxes up to the income threshold (somewhere around $140K these days).

This is all useful if you’re making $200K+ through your LLC, but if it’s just for side gig income of $20-30K, not worth it.

 

[JacobMcCandles]

The tax advantage of forming a LLC, if you classify it as a S Corp is if you pay yourself a W2 income, you don’t have to pay the Medicare tax (3.8% I believe) on the business profits (Total business income minus W2 income that you pay yourself).

You have to pay yourself a reasonable W2 income though, and you are still responsible for social security taxes up to the income threshold (somewhere around $140K these days).

This is all useful if you’re making $200K+ through your LLC, but if it’s just for side gig income of $20-30K, not worth it.

Generally, the amount of income where an S-Corp might start to make sense is much higher than $200k. Closer to $400k+. Most people who think they'll save money with an S-Corp won't. The trick is finding a good accountant who actually knows the numbers. Those seem pretty few and far between.

 

[oldtown]

Generally, the amount of income where an S-Corp might start to make sense is much higher than $200k. Closer to $400k+. Most people who think they'll save money with an S-Corp won't. The trick is finding a good accountant who actually knows the numbers. Those seem pretty few and far between.

OP is a pharmacist, they typically make around $135K per year, so I tailored the “worth it” threshold to reflect that.
For an ER doc, I agree with the $400K threshold. Pay yourself $305K so you can max out 401K at $61K/year, and save Medicare tax on the business profit.

 

[sylvanthus]

I'm a 1099 and originally had an LLC. Did away with it bc it's not worth my cognitive bandwidth.

Im debating dropping mine, they harass me monthly for taxes and I have zero side gig income atm. Also my “annual report” and other nonsense is just irritating atm.

 

[Dred Pirate]

OP is a pharmacist, they typically make around $135K per year, so I tailored the “worth it” threshold to reflect that.
For an ER doc, I agree with the $400K threshold. Pay yourself $305K so you can max out 401K at $61K/year, and save Medicare tax on the business profit.

Ya. Luckily I am higher than the average by a good chunk for my profession. Over the ss maximum so I know that is one bend point in regard to some tax benefits. I already have access to a 403b and 457 so plenty of tax deferred space as well. I figured I would ask in this forum since 1099 jobs are much more common for you all than my profession.

 

[sloh]

Im debating dropping mine, they harass me monthly for taxes and I have zero side gig income atm. Also my “annual report” and other nonsense is just irritating atm.

Same, I was tired of getting harassed and having to follow up on this. Time is MONEY. Especially as a 1099, I can just see more patients which is a better use of my time.

 

[JacobMcCandles]

Ya. Luckily I am higher than the average by a good chunk for my profession. Over the ss maximum so I know that is one bend point in regard to some tax benefits. I already have access to a 403b and 457 so plenty of tax deferred space as well. I figured I would ask in this forum since 1099 jobs are much more common for you all than my profession.

If you're over the SS maximum income at your regular job, it would be pretty rare that an S-Corp would make sense.

 

[DrMetal]

So, let say you have your main job (W2 ~$350K/yr).

Let's say your 1099 side hustle is good for $250/yr. (So your total income would be $600k/yr)

Does it make sense to LLC your 1099 job, or just stay a sole proprietor?

 

[JacobMcCandles]

So, let say you have your main job (W2 ~$350K/yr).

Let's say your 1099 side hustle is good for $250/yr. (So your total income would be $600k/yr)

Does it make sense to LLC your 1099 job, or just stay a sole proprietor?

A single member LLC is treated as a pass through entity from a tax standpoint so being an LLC vs. sole proprietor is irrelevant from a tax standpoint.

 

[cyanide12345678]

So I have the opportunity to do some consulting work as a side gig (IRB work)- income in the neighborhood of 20k with likelihood to increase as I desire.

My question is - this is 1099 work, and would there be any advantage in forming a LLC - i know several of you do 1099 sidework and wondering if you all have LLC? From a tax perspective, I don't think there is any advantage (since it would be a single member LLC). I also would not have any real expenses to deduct (work from home, so no travel, etc)

No benefit unless making enough to make s corp worth while. Then yes, it needs to be done. Otherwise, no real benefit

 

[DrMetal]

A single member LLC is treated as a pass through entity from a tax standpoint so being an LLC vs. sole proprietor is irrelevant from a tax standpoint.

Exactly. So the cost of setting up a LLC (probably) is not worth it. Better for a single member to just remain a sole proprietor, right?

 

[cyanide12345678]

Exactly. So the cost of setting up a LLC (probably) is not worth it. Better for a single member to just remain a sole proprietor, right?

In the grand scheme, the cost of setting up an LLC is around $100 depending on the state, even if you made one, it's not a big deal either way.

 

[thegenius]

So, let say you have your main job (W2 ~$350K/yr).

Let's say your 1099 side hustle is good for $250/yr. (So your total income would be $600k/yr)

Does it make sense to LLC your 1099 job, or just stay a sole proprietor?

I have similar numbers more or less. I don't have an LLC or an S-Corp. I think it's a hassle. You might save a few grand in taxes, but then you have to pay someone to do all the extra bookkeeping. If you don't mind that (which will cost thousands after you do your taxes too) then do it.

I do my own 1099, stock away 68K for my SEP-IRA, make a few other big deductions, and call it a day. Simple

 

[Janders]

I have similar numbers more or less. I don't have an LLC or an S-Corp. I think it's a hassle. You might save a few grand in taxes, but then you have to pay someone to do all the extra bookkeeping. If you don't mind that (which will cost thousands after you do your taxes too) then do it.

I do my own 1099, stock away 68K for my SEP-IRA, make a few other big deductions, and call it a day. Simple

This would be my advice though I’d use a solo401k instead of sep-ira to leave the backdoor Roth option easily open.

 

[DrMetal]

I have similar numbers more or less. I don't have an LLC or an S-Corp. I think it's a hassle. You might save a few grand in taxes, but then you have to pay someone to do all the extra bookkeeping. If you don't mind that (which will cost thousands after you do your taxes too) then do it.

I do my own 1099, stock away 68K for my SEP-IRA, make a few other big deductions, and call it a day. Simple

Yeah, I agree, thanks for the input.

 

[always.chillin]

Also worth checking out a defined benefit plan in addition to the SEP IRA. My employer offers 40k/year in this kind of plan so I’m putting away 109k this year. Screw the tax man. I missed a tax payment by a month because of vague wording from my tax “professional” and got hit with a $550 fee that I’m still depressed about and begging my state to forgive. Bunch of leeches.

 

[Ceez]

Gonna piggie back on this thread. Any 1099 solo proprietor peeps also obtaining EINs? I have one for the purpose of opening business accounts, credit card, and solo 401k. However the problem that I am running into is that jobs are confused when I placed my EIN on W-9 forms. Several have asked if I am incorporated (I am not), and want to use my SSN instead. Anyone else having this problem?

 

[DrMetal]

Gonna piggie back on this thread. Any 1099 solo proprietor peeps also obtaining EINs? I have one for the purpose of opening business accounts, credit card, and solo 401k. However the problem that I am running into is that jobs are confused when I placed my EIN on W-9 forms. Several have asked if I am incorporated (I am not), and want to use my SSN instead. Anyone else having this problem?

Im kinda in the same boat, was a Sole P for a while (my side hustle was only $30K/year). Now I'm in a position where my side hustle might be >$300K year. In the latter case, (and I think if making > $100K), you wanna go S-Corps.

I don't know of the nuances of using an EIN as an SoleP. If you're the one getting pain, it has to be your SSN they use. Can only use the EIN if the company or corps is getting paid. That's my understanding.

 

[BoardingDoc]

if the company or corps is getting paid. That's my understanding.

"Corp" as in short for corporation. The actual term is "S corporation." S-Corps makes me think of a bunch of guys in suits carrying m4s.

 

[DrMetal]

me think of a bunch of guys in suits carrying m4s.

Old habits die hard

 

[DrMetal]

For those of you who have a S-Corp:

What's the appropriate role of a formal accountant (CPA) in your S-Corp? You might obviously need one at the end of the year, to help file your S-corp taxes. But is it really important (necessary) to hire a CPA for monthly or quarterly services? If you're comfortable doing payroll/taxes via Gusto/ADP etc, do you need a monthly or quarterly CPA?

 

[Make Or Break]

For those of you who have a S-Corp:

What's the appropriate role of a formal accountant (CPA) in your S-Corp? You might obviously need one at the end of the year, to help file your S-corp taxes. But is it really important (necessary) to hire a CPA for monthly or quarterly services? If you're comfortable doing payroll/taxes via Gusto/ADP etc, do you need a monthly or quarterly CPA?

Once it’s all figured out which can be done with an accountant to tell you how much you can estimate to pay for taxes and all that the automation can be done by yourself using those tax programs like Gusto or ADP. It starts to get a little tricky when you are also working in different states and with different companies. I have my accountant do the tax side and my payroll manager do the payroll side.

FYI I’m pulling in around 800k+ a year, I haven’t done the exact numbers but doing s corp doesn’t really make sense until you’re breaking over 400k. Even then the whole thing is a giant headache and has tons of paperwork to do it right and stay compliant. Really glad I’m having someone else just do it all and make the necessary payments every month for me.

 

[JacobMcCandles]

FYI I’m pulling in around 800k+ a year, I haven’t done the exact numbers but doing s corp doesn’t really make sense until you’re breaking over 400k. Even then the whole thing is a giant headache and has tons of paperwork to do it right and stay compliant. Really glad I’m having someone else just do it all and make the necessary payments every month for me.

Yes, $400k seems to be around the line where an s-corp makes sense, however, a competent accountant should be able to give you a comparison. If your accountant recommends an s-corp without getting the details, get a new accountant.

 

[DrMetal]

FYI I’m pulling in around 800k+ a year, I haven’t done the exact numbers but doing s corp doesn’t really make sense until you’re breaking over 400k.

Yes, $400k seems to be around the line

Why such a high line, why $400K? I'm glad you guys brought this up: where's the line, at what amount of income do you think creating an S-corp makes sense?

So doing my calculations, with a $200K salary, assuming you claim some business expenses, other expenses particular for running the S-corp (CPA, payroll, etc), a 50% salary, I get a tax savings of about $13K.

Now, is $13K worth it to you? worth the headache of an S-corp? I think so, I can find things to do with $13K. No?

 

[southerndoc]

I'm not incorporated, but I have my own sole proprietor EIN that my CMG uses.

 

[thegenius]

Why such a high line, why $400K? I'm glad you guys brought this up: where's the line, at what amount of income do you think creating an S-corp makes sense?

So doing my calculations, with a $200K salary, assuming you claim some business expenses, other expenses particular for running the S-corp (CPA, payroll, etc), a 50% salary, I get a tax savings of about $13K.

Now, is $13K worth it to you? worth the headache of an S-corp? I think so, I can find things to do with $13K. No?

View attachment 387500

If you can save 13K doing an S-corp, then do it.

I found that the savings was not as much as everybody said it would have been. And I agree with others it's a big headache (for me).

If it's not a headache for you, then go for it. To be honest, back of the hand numbers seem to always overestimate savings. In real life it appears to not be as much. But you know to each their own. For instance, I doubt you can pay yourself $100K/year, although I don't know where you got that number. But if you are paying yourself something like $75-100/hr, that is too low. That is not an average ER salary anywhere in the country.
There are also other expenses you are not factoring into this, like 401K expenses, you are not deducting 1/2 of your self-employment tax, you have health care premiums you can potentially deduct, HSA contributions, and potentially other stuff.

 

[DrMetal]

, I doubt you can pay yourself $100K/year, although I don't know where you got that number. But if you are paying yourself something like $75-100/hr, that is too low. That is not an average ER salary anywhere in the country.

It's a good point, you do have to pay yourself a 'reasonable' salary, according to the IRS (they don't define reasonable). The 60-40 rule has been suggested (60% income, 40% distributions). In the above example, I used 50%. If I go up to 60% or even 70% salary, you still save somewhere between $8k-10K per year. Again, is that worth it to you? Sure, why not. If I can set up the S-Corp with the help of a payroll tax service, let it run a little 'auto-pilot', and save that money, I can certainly find use for it.

 

[JacobMcCandles]

Why such a high line, why $400K? I'm glad you guys brought this up: where's the line, at what amount of income do you think creating an S-corp makes sense?

So doing my calculations, with a $200K salary, assuming you claim some business expenses, other expenses particular for running the S-corp (CPA, payroll, etc), a 50% salary, I get a tax savings of about $13K.

Now, is $13K worth it to you? worth the headache of an S-corp? I think so, I can find things to do with $13K. No?

View attachment 387500

Is this your only job? If not, what EM physician only makes $200k from a full-time job?

 

[DrMetal]

Is this your only job? If not, what EM physician only makes $200k from a full-time job?

No, it's a side hustle. My other job is a W2.

 

[JacobMcCandles]

No, it's a side hustle. My other job is a W2.

I suspect your W2 job is over the max social security tax limit of $168,600 so I don't know why you're give the US Treasury a donation on taxes that you technically won't owe since your S-Corp would be taxed as a pass-through entity. You'd get the employee portion back when you file but you wouldn't get the employer portion back. If you correct this in your assumptions, you'll see that the S-Corp would be costing you quite a bit. And that's with a salary that likely wouldn't be reasonable if you were ever audited. As a general rule, if you have a W2 job over the yearly social security tax limit, an S-Corp is almost never worth it.

 

[DrMetal]

I suspect your W2 job is over the max social security tax limit of $168,600 so I don't know why you're give the US Treasury a donation on taxes that you technically won't owe since your S-Corp would be taxed as a pass-through entity. You'd get the employee portion back when you file but you wouldn't get the employer portion back. If you correct this in your assumptions, you'll see that the S-Corp would be costing you quite a bit. And that's with a salary that likely wouldn't be reasonable if you were ever audited. As a general rule, if you have a W2 job over the yearly social security tax limit, an S-Corp is almost never worth it.

Is a good point, I didn't think of that. Yes, indeed, my W2 is over that amount.

 

[JacobMcCandles]

Is a good point, I didn't think of that. Yes, indeed, my W2 is over that amount.

Then it won’t make sense for you unless you like spending unnecessary money and unnecessary complication.

 

[DrMetal]

Then it won’t make sense for you unless you like spending unnecessary money and unnecessary complication.

Can't thank you enough for pointing out the above, max on SSN tax, which is about $10,500 per year (no max on Medicare tax). Taking that max into account, running the numbers, I think I've concluded that if you already have a significant W2 income that pays the max (or near max) amount of SSN tax ($10,500), then your 1099 side hustle is better off being a Sole Proprietor instead of a S-Corp.

Assuming a $300K side hustle, paying yourself a good salary of 65% in the S-corp, it's almost event (SoleP vs S-Corp, a little in favor of the latter, definitely not worth the headache of the S-corp).

If you don't have a significant W2 gig, if you're all 1099, then the S-corp >> Sole P.

 

[JacobMcCandles]

Can't thank you enough for pointing out the above, max on SSN tax, which is about $10,500 per year (no max on Medicare tax). Taking that max into account, running the numbers, I think I've concluded that if you already have a significant W2 income that pays the max (or near max) amount of SSN tax ($10,500), then your 1099 side hustle is better off being a Sole Proprietor instead of a S-Corp.

View attachment 387559

Assuming a $300K side hustle, paying yourself a good salary of 65% in the S-corp, it's almost event (SoleP vs S-Corp, a little in favor of the latter, definitely not worth the headache of the S-corp).

If you don't have a significant W2 gig, if you're all 1099, then the S-corp >> Sole P.

You’re still not doing the comparison correctly as you’re leaving out the employer SS taxes on the s-corp for which you won’t be able to get those back. Think of them as two separate jobs. For instance, if you have two different W2 jobs and each paying you $200k, they’ll both take out SS taxes up to the SS income tax limit. They’ll also pay the employer’s share. You’ll get evened out on the overage of your SS taxes that you paid when you file your taxes. The employer’s will still both owe up to the limit. In your situation, you’re both employers and you can’t not pay the employer’s side and you can’t get that back. With that information, the breakeven doesn’t start getting close until over $400k.

 

[DrMetal]

You’re still not doing the comparison correctly as you’re leaving out the employer SS taxes on the s-corp for which you won’t be able to get those back. Think of them as two separate jobs. For instance, if you have two different W2 jobs and each paying you $200k, they’ll both take out SS taxes up to the SS income tax limit. They’ll also pay the employer’s share. You’ll get evened out on the overage of your SS taxes that you paid when you file your taxes. The employer’s will still both owe up to the limit. In your situation, you’re both employers and you can’t not pay the employer’s side and you can’t get that back. With that information, the breakeven doesn’t start getting close until over $400k.

Ok noted. (I thought since the employer is paying half of SSN on my behalf, that portion too would be worked towards my max SSN). You're right, definitely not worth the trouble until $400K.