[The Beast1]

My wife has a fantastic opportunity to get hired for a decent paying 100% remote gig either as a contractor or through a hiring firm.

The trick with this is, the hiring firm is going to skim off 16% as a finder's fee. I personally hate this contracting firm and would rather go through the steps of registering a business entity ourselves.

The requirement would have to be a 2+ corporate entity which is fine since my name would be on it as well.

My question is, what are the best types of business entities that I can register to help lower my tax burden? Could I set up a share structure, pay ourselves the US minimum wage (lowering our income and payroll tax) and then just pay out "dividends" in a share structure? What benefit would there be to registering in Nevada or Delaware?

For what it is worth, we're looking at around $65k. We'd ideally like to take as much as we can here.

I've opened Pandora's box of corporate registrations and i'm not sure what would be the best one for what we're trying to do. As always, I would greatly appreciate any advice.

Edit: I may also have an opportunity to contract my own work through this as well hence my interests in setting something up.

[kinnikinik]

I'm in WA... Here it's a simple matter to register an LLC. There are registration "kits" available in Barnes and Noble or Amazon with the Articles of Incorporation that you can then modify.

No matter what kind of "pass thru" you do, you're not going to avoid individual income tax. However, you CAN use a number of write-offs to lower the burden. In particular, itemizing mileage driven for business purposes is a major boon. As I understand it, the deduction for "office space" usage is examined carefully by the IRS so I've avoided it. One strategy that I'm working on putting into place right now is a 401K plan whereby you, the employer, can match your (the employee's) own contributions into your retirement accounts. The trick is that the same match has to be available to all full-time employees in the company. (not a problem in your case).

On a 65K job, 16 percent is 10K so the extra paperwork does make sense. BUT, record keeping (ie. receipts and mileage tracking) is CRITICAL come tax time.

[The Beast1]

(05-09-2016 12:43 PM)kinnikinik Wrote:  

One strategy that I'm working on putting into place right now is a 401K plan whereby you, the employer, can match your (the employee's) own contributions into your retirement accounts. The trick is that the same match has to be available to all full-time employees in the company. (not a problem in your case).

On a 65K job, 16 percent is 10K so the extra paperwork does make sense. BUT, record keeping (ie. receipts and mileage tracking) is CRITICAL come tax time.

This is interesting. Can you share some of your tricks on this 401k scheme?

The tax reporting is the more of a worrisome thing for me. I'm leaning towards just getting a good accountant and paying out that instead of doing it myself.

[CleanSlate]

(05-09-2016 12:54 PM)The Beast1 Wrote:  

The tax reporting is the more of a worrisome thing for me. I'm leaning towards just getting a good accountant and paying out that instead of doing it myself.

This.

That's what I did for my business when I registered it. It's not cheap, but really takes the stress and hassle out of it so you can focus on your actual work.

[fortysix]

(05-09-2016 09:21 AM)The Beast1 Wrote:  

My wife has a fantastic opportunity to get hired for a decent paying 100% remote gig either as a contractor or through a hiring firm.

The trick with this is, the hiring firm is going to skim off 16% as a finder's fee. I personally hate this contracting firm and would rather go through the steps of registering a business entity ourselves.

The requirement would have to be a 2+ corporate entity which is fine since my name would be on it as well.

My question is, what are the best types of business entities that I can register to help lower my tax burden? Could I set up a share structure, pay ourselves the US minimum wage (lowering our income and payroll tax) and then just pay out "dividends" in a share structure? What benefit would there be to registering in Nevada or Delaware?

For what it is worth, we're looking at around $65k. We'd ideally like to take as much as we can here.

I've opened Pandora's box of corporate registrations and i'm not sure what would be the best one for what we're trying to do. As always, I would greatly appreciate any advice.

Edit: I may also have an opportunity to contract my own work through this as well hence my interests in setting something up.

I'm no expert in tax, but it seems to me that it may be a better idea to register an LLC rather than a corporation / share structure.

Corporations are usually only preferred if you are seeking investment, because they allow you to issue stock. LLCs are generally more beneficial from a tax standpoint.

With an LLC, all your profits will run through to your personal tax return on your K-1, so you're only taxed once.

With a corporation, you will first pay corporate tax on your income, and then pay individual tax again when you distribute the income from the corp to yourself as an individual.

Keep in mind that if you register as an LLC, you can still elect to be taxed as a corporation if you want to.

You only really register in Delaware if you are seeking investment because most institutional investors only invest in Delaware startups because Delaware has a clear corporate law system. I do not know anything about registering in Nevada.

Also, if you incorporate out of state, you will still need to register your company in the state where you do business, so keep this small headache in mind.

In regard to your idea about paying the minimum salary and the rest as dividends - Won't both be subject to the same personal income tax bracket once you pay yourself the dividend? Is there some kind of deduction for dividends that you plan to utilize? I think a potential problem is that if you pay yourself dividends rather than salary, you may not be able to take certain deductions on your return.

For everything I said above, correct me if im wrong, as I am interested in all this stuff also!

[JacksonRev]

S-Corps are the best for tax purposes. All the benefits of a corporation, minus the double taxation. The main drawback is you need cash on hand to pay taxes each year, since the corporation is not required to pay your portion. And they are more complicated to create and maintain.

LLC's are the easier to create and maintain. I personally use an LLC, but I'll be making an S-Corp by then end of the month, mainly for tax purposes. I registered my LLC through my Secretary of State for $25 online.

[fortysix]

(05-09-2016 03:27 PM)JacksonRev Wrote:  

S-Corps are the best for tax purposes. All the benefits of a corporation, minus the double taxation. The main drawback is you need cash on hand to pay taxes each year, since the corporation is not required to pay your portion. And they are more complicated to create and maintain.

LLC's are the easier to create and maintain. I personally use an LLC, but I'll be making an S-Corp by then end of the month, mainly for tax purposes. I registered my LLC through my Secretary of State for $25 online.

Why do you find an S Corp to be more beneficial than a LLC?

As I understand, with a corporation you need to comply with corporate formalities by law, while LLCs you don't really need to unless its set out in your operating agreement. Also, an s corp seems more of a hassle because you still to need to file tax returns for the entity, while with LLC you just file your own return. Finally, with LLC it seems easier to allocate your distributions / profits / losses than with an s corp, where your profit / loss has to follow your stock ownership?

[PapayaTapper]

(05-09-2016 12:54 PM)The Beast1 Wrote:  

(05-09-2016 12:43 PM)kinnikinik Wrote:  

One strategy that I'm working on putting into place right now is a 401K plan whereby you, the employer, can match your (the employee's) own contributions into your retirement accounts. The trick is that the same match has to be available to all full-time employees in the company. (not a problem in your case).

On a 65K job, 16 percent is 10K so the extra paperwork does make sense. BUT, record keeping (ie. receipts and mileage tracking) is CRITICAL come tax time.

This is interesting. Can you share some of your tricks on this 401k scheme?

The tax reporting is the more of a worrisome thing for me. I'm leaning towards just getting a good accountant and paying out that instead of doing it myself.

This...You need someone to not only help with your preparation but someone who can understand your goals and set you up properly from the onset

[Onto]

(05-09-2016 04:02 PM)se7en Wrote:  

(05-09-2016 03:27 PM)JacksonRev Wrote:  

S-Corps are the best for tax purposes. All the benefits of a corporation, minus the double taxation. The main drawback is you need cash on hand to pay taxes each year, since the corporation is not required to pay your portion. And they are more complicated to create and maintain.

LLC's are the easier to create and maintain. I personally use an LLC, but I'll be making an S-Corp by then end of the month, mainly for tax purposes. I registered my LLC through my Secretary of State for $25 online.

Why do you find an S Corp to be more beneficial than a LLC?

As I understand, with a corporation you need to comply with corporate formalities by law, while LLCs you don't really need to unless its set out in your operating agreement. Also, an s corp seems more of a hassle because you still to need to file tax returns for the entity, while with LLC you just file your own return. Finally, with LLC it seems easier to allocate your distributions / profits / losses than with an s corp, where your profit / loss has to follow your stock ownership?

I don't know the answer of what the differences are, but I'm in the same situation and my accountant said (many years ago) that an S-Corp is better for my purposes than an LLC.

Maybe it's because I don't have partner's so I'm the only shareholder? I don't know.

[RexImperator]

The answer partly depends on your state of residency and where the business is registered.

[JacksonRev]

(05-09-2016 04:34 PM)Onto Wrote:  

(05-09-2016 04:02 PM)se7en Wrote:  

(05-09-2016 03:27 PM)JacksonRev Wrote:  

S-Corps are the best for tax purposes. All the benefits of a corporation, minus the double taxation. The main drawback is you need cash on hand to pay taxes each year, since the corporation is not required to pay your portion. And they are more complicated to create and maintain.

LLC's are the easier to create and maintain. I personally use an LLC, but I'll be making an S-Corp by then end of the month, mainly for tax purposes. I registered my LLC through my Secretary of State for $25 online.

Why do you find an S Corp to be more beneficial than a LLC?

As I understand, with a corporation you need to comply with corporate formalities by law, while LLCs you don't really need to unless its set out in your operating agreement. Also, an s corp seems more of a hassle because you still to need to file tax returns for the entity, while with LLC you just file your own return. Finally, with LLC it seems easier to allocate your distributions / profits / losses than with an s corp, where your profit / loss has to follow your stock ownership?

I don't know the answer of what the differences are, but I'm in the same situation and my accountant said (many years ago) that an S-Corp is better for my purposes than an LLC.

Maybe it's because I don't have partner's so I'm the only shareholder? I don't know.

S-Corps are more of hassle precisely because you have more laws to take advantage of, which is why I've been using an LLC so far. It's easy for me to do by myself, but as income goes up I'll be working with an accountant to transfer over to an S-Corp.

[Oneeyedjack]

The complexity of the S-corp almost makes it mandatory to use an accountant for your taxes. S-corp also requires some minimal yearly paperwork maintenance while none is required for an LLC. The advantage is that an S-corp is easier to sell and has some tax advantages e.g., lower self employment tax over an LLC. This only matters when your making a 7+ figure income.

I believe, not 100% sure of this, that a business entity has has a one-time option to change its business structure. At the end of the day, the structure will only be a factor if your business is successful.

[kinnikinik]

(05-09-2016 12:54 PM)The Beast1 Wrote:  

This is interesting. Can you share some of your tricks on this 401k scheme?

The tax reporting is the more of a worrisome thing for me. I'm leaning towards just getting a good accountant and paying out that instead of doing it myself.

Here's a simple explanation of how 401K plans work.. (no association and no recommendation, it's just a clear explanation...)[url=http://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/individual_401k_plans[/url]

This sounds like it would acheive your goals if saving for retirement is part of your future.

[frozen-ace]

I'll run you through some illustrative examples. This will be very simplistic, but you'll get the picture.

Also please note-
An LLC is taxed as a partnership, unless you make the S-Corp election. An LLC taxed as a partnership does not pay taxes, they flow through to the owners.

A C-Corp is taxed as a corporation, unless you make the S-Corp election. If it makes the S-Corp election, it does not pay taxes, they flow through to the owner.

There is no S-Corp legal entity. It's either an LLC or a C-Corp.

Assume- $65,000 gross income. Single. No expenses, no other complications, no state tax, and 2015 tax rates, standard deduction and yourself as personal exemption. Some rounding below (this was all done quickly in excel-

Sole proprietor (self employed). You get hit hard with SE tax-
Schedule C income $65,000
Taxable income- $50,108
Self employment tax- $9,184
Federal Income tax- $8,325
Total Tax- $17,509
Net take home- $47,491

LLC, taxed as partnership. As owner is not legal to pay yourself W-2 wages (need have S-Corp election to do that)-
Schedule C income $65,000
Taxable income- $50,108
Self employment tax- $9,184
Federal Income tax- $8,325
Total Tax- $17,509
Net take home- $47,491
In this case, your take home is the exact same as above, but you will have to file a tax return for the LLC (additional expense and burden). Only recommend this route for legal protection, otherwise forget it and go sole proprietor.

LLC, with S-Corp election. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is flow through as self employment income (for lack of a better term, a "dividend", even through it isn't. S-Corps don't and can't pay dividends).
On your W-2 wages, you pay SS and Medicare, as does the LLC.
W-2 income $50,000
Schedule C Income $11,175
Taxable Income- $50,085
Federal Income Tax- $8,313
Self Employment Tax- $1,579
However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the LLC paid on your behalf. That has to get added to the total net consideration-
Net take home after ALL taxes- $47,458

C-Corp, with S-Corp election. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is flow through as self employment income (for lack of a better term, a "dividend", even through it isn't. S-Corps don't and can't pay dividends).
On your W-2 wages, you pay SS and Medicare, as does the C-Corp.
W-2 income $50,000
Schedule C Income $11,175
Taxable Income- $50,085
Federal Income Tax- $8,313
Self Employment Tax- $1,579
However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the C Corp paid on your behalf. That has to get added to the total net consideration-
Net take home after ALL taxes- $47,458

C-Corp. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is "qualified" dividend.
On your W-2 wages, you pay SS and Medicare, as does the C-Corp.
W-2 income $50,000
Qualified Dividend from C-Corp- $9,499
Taxable Income- $49,199
Federal income tax- $7,138
This one is the most complicated because the C-Corp pays its own taxes, and the dividends paid to you are taxed at different rate. However, let's look at the NET take home after all is said and done- $48,536

Summary-
Self employed- $47,491
LLC (no S-Corp election)- $47,491
LLC (S-Corp election)- $47,458
C Corp (S-Corp election)- $47,458
C Corp- $48,536

The numbers speak for themselves. If the legal protection isn't really an issue, I don't think I'd bother with an LLC or C Corp at $65K unless you really like tax forms and tax filings. In essence you can take many different paths to the SAME EXACT spot. You don't magically save money by incorporating, the taxes just get shifted around to different spots and who pays. But if you are the sole owner, you pay at the end of the day, so it is six one way or half a dozen another.

If you were making $300K+ then the analysis REALLY changes. Hope that helps.

[The Beast1]

Just a heads up, my wife and myself would be listed on the LLC so it wouldn't be a sole proprietorship. That's part of the requirement for doing the work as a contractor vs the staffing firm.

Not to also mention, we both live in the UK which makes things more interesting.

[frozen-ace]

The U.K. Part might make it more complex. That's outside my knowledge area, but if it's US based income and you are a nonresident alien, there could be special tax implications.

This might fall under IRS Publication 515 which is very dense and messy.

[fortysix]

(05-09-2016 11:40 PM)frozen-ace Wrote:  

Sole proprietor (self employed). You get hit hard with SE tax-
Schedule C income $65,000
Taxable income- $50,108
Self employment tax- $9,184
Federal Income tax- $8,325
Total Tax- $17,509
Net take home- $47,491

LLC, taxed as partnership. As owner is not legal to pay yourself W-2 wages (need have S-Corp election to do that)-
Schedule C income $65,000
Taxable income- $50,108
Self employment tax- $9,184
Federal Income tax- $8,325
Total Tax- $17,509
Net take home- $47,491
In this case, your take home is the exact same as above, but you will have to file a tax return for the LLC (additional expense and burden). Only recommend this route for legal protection, otherwise forget it and go sole proprietor.

LLC, with S-Corp election. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is flow through as self employment income (for lack of a better term, a "dividend", even through it isn't. S-Corps don't and can't pay dividends).
On your W-2 wages, you pay SS and Medicare, as does the LLC.
W-2 income $50,000
Schedule C Income $11,175
Taxable Income- $50,085
Federal Income Tax- $8,313
Self Employment Tax- $1,579
However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the LLC paid on your behalf. That has to get added to the total net consideration-
Net take home after ALL taxes- $47,458

C-Corp, with S-Corp election. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is flow through as self employment income (for lack of a better term, a "dividend", even through it isn't. S-Corps don't and can't pay dividends).
On your W-2 wages, you pay SS and Medicare, as does the C-Corp.
W-2 income $50,000
Schedule C Income $11,175
Taxable Income- $50,085
Federal Income Tax- $8,313
Self Employment Tax- $1,579
However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the C Corp paid on your behalf. That has to get added to the total net consideration-
Net take home after ALL taxes- $47,458

C-Corp. Assume you pay yourself $50,000 as W-2 wages, and the remaining money is "qualified" dividend.
On your W-2 wages, you pay SS and Medicare, as does the C-Corp.
W-2 income $50,000
Qualified Dividend from C-Corp- $9,499
Taxable Income- $49,199
Federal income tax- $7,138
This one is the most complicated because the C-Corp pays its own taxes, and the dividends paid to you are taxed at different rate. However, let's look at the NET take home after all is said and done- $48,536

Summary-
Self employed- $47,491
LLC (no S-Corp election)- $47,491
LLC (S-Corp election)- $47,458
C Corp (S-Corp election)- $47,458
C Corp- $48,536

The numbers speak for themselves. If the legal protection isn't really an issue, I don't think I'd bother with an LLC or C Corp at $65K unless you really like tax forms and tax filings. In essence you can take many different paths to the SAME EXACT spot. You don't magically save money by incorporating, the taxes just get shifted around to different spots and who pays. But if you are the sole owner, you pay at the end of the day, so it is six one way or half a dozen another.

If you were making $300K+ then the analysis REALLY changes. Hope that helps.

Hey - great write up, thank you, +1ed you.

Two questions:

1. How are dividends typically taxed? Isnt it at capital gains since its a distribution from capital?

2. You wrote: "However, when you look at total taxes paid, you also have to see the Social Security and Medicare you paid on the $50,000, as well as the Social Security and Medicare the C Corp paid on your behalf. That has to get added to the total net consideration" - Do you incorporate the SS and medicare in your analysis above? - As I understand, you included this under your "Federal Income Tax" line. If so, or if not, how much $ (estimated) would these typically be?

[frozen-ace]

@ se7en

1) it depends. The only true "dividend" in the case above is from a C Corp taxed as a C Corp. The board would meet and declare a $ per share dividend to be paid out of retained earnings. Dividends can be considered "ordinary" (taxed at your marginal tax rate) or "qualified" (taxed at 0% or 15% depending on your marginal tax rate). Dividends are not subject to social security or Medicare.

You are probably thinking of partnership taxation and taking a "draw". I can post some examples later, but in essence in a partnership (or LLC taxed as partnership) everything is flow through, so any draw is either a reduction of your basis (special rules if your basis hits $0 and you take a draw), or if you sell assets out of the partnership, or sell your basis in the partnership, then it's a capital gain (or loss!).

2) yes, social security and Medicare are included in the analysis above. Social security and Medicare is NOT included in the federal income tax line. They are completely separate.

Employee- Social security- 6.2%, stops after reaching a wage base limit ($118,500).
Employee- Medicare- 1.45%, no limit
Employer- same as above.
Total for employer and employee- 15.3%

So, on $1000 of w-2 wages, you pay $62.00 in ss and $14.50 in Medicare. The employer pays $62 and $14.50 as well. Total paid by employee and employer is $153.

There are unique considerations on Medicare once you have fat cat wages you get hit with a supplemental Medicare tax but that's beyond the scope of this example.


Simple example-
Assume you make $1000 of w-2 wages and your marginal tax rate is 25%. You are paid by a C Corp you own, and the C Corp's net income for the year after everything is $0.

You the individual-
Federal income tax- $250
Social security- $62
Medicare- $14.50

C Corp social security- $62
C Corp Medicare- $14.50
C Corp fed income tax $0

So on that $1000, fed income tax is $250, social security is $124, and Medicare is $29. So on the $1000 your total paid is $403.

Most discussions around tax rates do not fully take into consideration of social security and Medicare.

[The Beast1]

For what it is worth, the opportunity for the LLC has been denied so my wife will have to take a pay hit and go through the staffing firm.

However, this topic has piqued my interest in terms of ways of lessening my tax burden. I find social security, medicare, and income taxes to be onerous.

Anyway to lessen taxes is a good thing for me. I'd have no shame if my name ended up in some leaked document from some tax haven law firm.