Tax Q - Employee or Sole proprietor/LLC/CORP
echelon3 (9 points) | Fri, 2007-08-24 06:35I normally freelance (NYer) as an employee and usually have about 36% of my earnings with held. If I spend about 10% of my earnings on deductions (hardware, software, hosting, etc) should I elect to work as a Sole proprietor (or even LLC/CORP)? Thanks for any feedback.
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If you're sinking a lot of money back into your business you may want to consider an S Corp.
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Thanks for the quick reply. I think I will only have about $5,000 worth of expenses per year (not including health care, retirement plans .. which I don't currently have). I'll have zero chance of being sued. :) I'd also like a home office deduction, but I'm still figuring out this stuff first.
Be careful with claiming part of your home anything but a residential space. I was talking to an accountant about it and he said that you may run into trouble when you go to sell your house and that the benefit wasn't worth the risk.
It's not. There's also a few stipulations about how you deduct your home or property for business. Your best best is to have a room and everything in it as your "office". Otherwise you can get yourself into a bit of trouble if you're ever audited.
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Based on advice from a lawyer back in 1997 a partner and I went the LLC route. You get the protect of a 'corporation' while being able to file your taxes as a 'partnership' with Form 1065. It was also much cheaper than registering as a 'S Corp'. We highly doubted the business would ever be sued but in case you are a sole proprietorship or partnership will not protect your personal assets.
ie. Once they are done cleaning out the bank account of your business they can go after your house, cars and personal bank accounts up to the settlement amount.
With a 'S Corp' or 'LLC' once they are done taking all of the business assets they can't go after any of your personal stuff.
Also talk with an accountant about different ways to pay yourself. We chose not to be employees to the business but rather contractors that receive a 1099-Misc at the end of the year. In addition, part of our business expenses are claimed on our personal taxes.
ie. home office, personal computers, cell phone and mileage on the car. Note: It was an extra tax form the last time I sold my car but nothing outrageous.
There are many ways to skin the cat... get advice from an accountant to set a plan so you won't have any issues when files taxes.
Best of luck
thanks for the replies so far, I'll be sure to bring it up!
Freelance and 'as an employee' are contradicting terms in most states. Generally, if you work on-site on a company's equipment (even if it's your own gear) you are technically considered an employee.
If you are freelance you must claim taxes and either pay at the end of the year or pay quarterly; talk to your accountant for clarification. You must also have less than 50% of your income coming from any one client. More than 50% and that client is considered to be your employer.
You can pay for an LLC, but it seems the costs outweigh the benefits unless you have high dollar accounts that require a lot of legal indemnity protection that only incorporating your business can provide.
Generally, most freelancers are sole proprietors and work on jobs on a contracted basis as vendors.
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I ended up forming a c-corp myself because there were more opportunities to turn business profits into benefits ( like 100% paid medical ) in a pre-tax way. Everyone's situation is different though.
This article was helpful: Incorporate as an LLC, C-Corp, or S-corp ?