You make the LLC S Corp election using
IRS Form 8832. This needs to be done very quickly after forming your LLC. Once you do the election to be taxed as an S Corp then S Corp taxing rules take over. This becomes confusing. When you read about self-employed individuals paying SE taxes you know they didn't take the S Corp election, since you become an "employee" of the S Corp and SE taxes are no longer required. More to come on that. So any advice you read regarding independent contracting, LLCs, SE taxes, etc needs to be scrutinized. Is the advice really for a self-employed individual, or for an owner/employee of an S Corp?
So why not just go S Corp directly and skip the LLC? LLCs are easier to dissolve if I later go back to being an employee and LLC annual expenses are much lower. There is also far less paperwork regarding Operating Agreements, shareholder minutes, etc. An LLC is mostly a pass-through taxing entity that still gives you the benefit of the "corporate veil". An S Corp is a true "corporation", an LLC is not. The IRS and states require all corporations to hold shareholder meetings and document important decisions with minutes where business decisions are made. This seems ridiculous for single shareholder S Corps but it is necessary.
One drawback to an S Corp is that since you will be an employee then your entity will need to provide unemployment compensation insurance to you.
One drawback to an S Corp is that since you will be an employee then your entity will need to provide unemployment compensation insurance to you (it isn't much). The paperwork is also more of a burden, but, if my calculations are correct, I should net *at least* an additional $4500 in tax savings. We'll see if I'm right. Granted, that missing FICA money lowers my Social Security payments in later life, but I really couldn't care less.
Personal Services Corporation
When you are a C Corp you need to be very careful that the IRS doesn't classify you as a Personal Services Corporation. A PSC is a corporation where the bulk of its income is generated by consulting services of the employee-owner. PSCs are taxed at a flat 35%. An S Corp can never be declared a PSC. This is last, and probably most important reason, why an independent IT contractor should form a S Corp.
When would a 1099 make sense instead of a separate entity?
...maybe when you have a lot of legitimate business expenses that relieve the SE burden. As a data architect consultant I really shouldn't have *that* many expenses. If your spouse's employer is covering your health insurance then the reduction in SE taxes for health insurance premiums isn't available to you so S Corp might be overkill. Also, if for some reason you don't want to contribute to a retirement plan then again an S Corp wouldn't make sense since you are not reducing your SE tax.
Next post...[[Tax Procedures]]
Self Employment Taxes
You have to pay your SSI and Medicare the same as everyone else, plus your S Corp pays 1/2 of the SSI and Medicare and all FUTA.
Self Employment Taxes
You have to pay your SSI and Medicare the same as everyone else, plus your S Corp pays 1/2 of the SSI and Medicare and all FUTA.
