S corp for freelancer?

[GUNDERSON]

Hi folks,
I'm sorry if this is rehashing an old question but you can't search for single-letter words! Ha.

I'm a freelance writer and am wondering whether to be an LLC or an S corp. I like the idea of cutting down my self-employment tax with an S Corp, but also have been advised that this would lose me the useful deduction of per diems for traveling. Does anyone have thoughts on when S corps are worth it? Or have a calculator? My income is a bit erratic, but in the ballpark of 50-60K after deductions.

Or if there are other issues I'm not thinking about here, please let me know! Thanks

[SeattleCPA]

Hi folks,
I'm sorry if this is rehashing an old question but you can't search for single-letter words! Ha.

I'm a freelance writer and am wondering whether to be an LLC or an S corp. I like the idea of cutting down my self-employment tax with an S Corp, but also have been advised that this would lose me the useful deduction of per diems for traveling. Does anyone have thoughts on when S corps are worth it? Or have a calculator? My income is a bit erratic, but in the ballpark of 50-60K after deductions.

Or if there are other issues I'm not thinking about here, please let me know! Thanks

First, an LLC can be either a sole proprietorship or an S corporation... so that's really different from decision as to how your biz gets taxed.

Second, 1120S S corp tax returns really aren't DIY projects. In your other message, it sounds like you want to do your return yourself... thus this remark.

Third, an 1120S will save you the 15.3% payroll tax on the amount of profit you don't pay as wages... that's the savings. But you probably need to pay too much of your profit as wages, so your savings will be minimal. E.g., if you pay $40K as wages and then take the other $15K or $20K as distributive share (the leftover), you're saving 15.3% on roughly $15K or $20K. that's $2K to $3K... and not enough to pay for the costs of running the S corp.

Fourth, you don't lose deductions when you reform as an S corporation. E.g., the travel expenses aren't going to change.

Here are some blog posts about S corporations that'll help you:
https://evergreensmallbusiness.com/million-dollar-s-corporation-mistake/

https://evergreensmallbusiness.com/s-corporation-paperwork-problems/

https://evergreensmallbusiness.com/s-corporation-salary-rules/

https://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/

https://evergreensmallbusiness.com/safe-harbor-s-corporation-salaries/

[GUNDERSON]

Thanks very much, @SeattleCPA! I appreciate your help, I find this all pretty confusing. It sounds like my income is low enough that this wouldn't be worth it. But just to check a few factors, with real numbers... This year, my self-employment taxes are on track to be a little under 8k. I have done my return myself in the past but am certainly open to working with a professional for a more complicated but better system. I also have had years where I make a lot more than other years, like as much as a 50k difference from year to year (in the past because a lot of projects happened to pay just after the new year; this may also happen in the future due to a book advance), and I'm wondering if paying myself a salary will help smooth out and reduce that tax burden. I also think I could save money by getting a solo 401k (am I correct in understanding that you need an S corp for that?) because I often have more to save than can go in a SEP... although, then again, I want to reduce taxes, but also have some concern about locking away so much of my money for so long in retirement accounts. (I'm 33, and currently my assets are about 115k in retirement accounts and 125k in non-retirement accounts. I don't plan to retire early, I love my job, but I do want to work toward the flexibility and peace of mind of financial independence).

Thanks again.

[GUNDERSON]

My current thinking is to set up an LLC and then it will be ready to convert if my income goes up and it makes sense to do the S corp election. (I live in Washington). Does this make sense?

[SeattleCPA]

Sure, that's a pretty dang good idea. I.e., set up LLC in Washington state today.. and then if you see your income spike up a bit more, elect S status.

BTW, all this also depends on your specific situation. E.g., say you pay $7K in health insurance... and do $3K to an HSA... and want to save $9K to a SEP...

In this situation--just as an example--you might be able to make an S corporation work. You would pay Gunderson the employee $26K in wages... that's low but the health insurance and HSA can count as wages too except they aren't subject to payroll taxes... so you're only paying FICA on the $26K and the W-2 shows $36K...

With $36K in wages, you can do a 25% match so that's another $9K... now Gunderson the employee's "compensation" is up to $45K basically but he's only paid payroll taxes on $26K.

If Gunderson the shareholder gets another $5K or $10K of shareholder profit, that's not subject to payroll taxes and probably not interesting to the IRS.

In example like above, an S corp might work.

[SeattleCPA]

BTW here are steps for setting up Washington LLC:

https://evergreensmallbusiness.com/forming-a-washington-state-llc/

[GUNDERSON]

Thanks so much again. I was advised to get an attorney to set up the LLC, and got a quote for $1100, but given my simple situation, I imagine it's fine to do it myself?

[SeattleCPA]

You should look at the form and see if you need help...

[SmileAllDay]

I had my accountant set up my S Corp for me and he charged nothing close to $1100. And that was in NYC.

Maybe price out alternatives, it look at LegalZoom.

I have been a S Corp for coming up on 3 years and it was a very attractive option. But with recent changes in tax laws it's not as attractive as it used to be.

I'm far from an expert but I would get a few opinions on it!