Author Topic: Small Business and Miscellaneous Income Best Practices  (Read 4170 times)

CanuckExpat

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Small Business and Miscellaneous Income Best Practices
« on: February 01, 2017, 09:58:20 PM »
Thread created to break off tax strategy discussion from Selling Tradelines Side Gig thread.

Hopefully there's good discussion and I will try to summarize and update this first post with useful information as it's gathered.
Perhaps it's as easy as a definite article which covers everything we need to know, if it is exists, somebody hopefully knows what it is.

Questions to answer
Report as small business or miscellaneous income and advantages of each
Advantages and disadvantageous of being subject to FICA taxes
Best, cheapest, easiest, SEP, SIMPLE IRA or Individual 401(k) account
Too late to shelter 2016 income from taxes?
S Corp advantages, complexity, disadvantages: When does it make sense?
Others...?

Relevant Articles
MMM: Should You Do Your Own Taxes? (and Why I Donít)
Oblivious Investor: SEP vs. SIMPLE vs. Solo 401(k)
Others...?

Relevant forum threads
Misc Income vs. Self employed income for referral fees
1099 SSN vs EIN
LLC, S Corp, or Sole Proprietorship?
S-Corp contribution to solo 401k
Others, prune any above..?
« Last Edit: February 04, 2017, 09:30:08 PM by CanuckExpat »
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CanuckExpat

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #1 on: February 01, 2017, 09:58:42 PM »
Reserved for future use if needed, currently carrying over relevent quotes from other discussion:

I plan to just file as misc income and not file as a business subject to FICA taxes.

I don't know if that's a choice, but if you do recognize it as self employment income (which i believe it probably is) You could always open a SEP, SIMPLE IRA or Individual 401(k) and funnel it all (less the SE taxes) into retirement accounts.

i'd also argue that if it was a choice, you probably should recognize it as SE income until you are above the Second Bend Point:

https://thefinancebuff.com/early-retirement-social-security-benefits.html

I plan to exclude it all under FEIE, being an expat, but I'm interested in the discussion both for when I eventually go back to the states, and as an intellectual curiosity.

looks like they raised that number to 127200 for when your IRS payments stop.  I feel like this is the perfect scenario for an S corp.  Its easy to argue that the level of effort involved is so small that it would justify you paying your self 300 an hour ... and the real value is in the assets(credit lines) you company holds.  so figure out the balance of taxes with that.  i havent researched it a ton.  but just avoiding fica would save quite a bit of money.

It would be beneficial if the tradeline income was income for my wife instead of myself, as I have a lot more social security wages.

She already handles a lot of the work, and it would be straightforward to have her handle all the tradeline stuff. No business set up though.

Do it under her Ssn or register a tax ID number for her.
« Last Edit: February 01, 2017, 10:03:32 PM by CanuckExpat »
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CanuckExpat

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #2 on: February 01, 2017, 09:58:55 PM »
I was thinking this discussion might be relevant to others with side hustle income, 1099 misc income from contracting/consulting, etc.

My first questions are what is the best way to shelter the income from taxes, and the trade offs and advantages of each. What is everyone doing currently?

I realized we did nothing to shield the tradelines revenue (reported on 1099) from taxes, and at our ordinary marginal tax rate will probably pay 30% - 40% in 2016 on that income if it is simply reported as miscellaneous income. I think it might be too late to do anything about that for 2016 (correct me if I'm wrong), but what would be the best approach for someone in future years?

The other thing that seems to be worth considering is whether you want to pay FICA taxes, and earn SS credits, or find a way to avoid that if that is optimal in your situation. Does that summarize correctly?
« Last Edit: February 01, 2017, 10:16:03 PM by CanuckExpat »
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #3 on: February 01, 2017, 10:19:02 PM »
Nice thread! Canuck! Posting to follow.

Some of my other posts about friends' side gigs got culled by mods as 'off topic', so maybe they'll be more appropriate here.
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #4 on: February 01, 2017, 10:29:15 PM »
Posting to follow.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #5 on: February 01, 2017, 11:11:45 PM »
Following!
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #6 on: February 01, 2017, 11:15:25 PM »
Posting to follow. It would seem like the tradeline income is self-employment income and FICA taxes would be due. I'm already maxing my 401k but would like to funnel additional amounts into other retirement accounts if possible. What's the main difference between the SEP IRA and SIMPLE IRA? Can you contribute to these in excess of your 401k? What are the limits? Where chan you set one up and what is the minimum m amount needed? (I only have two tradeline cards for sale so my expected income may be low)

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #7 on: February 02, 2017, 04:50:27 AM »
I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale.  I only made 2500 in 2016 so I'm not filing as a bus

In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.

I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.

Or any other ways to minimize taxes 
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FrugalGrad

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #8 on: February 02, 2017, 05:22:46 AM »
My opinion would be that it is subject to self employment.
"You must pay SE tax if you had net earnings of $400 or more as a self-employed person. If you are in business (farm or nonfarm) for yourself, you are self-employed. " https://www.irs.gov/pub/irs-pdf/i1040sse.pdf

Further:
"A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business." https://www.irs.gov/businesses/small-businesses-self-employed/business-activities

Since the activity is being pursued for profit, and you are making an ongoing effort (adding and removing authorized users), I would think you would have to pay SE tax.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #9 on: February 02, 2017, 06:19:05 AM »
Following...thanks!
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #10 on: February 02, 2017, 06:36:39 AM »
It would be very difficult to set this up as an S-Corp. The credit cards are (presumably) in your name, and the 1099 will come to you personally. You cannot assign income from yourself to the Corp, especially if the reason for this is tax avoidance. You would need the credit cards to be in the name of the business.
Can you find an accountant who would do it anyway? Sure - but that doesn't mean it won't blow up in your face. And is it worth the potential penalties/interest and court costs (if it goes that far)?

My initial thought for sheltering some income is to run it through your schedule C with a SEP-IRA, Solo 401k or similar. I will let someone with more knowledge of those plans chime in with the benefits/detriments of each.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #11 on: February 02, 2017, 06:40:43 AM »
I am trying to figure out which of the self employment accounts are best.  Is SEP IRA the best bet?  And does the Solo 401k limit of $18,000 conflict with the limit at my employer?  (no double dipping basically?)

I found a few articles comparing the different account types:

https://www.fidelity.com/retirement-ira/small-business/compare-plans
https://www.nerdwallet.com/blog/investing/retirement-plans-self-employed/
http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/

Could the income from both my wife and I be combined with any of these so we could just have one account?  I am thinking even if we could only do the Employer contributions for one of these accounts it might shelter a few thousand dollars.
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #12 on: February 02, 2017, 07:14:06 AM »
I'm planning to report this on line 21 as other income per the last sentence in the instructions on 1099-MISC for box 7 (which is where the old company reported my AU sales):

"If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."

Because at this point the income is sporadic activity.  I don't know if or when I'll get a tradeline sale, and I really do (honest, Judge!) consider it an income producing hobby rather than a business.  There are a few other facts that support it not being a business:

  • I'm depositing the income into my personal checking account
  • I am using my SSN, not a business EIN
  • I am using my personal credit cards
  • I don't spend much time on this
  • I have fun doing this

For me, as a recently retired person, this also works well with respect to Social Security and sheltering income from taxes.  With regards to Social Security, I personally passed the second bend point in 2014, so I don't think paying the SE taxes is worth it.  And if I get additional after tax money, it gets funneled into my spending and ends up reducing the amount of money I need to convert into my Roth pipeline.  OTOH, I guess it does somewhat increase any potential RMD tax torpedo issue I may have.
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FrugalGrad

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #13 on: February 02, 2017, 07:24:25 AM »
I'm planning to report this on line 21 as other income per the last sentence in the instructions on 1099-MISC for box 7 (which is where the old company reported my AU sales):

"If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."

Because at this point the income is sporadic activity.  I don't know if or when I'll get a tradeline sale, and I really do (honest, Judge!) consider it an income producing hobby rather than a business.  There are a few other facts that support it not being a business:

  • I'm depositing the income into my personal checking account
  • I am using my SSN, not a business EIN
  • I am using my personal credit cards
  • I don't spend much time on this
  • I have fun doing this

For me, as a recently retired person, this also works well with respect to Social Security and sheltering income from taxes.  With regards to Social Security, I personally passed the second bend point in 2014, so I don't think paying the SE taxes is worth it.  And if I get additional after tax money, it gets funneled into my spending and ends up reducing the amount of money I need to convert into my Roth pipeline.  OTOH, I guess it does somewhat increase any potential RMD tax torpedo issue I may have.
I think it would depend on the regularity.
For example, if you sell 6 slots over the course of a year, ok, probably not SE.
If you are consistently selling 3, 4 or more slots a month, then it would be hard to argue it is sporadic. You may not know the exact amount you will make each month, but you are reasonably certain that the income will be there.
Again, just one man's opinion here. I am certainly open to opposing arguments, and I'm certainly not saying there is only 1 correct way to present the income.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

SeattleCPA

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #14 on: February 02, 2017, 07:25:53 AM »
I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale.  I only made 2500 in 2016 so I'm not filing as a bus

In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.

I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.

Or any other ways to minimize taxes

I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...

Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.

SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.

S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #15 on: February 02, 2017, 07:26:06 AM »
Posting to follow.  Thanks OP!

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #16 on: February 02, 2017, 07:40:58 AM »
Following. I'm all about depriving Uncle Sam as much as possible.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #17 on: February 02, 2017, 07:44:24 AM »
Thank you, thank you, thank you for starting this. Following.

terran

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #18 on: February 02, 2017, 07:48:38 AM »
I am trying to figure out which of the self employment accounts are best.  Is SEP IRA the best bet?  And does the Solo 401k limit of $18,000 conflict with the limit at my employer?  (no double dipping basically?)

Yes, the $18k Employee contribution limit is cumulative across all 401k/403b plans, so they would conflict. If you're already maxing out another 401k this would effectively make the contribution limit of SEP and Solo 401k the same 25% of net business income (remember that this is after the employer portion of self employment tax and after the contribution itself making it more like 20% for sole proprietors).

Despite that, the solo 401k could still be a better option because, 1) unlike a SEP, it would not interfere with a backdoor roth, 2) some providers allow you to roll over existing IRAs into the 401k (which would help with a backdoor roth if you have existing traditional IRAs), 3) some providers  allow roth contributions on the employee portion (only interesting if at some point you want to use a roth and no longer have another 401k), and 4) it has significantly higher contributions limits at lower income levels if at some point you don't have another 401k.

The main advantage of the SEP is that it can be opened any time up to your tax filing deadline, while the Solo 401k has to be opened in the year for which you want to make contributions.

If it was me and I had a 401k I was happy with through my employer I would probably open the SEP for this income then plan on opening a solo 401k at a provider that allows rollovers if I ever end up without another 401k, and roll the SEP into that.

I have my solo 401k at Fidelity. They allow access to the full slate of fidelity index (and active) funds. They allow incoming rollovers from traditional IRAs. They do not have a roth option.

Vanguard is always high on the list for investing too of course. They only allow access to investor class shares (not admiral). They do not allow incoming rollovers. They do allow a roth option. There might be an additional fee ($20/year?) unless you have flagship status (over $50k with vanguard), but I'm not sure about that.

I think etrade allows incoming rollovers and roth employee contributions, but I don't know what kinds of fee free index funds or ETFs they have, so you'd want to look into that.

Solo 401ks with a balance over $250k requiring filing a form 5500. I don't get the impression it's terribly complicated, but it is something else you'd have to do every year.
« Last Edit: February 02, 2017, 07:51:54 AM by terran »

boarder42

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #19 on: February 02, 2017, 08:22:09 AM »
I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale.  I only made 2500 in 2016 so I'm not filing as a bus

In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.

I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.

Or any other ways to minimize taxes

I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...

Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.

SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.

S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold.  to make this 20k i estimate it takes 20 hours of work.  how would you setup and pay yourself out of this Corp to minimize taxes.
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tj

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #20 on: February 02, 2017, 08:58:03 AM »
Following. The ObliviousInvestor post linked is a great resource. Thanks for sharing.

SeattleCPA

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #21 on: February 02, 2017, 09:48:00 AM »

The main advantage of the SEP is that it can be opened any time up to your tax filing deadline...

I think another advantage of a SEP over a 401(k) is that you don't set yourself up for problems if you later add an employee. Pension funds come with a permanency requirement. I talk in quite a bit more detail about this requirement at the blog post provided below (scroll down to the "Permanency Requirement" discussion...)

http://evergreensmallbusiness.com/hidden-small-business-pension-plan-costs/

BTW, the permanency requirement means you really shouldn't cancel your pension plan because you hire a new employee... so if you have a solo 401(k) and you hire someone, you probably need to replace your solo 401(k) with a real 401(k)... Note that a SEP lets you delay covering some new employee until year 4... so you may sidestep the permanency requirement pretty easily in a small business setting.
« Last Edit: February 02, 2017, 04:22:57 PM by SeattleCPA »

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #22 on: February 02, 2017, 09:57:38 AM »
I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale.  I only made 2500 in 2016 so I'm not filing as a bus

In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.

I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.

Or any other ways to minimize taxes

I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...

Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.

SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.

S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold.  to make this 20k i estimate it takes 20 hours of work.  how would you setup and pay yourself out of this Corp to minimize taxes.

Are you really going past the threshold? If your profit is $20K, you'll have to call out some big chunk of that as wages. (In your situation probably a good number would be the FUTA limit, so $7,000.) Which means you maybe avoid SE taxes on $13,000-ish... which is means roughly $1800 of savings. And for that, you'll pay  (maybe) $1K for the tax return and probably $420 or so in FUTA... that's pretty thin savings.

You might find this blog post on setting an S corporation wage to zero helpful:

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

Also, this post of the problems of using an S corporation for a sideline or part-time business:

http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

BTW, just to say this, I am a huge booster of S corporations. We have a giant S corporation tax practice. If I have a bias about S corporations, it's probably a bias to "jump into" this option too quickly... but for a sideline gig, it just doesn't seem that economical.

And final thought: If you're talking about a full-time gig and your business profits are, say, high five figures or into six figures?  Hey, count me in, that's the no-brainer situation where you almost surely do want to operate as an S corporation.

Wait, I have another thought too: You could set up an LLC now ( like today )... see how the rest of the year goes. If it's more of the same, you would let your LLC get the default tax treatment, which would be "sole proprietor"... but if your deal heats up and you make more, you could (even very late in the year) make an election to have your LLC taxed as an S corporation.


FrugalGrad

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #23 on: February 02, 2017, 10:00:37 AM »
I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale.  I only made 2500 in 2016 so I'm not filing as a bus

In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.

I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.

Or any other ways to minimize taxes

I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...

Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.

SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.

S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold.  to make this 20k i estimate it takes 20 hours of work.  how would you setup and pay yourself out of this Corp to minimize taxes.

Are you really going past the threshold? If your profit is $20K, you'll have to call out some big chunk of that as wages. (In your situation probably a good number would be the FUTA limit, so $7,000.) Which means you maybe avoid SE taxes on $13,000-ish... which is means roughly $1800 of savings. And for that, you'll pay  (maybe) $1K for the tax return and probably $420 or so in FUTA... that's pretty thin savings.

You might find this blog post on setting an S corporation wage to zero helpful:

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

Also, this post of the problems of using an S corporation for a sideline or part-time business:

http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

BTW, just to say this, I am a huge booster of S corporations. We have a giant S corporation tax practice. If I have a bias about S corporations, it's probably a bias to "jump into" this option too quickly... but for a sideline gig, it just doesn't seem that economical.

And final thought: If you're talking about a full-time gig and your business profits are, say, high five figures or into six figures?  Hey, count me in, that's the no-brainer situation where you almost surely do want to operate as an S corporation.

Wait, I have another thought too: You could set up an LLC now ( like today )... see how the rest of the year goes. If it's more of the same, you would let your LLC get the default tax treatment, which would be "sole proprietor"... but if your deal heats up and you make more, you could (even very late in the year) make an election to have your LLC taxed as an S corporation.
I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #24 on: February 02, 2017, 10:05:05 AM »
I think another advantage of a SEP over a 401(k) is that you don't set yourself up for problems if you later add an employee. Pension funds come with a permanency requirement. I talk in quite a bit more detail about this requirement at the blog post provided below (scroll down to the "Permanency Requirement" discussion...)

http://evergreensmallbusiness.com/hidden-small-business-pension-plan-costs/

BTW, the permanency requirement means you really shouldn't cancel your pension plan because you hire a new employee... so if you have a solo 401(k) and you hire someone, you probably need to replace your solo 401(k) with a real 401(k)... Note that a SEP lets to delay covering some new employee until year 4... so you may sidestep the permanency requirement pretty easily in a small business setting.

Great, and interesting point. Thanks for the link.

In the case of this thread, it seems highly unlikely that someone will hire an employee to help with their tradelines "business," but I wonder if opening a solo 401k might still cause problems for that person in future business endeavors? My understanding is that if you have multiple businesses they're considered as one for plans like these (called a controlled group I think?). Given that, if someone were to start a new business that might someday have employees, would discontinuing the tradelines activity constitute a viable business reason for shutting down the solo 401k so it won't cause the problem you've outlined in the future? Or is a solo 401k considered to be a retirement plan for any business you engage in regardless of whether the trade/business it was originally opened for is not the same trade/business you're now in?

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #25 on: February 02, 2017, 10:15:08 AM »
I don't know if it's legal to file as misc income and not claim small bus and pay FICA. That being said it's going to be the cheapest for everyone who hasn't already hit or is close the SSA max. If you're close it becomes a sliding scale.  I only made 2500 in 2016 so I'm not filing as a bus

In 2017 I'll probably make 30k so I'm going to file as as business. Sole proprietor. Using a SEP IRA is the most efficient. But you need to make sure you open these in the tax year. You can still contribute up to tax day but there is a date in the previous tax year it must be established by.

I'd like to see info on using an scorp LLC. BC this is such a low time job I think it would come out way ahead.

Or any other ways to minimize taxes

I'm not sure how you guys want content collected here. But here are some comments to issues raised and answers to questions posed above...

Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.

SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.

S Corporation Breakeven Threshold: I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

ok so i'm easily going to pull 20k this year selling tradelines going past your break even threshold.  to make this 20k i estimate it takes 20 hours of work.  how would you setup and pay yourself out of this Corp to minimize taxes.

Are you really going past the threshold? If your profit is $20K, you'll have to call out some big chunk of that as wages. (In your situation probably a good number would be the FUTA limit, so $7,000.) Which means you maybe avoid SE taxes on $13,000-ish... which is means roughly $1800 of savings. And for that, you'll pay  (maybe) $1K for the tax return and probably $420 or so in FUTA... that's pretty thin savings.

You might find this blog post on setting an S corporation wage to zero helpful:

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

Also, this post of the problems of using an S corporation for a sideline or part-time business:

http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

BTW, just to say this, I am a huge booster of S corporations. We have a giant S corporation tax practice. If I have a bias about S corporations, it's probably a bias to "jump into" this option too quickly... but for a sideline gig, it just doesn't seem that economical.

And final thought: If you're talking about a full-time gig and your business profits are, say, high five figures or into six figures?  Hey, count me in, that's the no-brainer situation where you almost surely do want to operate as an S corporation.

Wait, I have another thought too: You could set up an LLC now ( like today )... see how the rest of the year goes. If it's more of the same, you would let your LLC get the default tax treatment, which would be "sole proprietor"... but if your deal heats up and you make more, you could (even very late in the year) make an election to have your LLC taxed as an S corporation.

Thanks for the info.  So this is from ARS's tradeline system and i expect to be pulling 40k in 2018 based on conservative 60% fill projections.  And this number will grow annually. 

My question lies more in what qualifies as LLC income, only income after the setup or can i set this up in October and it will work for all 2017 income.
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trollwithamustache

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #26 on: February 02, 2017, 10:21:50 AM »
We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.

But a true side hustle isn't that big a percentage of your income right?  so we are talking under 25k a year?

The problem with SEP IRAs and what not is you have to have taxed income to contribute.

A side hustle has to make money and you pay taxes on it for the IRS to be happy, but there isn't a requirement that your business be well run. Part of my FIRE plan is to keep the consulting business going in some low key fashion that pays a chunk of cell phones for me and my president (DW), internet, I'll need new computers for the business ect. Anyone with a big w-2 salary should insist any side hustle be on a 1099 basis, as there is a huge advantage to any cost that can be shared with the pre-tax income.



boarder42

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #27 on: February 02, 2017, 10:25:59 AM »
We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.

But a true side hustle isn't that big a percentage of your income right?  so we are talking under 25k a year?

The problem with SEP IRAs and what not is you have to have taxed income to contribute.

A side hustle has to make money and you pay taxes on it for the IRS to be happy, but there isn't a requirement that your business be well run. Part of my FIRE plan is to keep the consulting business going in some low key fashion that pays a chunk of cell phones for me and my president (DW), internet, I'll need new computers for the business ect. Anyone with a big w-2 salary should insist any side hustle be on a 1099 basis, as there is a huge advantage to any cost that can be shared with the pre-tax income.

see above i'm talkin 40-100k ... this year conservative is 20k for me.  next year conservative is 40k.  and it just climbs from there.  in 5 years this could easily be worth 6 figures if i can get new cards and my current cards dont get shutdown.
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brooklynguy

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #28 on: February 02, 2017, 11:13:27 AM »
I'm planning to report this on line 21 as other income per the last sentence in the instructions on 1099-MISC for box 7 (which is where the old company reported my AU sales):

"If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21)."

Because at this point the income is sporadic activity.  I don't know if or when I'll get a tradeline sale, and I really do (honest, Judge!) consider it an income producing hobby rather than a business.  There are a few other facts that support it not being a business:
  • I'm depositing the income into my personal checking account
  • I am using my SSN, not a business EIN
  • I am using my personal credit cards
  • I don't spend much time on this
  • I have fun doing this

For reference, 26 CFR 1.183-2 (which is a federal tax regulation, meaning that it represents the Treasury Department's official interpretation of the federal tax code) provides guidance on how to determine whether an activity is a business or a hobby for tax purposes.  It says that that determination "is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case," and it provides both a non-exhaustive list of relevant factors to be taken into account and a set of examples illustrating its provisions.

IRS Publication 535 (which is informal guidance published by the IRS (one of the Treasury Department's several bureaus), and which does not have the force of law) also provides guidance on making this determination in the "Not-for-Profit-Activities" section starting on page 5.

Note that I am providing these links for reference and informational purposes only and I express no view as to whether your specific situation, or the activity of selling tradelines generally, constitutes a business or a hobby for tax purposes, or whether the factors you identified are relevant for purposes of making that determination.

***This post, like all my posts in the forum, does not constitute tax or legal advice.***

Edited solely to remove an extraneous hanging parenthesis (one of the drafting hazards faced by heavy users of parentheses (like me)).
« Last Edit: February 02, 2017, 11:48:01 AM by brooklynguy »

katsiki

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #29 on: February 02, 2017, 11:17:57 AM »
I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.

I'm not a tax expert...  I think many here are assuming if you supply the customer with a W-9 with an EIN, that's it.  I imagine you are implying there is more to it from a tax perspective.  Is that what you mean?

FrugalGrad

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #30 on: February 02, 2017, 11:23:00 AM »
I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.

I'm not a tax expert...  I think many here are assuming if you supply the customer with a W-9 with an EIN, that's it.  I imagine you are implying there is more to it from a tax perspective.  Is that what you mean?
Yes. I haven't sold tradelines - will they accept a W-9 for a corporation when listing your personal credit cards? For anyone who receives a 2016 1099 it would be too late, you can't reassign the income.
You would also have to have separate bank accounts. etc open for separation of business and personal use.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

katsiki

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #31 on: February 02, 2017, 11:25:52 AM »
I would be interested in hearing your thoughts of how to get the income into the S-corp. If the CC is in the individual's name, I would assume the individual would get the 1099.

I'm not a tax expert...  I think many here are assuming if you supply the customer with a W-9 with an EIN, that's it.  I imagine you are implying there is more to it from a tax perspective.  Is that what you mean?
Yes. I haven't sold tradelines - will they accept a W-9 for a corporation when listing your personal credit cards? For anyone who receives a 2016 1099 it would be too late, you can't reassign the income.
You would also have to have separate bank accounts. etc open for separation of business and personal use.

Yes, they will accept the W9 any way you send in my experience. 

Thanks for your other points.  Good info in this thread!

arebelspy

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #32 on: February 02, 2017, 04:01:29 PM »
I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

If the wife and I are both above that threshold just from TL sales (at least 20, maybe 30k each, and growing).

Right now we're looking at excluding it all with FEIE for at least this year, and probably the next, but when we're in the States, it sounds like an S Corp would be the way to go, if possible.  I do have the concern others have brought up--if it's done under your SSN, with your personal cards (business cards cannot do tradelines, they report AUs differently), can that qualify?  Also, would the wife and I each need our own, or could it be done under one corporation?

For that matter, can multiple side-gigs be done under one corporation?  The wife's writing (romance novels) gig, my consulting, etc.  Much of that is donated to charity, so would it be beneficial to be under the corporation?
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #33 on: February 02, 2017, 04:26:06 PM »
[...My understanding is that if you have multiple businesses they're considered as one for plans like these (called a controlled group I think?)

You are correct. Pretty much all your ventures get lumped together and treated as a single employer. And then once that happens. you can't discriminate by providing owner with a killer pension plan and rank-and-file employees with a crummy plan or no plan.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #34 on: February 02, 2017, 04:26:25 PM »
We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.

But a true side hustle isn't that big a percentage of your income right?  so we are talking under 25k a year?

The problem with SEP IRAs and what not is you have to have taxed income to contribute.

A side hustle has to make money and you pay taxes on it for the IRS to be happy, but there isn't a requirement that your business be well run. Part of my FIRE plan is to keep the consulting business going in some low key fashion that pays a chunk of cell phones for me and my president (DW), internet, I'll need new computers for the business ect. Anyone with a big w-2 salary should insist any side hustle be on a 1099 basis, as there is a huge advantage to any cost that can be shared with the pre-tax income.

see above i'm talkin 40-100k ... this year conservative is 20k for me.  next year conservative is 40k.  and it just climbs from there.  in 5 years this could easily be worth 6 figures if i can get new cards and my current cards dont get shutdown.
I've got a buddy who does this with his girlfriend.  Sold trade lines for several years to fund his small business. I know he made easily $50k between them, just on tradelines. I wonder if he ever got up into the 6 figures, as he quit a 80k job. Now they live mostly  outside the USA running their travel business, which I'm sure complicates their tax bill even more, though likely reduces it.
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Re: Small Business and Miscellaneous Income Best Practices
« Reply #35 on: February 02, 2017, 04:43:10 PM »
I love S corporations. I have an entire website that's about nothing but S corporations. And S corporations do provide a way to really save on self-employment taxes because you avoid FICA or SE tax on anything you can turn into a nontaxable fringe benefit or a shareholder distribution... but they are not economical, usually, for side hustles or part-time or sideline businesses. You'll pay between $1K and $2K annually in extra taxes and CPA fees to gain entrance to this "club" and given that you're saving a 15.3% tax, you need therefore more escape tax on about (say) $10,000 of earnings just to break even. (The math: $1500 in costs divided by 15.3% tax equals roughly $10,000.)

If the wife and I are both above that threshold just from TL sales (at least 20, maybe 30k each, and growing).

Right now we're looking at excluding it all with FEIE for at least this year, and probably the next, but when we're in the States, it sounds like an S Corp would be the way to go, if possible.  I do have the concern others have brought up--if it's done under your SSN, with your personal cards (business cards cannot do tradelines, they report AUs differently), can that qualify?  Also, would the wife and I each need our own, or could it be done under one corporation?

For that matter, can multiple side-gigs be done under one corporation?  The wife's writing (romance novels) gig, my consulting, etc.  Much of that is donated to charity, so would it be beneficial to be under the corporation?

Regarding the foreign earned income exclusion, I think you are correct that the S corp option usually doesn't make sense. You exclude *earned* income... so pushing down your earned income to save payroll taxes mean you push down your FEIE tax savings--and your possible pension plan contributions and savings. BTW, the one sort of person who does save money with an S corporation when he or she operates offshore and gets the FEIE is when he or she make sa *lot* of money. E.g., if you make $200K, pay yourself a wage of $100K which doesn't get taxed because of the FEIE and then your shareholder gets a K-1 with $100K on it, you only pay income taxes on that last $100K... you only pay payroll taxes on that first $100K... that's a pretty good deal.

Regarding maybe delaying this until you're back stateside, I think that's a good idea.

You should be able to use one S corporation for all of a couple's ventures... that's a way to economize. And if some of that money is being donated (like from romance novel writing), it's better to have the donation come from the S corporation because the charitable contribution works the same way regardless of whether it's originally made by your S corp or by you or your spouse... and making the charitable donation from the S corporation dials down your risk of IRS claiming you're paying your shareholder too little.

With regard to ventures where you start initially using your SSN... yes, that's an issue. Good point. Actually the most recent significant S corporation tax court case is example of risks here... basically a judge called "bogus!" when a guy tried to say that his S corporation was operating the business when really all the documentation said it was him. I feel kind of spammy (sorry arebelspy!) about linking to this, but here's another post I did about this guy and his dilemma:

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

The taxpayer was running a financial planning business using his SSN but he told IRS it was his S corporation... Wailing and gnashing of teeth ensued...

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #36 on: February 02, 2017, 11:49:07 PM »
Great thread, posting to follow.
Im new to tradelines- so Im hoping there will be income, but its unproven so far.
I am a homemaker, my husband has a FT job, but the TL are all on my cards. Im definitely interested in lowering our tax burden. I currently have a roth and a traditional IRA. I guess I should research if another type of IRA is better?

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #37 on: February 03, 2017, 07:36:43 AM »
Following.

boarder42

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #38 on: February 03, 2017, 12:45:09 PM »
So Seattle CPA you've been great but a few questions

1. cant i just setup an LLC with my state myself for around 50 bucks in my state i believe
2. File the taxes myself as an S corp. 

Wouldnt this bypass all those fees you're talking about and allow me to pay myself as a shareholder.  and just compensate myself for the "work" i do at x dollars per hour.

i'm serious when i say the hours i spend to make that 20k will be less than 20 hours of actual work from me.
« Last Edit: February 03, 2017, 12:54:08 PM by boarder42 »
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SeattleCPA

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #39 on: February 03, 2017, 01:35:41 PM »
So Seattle CPA you've been great but a few questions

1. cant i just setup an LLC with my state myself for around 50 bucks in my state i believe


Sure. Filing the articles of formation or the articles of organization is about as simple as you can get. You provide the LLC's name, its address, name your registered agent... it is, in my states, super easy. Definitely DIY... Also, in many states, very, very fast because you do the filing through an online portal.

2. File the taxes myself as an S corp.


So here, we maybe disagree. I don't think an 1120S and the related schedules are easy enough to DIY... You can peek at the forms available at Internal Revenue Service website. But maybe this additional bit of info helps. I find that many 1040-centric CPAs and EAs don't do enough 1120S returns to really do a safe job.

Also, you will need do payroll (even if its very modest)... and that's a serious amount of fiddling. We've got a hack we call "Five Minute Payroll" system which works in many states... but if it won't work or someone isn't organized enough, you need to outsource your payroll too. (I didn't explicitly count that cost because I forgot but I think Gusto is maybe $500 a year... so you can probably keep the whole deal, still, below $2K).

Wouldnt this bypass all those fees you're talking about and allow me to pay myself as a shareholder.  and just compensate myself for the "work" i do at x dollars per hour.

i'm serious when i say the hours i spend to make that 20k will be less than 20 hours of actual work from me.

I understand. But I still think you'd need to do the return in way that (a) pays boarder42 something that looks like a reasonable wage when the IRS computers read and analyze the return and that (b) dials down the perception that there's abuse going on. E.g., you do not want to pay boarder42 the shareholder $18K and then boarder42 the employee $2K. I don't know how well you know your way around the 1120S form, but the form makes it extremely explicit that you're doing something like this...

One other related comment: The IRS often takes the position in a case like we're talking here that all of the profits need to go out to shareholder as wages. I don't think you necessarily need to think that way. But I think you want to arrange things so as to not trigger a query and so as to have a more likely than not chance of prevailing in any argument with the IRS.

Hope that helps.

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #40 on: February 03, 2017, 02:18:53 PM »
Thanks for all the great information everyone.  I'm definitely interested in this topic.

CanuckExpat

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #41 on: February 04, 2017, 09:27:07 PM »
I'm not sure how you guys want content collected here.
Thanks everyone for the awesome discussion so far, please keep it coming!
If anyone has suggestions on how to summarize, let me know. In the meantime, I'll go through the thread and try to link back from the first post to any questions that have been answer/discussed, and add new questions and discussion items as they come up.

Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
Follow up questions to that point:
If you are over the SS max (~$120k) would there be any reason not to file as self employment income, perhaps except more complex taxes?
If you have multiple sources of misc 1099 income, some business-y and some more miscellaneous-y, can you pool them all for the purposes of filing and funding a pension?

SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
So for someone who has side hustle business income from the previous year and didn't think about sheltering the taxes earlier, it sounds like a SEP would be the only choice after the year ended, but before the tax filing deadline. With the caveat that you should consider the implications if you also performed a backdoor Roth:
Despite that, the solo 401k could still be a better option because, 1) unlike a SEP, it would not interfere with a backdoor roth
Given that, before the filing deadline, could you first set up a SEP to accept as much 2016 income as allowed, and also set up a solo 401k based on anticipated 2017 income, then perform a rollover relatively immediately from the SEP to the solo 401k in order to avoid interfering with the backdoor roth?

The ObliviousInvestor post linked is a great resource. Thanks for sharing.
I thought so too, will add to the top

We are talking about strictly a side hustle here right? I formed an S-corp for my main job because a customer wanted to do business with another corporation. Otherwise, its a bit of work and I don't know that I would recommend it.
This is something worth considering from a non taxes point of view. I've run into this in the past before as well, where a consulting firm would only enter into a 1099 relationship with me if I was corporation; otherwise it had to be a W2 relationship. I don't know how you would figure out if it's worth the complexity for the chance that this might happen.
Was targetting Freedom35
Currently We're Homeless and Jobless

SeattleCPA

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #42 on: February 05, 2017, 05:43:01 AM »
Miscellaneous Income: If you're doing something business-y or that requires your effort for the income, you should report on Schedule C and if over $400 on Schedule SE. Yes, this means you pay SE tax. This also means you can use the earnings to fund a pension.
Follow up questions to that point:
If you are over the SS max (~$120k) would there be any reason not to file as self employment income, perhaps except more complex taxes?
If you have multiple sources of misc 1099 income, some business-y and some more miscellaneous-y, can you pool them all for the purposes of filing and funding a pension?

I think your main question is if you're already in a W-2 job over the FICA limit, does it still make sense to consider the S corporation...

And my answer to that question is "no probably not"... If you're over or close to the FICA limit, your tax savings from an S corporation are the Medicare or Obamacare taxes... those equal 2.9% or 3.8%... and that lower tax rate makes it hard to accumulate enough tax saving to justify costs and hassle factor of an S corporation.

BTW, in that situation, you may also have opportunity at your regular job to max a 401(k) and so a SEP in your side business is best deal. Further, if you have minor children, a sole proprietorship does offer you that little trick where you can pay your kids, deduct the payroll, but kids aren't taxed.

SeattleCPA

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #43 on: February 05, 2017, 05:47:15 AM »
SEP Plan Creation Deadline: You can set up a SEP and make the contribution right up until the tax return deadline. If you extend, you can use the extended return deadline. Note that other options, like a Simple-IRA, have earlier deadlines.
So for someone who has side hustle business income from the previous year and didn't think about sheltering the taxes earlier, it sounds like a SEP would be the only choice after the year ended, but before the tax filing deadline. With the caveat that you should consider the implications if you also performed a backdoor Roth:

Yes, I think that's right.

P.S. Sorry I didn't answer or address all comments in same message. The nested quotes made it hard for me to keep things straight on a small screen...

tj

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #44 on: February 05, 2017, 09:16:55 AM »
Quote
BTW, in that situation, you may also have opportunity at your regular job to max a 401(k) and so a SEP in your side business is best deal.

Does this depend on the $$$ earned in the side business? My understanding is that a SEP is an employer contribution that is limited to around 20% of your profits. If your side hustle is say, $20k, would the SIMPLE IRA be more beneficial as it seems to allow a $12,500 employee deduction which is apparently seperate from the employee part of a work 401(k) or a traditional/Roth IRA

sol

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #45 on: February 06, 2017, 05:02:40 PM »
If you're making a few thousand per year in retirement, and paying self employment taxes, and have children, you're potentially eligible for up to $6,269/year (for 2016) in Earned Income Tax Credit, which may offset a significant portion of your self employment taxes.

It's a sliding scale.  Three kids pays the most, and maxes out at about $16k/year of MFJ income. 

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts

tj

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #46 on: February 06, 2017, 05:53:08 PM »
If you're making a few thousand per year in retirement, and paying self employment taxes, and have children, you're potentially eligible for up to $6,269/year (for 2016) in Earned Income Tax Credit, which may offset a significant portion of your self employment taxes.

It's a sliding scale.  Three kids pays the most, and maxes out at about $16k/year of MFJ income. 

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts

You need to have less than $3k (3.5k?) of investment income to qualify for that tax credit.

sol

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #47 on: February 06, 2017, 07:20:46 PM »
You need to have less than $3k (3.5k?) of investment income to qualify for that tax credit.

In your taxable accounts, yes.

You'd probably need to move your bonds and dividend paying stocks into your Roth or 401k or something.   VTSAX pays 1.86% dividend, so you can hold $182,795 of VTSAX in your taxable brokerage account and still qualify.

elysianfields

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #48 on: February 08, 2017, 07:57:10 AM »
What's everyone's take here on the formation of an LLC for this (and other ventures) with one's spouse?

In our case, we are both W-2 employees and residents of a common-law (vs. community-property) state, but we have rented out our house (filing Schedule E) and I'm starting to sell tradelines.  I may also add other side businesses going forward, though I doubt we'd engage any employees.  We have a property manager for our rental, whom I issue a 1099 each year.

Should we have a single LLC for all our business ventures, or a separate one, say, for the rental properties?  Should we set it up as a single-member or multi-member LLC?

I'm especially interested in the possibility of expanding our retirement fund buckets to (most likely) a SEP-IRA.

Elysian

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Re: Small Business and Miscellaneous Income Best Practices
« Reply #49 on: February 08, 2017, 08:06:21 AM »
What's everyone's take here on the formation of an LLC for this (and other ventures) with one's spouse?

In our case, we are both W-2 employees and residents of a common-law (vs. community-property) state, but we have rented out our house (filing Schedule E) and I'm starting to sell tradelines.  I may also add other side businesses going forward, though I doubt we'd engage any employees.  We have a property manager for our rental, whom I issue a 1099 each year.

Should we have a single LLC for all our business ventures, or a separate one, say, for the rental properties?  Should we set it up as a single-member or multi-member LLC?

I'm especially interested in the possibility of expanding our retirement fund buckets to (most likely) a SEP-IRA.

Elysian

In a non-community property state, the usual rules for classification of a multiple member LLC apply... which means the husband and wife LLC needs to file a partnership tax return.

Because that's not a DIY project and because it's not cheap, I would think you want to be really careful and do thorough, specific-to-your-situation before doing this.

BTW, if you really want to dig into the weeds on this, a few years ago, I wrote a really lengthy article about how LLCs are taxed here:

http://www.llcsexplained.com/llc-faq/what-you-must-know-about-llc-taxation/

Note that the FICA limits mentioned in the article are out of date. The 2017 limit for FICA is $127.200...