Author Topic: W2 incomes and new side business  (Read 1804 times)

dragonwalker

  • Bristles
  • ***
  • Posts: 276
W2 incomes and new side business
« on: September 27, 2024, 11:13:56 PM »
I recently married this year, I work a W2 job bringing about $85K, I also make about $15K from rental income, and $10K from dividends and interest. My partner makes about 300K W2.

I am considering getting into buying and running vending machines as a side hustle (long story). I wanted to get into it slowly and see how I like it. I could potentially get setup for under $10K. I know of people who have bigger operations commonly organize themselves into an LLC for tax and liability reasons.

I wanted to find it couldn't I take some of those same write offs technically operating as a sole prop? The first year I wouldn't be expecting to make any profit but couldn't my expenses for purchasing machines/route, cost of goods (food), and services all be written off by ordinary income simply by filling out the self-employment income of the tax return? Assuming I keep a paper trail of my expenses? I don't want to organize myself as an LLC before I know I will go much further in the business.

My partner would have nothing to do with this business but I'm wondering is there something income related that might restrict any benefit that I get?


terran

  • Magnum Stache
  • ******
  • Posts: 3860
Re: W2 incomes and new side business
« Reply #1 on: September 28, 2024, 07:20:23 AM »
An LLC is a liability designation, not a tax designation. You can elect to have them taxed the same as a sole proprietorship or as as S-Corp. I think all the same expense deductions are allowed with either (not sure about that, though). The difference is that an S-corp can pay the owner a salary (subject to both halves of FICA tax just like sole proprietorship income) and pay the rest as business profit, which isn't subject to FICA. The salary needs to be justifiable based on the facts of the situation, which is wishy washy, but you can't for example, pay $1 salary and the rest as profit. @SeattleCPA can probably give you a more complete and definitive answer.

On the liability front, note that an LLC is of limited utility for single person businesses because a lawyer can choose to go after the business or they choose to go after the individual who took the negligent action.

dragonwalker

  • Bristles
  • ***
  • Posts: 276
Re: W2 incomes and new side business
« Reply #2 on: September 28, 2024, 08:39:33 AM »
An LLC is a liability designation, not a tax designation. You can elect to have them taxed the same as a sole proprietorship or as as S-Corp. I think all the same expense deductions are allowed with either (not sure about that, though). The difference is that an S-corp can pay the owner a salary (subject to both halves of FICA tax just like sole proprietorship income) and pay the rest as business profit, which isn't subject to FICA. The salary needs to be justifiable based on the facts of the situation, which is wishy washy, but you can't for example, pay $1 salary and the rest as profit. @SeattleCPA can probably give you a more complete and definitive answer.

On the liability front, note that an LLC is of limited utility for single person businesses because a lawyer can choose to go after the business or they choose to go after the individual who took the negligent action.

Ok, that's good news. As far as calling my business something for example "ABC Vending", would I need to file some kind of DBA to do that and am I able to do so as a sole prop without any other documentation?

terran

  • Magnum Stache
  • ******
  • Posts: 3860
Re: W2 incomes and new side business
« Reply #3 on: September 28, 2024, 09:22:07 AM »
Yes, you'd file a DBA, probably with some kind of town/city clerk, although it's probably state specific. If you end up with an LLC then you wouldn't need a DBA unless you want to refer to the business as something other than the name of the LLC.

And I wasn't necessarily saying an LLC is a bad idea. For example, if you install a machine, everything is in good working order, you inspect it regularly, and follow whatever industry standards and some kid decides to climb the machine and it fall on them, maybe having an LLC would be a good idea. Probably worth talking with a lawyer to see what they recommend.

What I'm talking about is more like you're driving to check on a machine and you get in an accident (this would also apply if you did something negligent like put expired food in the machine). They're definitely going to sue you personally. On the other hand, if you had an employee and they got in an accident through no fault of yours then that's where a business structure really helps.

SeattleCPA

  • Magnum Stache
  • ******
  • Posts: 2558
  • Age: 65
  • Location: Redmond, WA
    • Evergreen Small Business
Re: W2 incomes and new side business
« Reply #4 on: September 29, 2024, 07:00:04 AM »
An LLC is a liability designation, not a tax designation. You can elect to have them taxed the same as a sole proprietorship or as as S-Corp. I think all the same expense deductions are allowed with either (not sure about that, though). The difference is that an S-corp can pay the owner a salary (subject to both halves of FICA tax just like sole proprietorship income) and pay the rest as business profit, which isn't subject to FICA. The salary needs to be justifiable based on the facts of the situation, which is wishy washy, but you can't for example, pay $1 salary and the rest as profit. @SeattleCPA can probably give you a more complete and definitive answer.

On the liability front, note that an LLC is of limited utility for single person businesses because a lawyer can choose to go after the business or they choose to go after the individual who took the negligent action.

@terran 's answer here is great. I don't have anything to add.

 

Wow, a phone plan for fifteen bucks!