Should I form an LLC

[Giro]

I'm considering a move from an employee position to a 1099 or self-employed position.  Does anyone know details about starting an LLC?  I understand that it would protect me in case of a situation of liability, but I would just be basically working as an employee at an office just with no benefits.  I don't see a need for liability protection. 

Other reasons that I may need an LLC? 

[Jrr85]

You probably don't need an LLC for liability reasons.  There are two types of liability an LLC could protect you from.  Tort liability (e.g., getting sued because you injured somebody in the course of or because of your work) or contractual liability (getting sued because you don't fulfill a contractual obligations related to the business).  For tort liability, if you don't carry sufficient insurance, a court will "pierce the corporate veil", meaning the court will ignore the fact that you ahve an LLC and hold you personally liable because you didn't adequately capitalize or insure your business.  For contractual liability, anybody relying on you to do something financially significant will probably require you to personally guarantee the contract anyway. 

That said, if you live in a jurisdiction where it is cheap to maintain, it does provide some protection and potentially simplifies the sale process in the event you sell.  It's also possible it would allow you to do some tax optimization, although I'm less sure about what's available if you do a simple LLC as opposed to an SCorp. 
 

[Giro]

Yes, I would have to personally guarantee the contract and I only get paid for work completed anyway...so, LLC doesn't help me there.  Tort liability for IT work is pretty much non-existent especially since I'm working on-site.

I thought about the tax benefits a little but I would be the only employee.  I could hold some retained earnings to avoid taxes in a single year, but I'm really just kicking the can down the road.  I don't think that's very beneficial for me unless I held retained earnings until I "retired" and paid myself for a  couple of more years after I was already paid for the work.  BUT, my husband would still be working so I would still be in a fairly high tax bracket even in that case.  AND, it might even be worse because I wouldn't have maxed out my personal SS tax for the non-working years....so that's 12.4% right there.

Thank you for the reply.

[Jrr85]

Yes, I would have to personally guarantee the contract and I only get paid for work completed anyway...so, LLC doesn't help me there.  Tort liability for IT work is pretty much non-existent especially since I'm working on-site.

I thought about the tax benefits a little but I would be the only employee.  I could hold some retained earnings to avoid taxes in a single year, but I'm really just kicking the can down the road.  I don't think that's very beneficial for me unless I held retained earnings until I "retired" and paid myself for a  couple of more years after I was already paid for the work.  BUT, my husband would still be working so I would still be in a fairly high tax bracket even in that case.  AND, it might even be worse because I wouldn't have maxed out my personal SS tax for the non-working years....so that's 12.4% right there.

Thank you for the reply.

Just to be clear, I wasn't thinking about retained earnings but about dividends.  If you set up as an SCorp, you can pay yourself "reasonable compensation" and then take any excess and disburse it to yourself as a dividend, avoiding social security tax on those dividends and also getting taxed at the dividend rate instead of ordinary income rate, which combined will make your tax roughly 25 percentage points lower, depending on your income. 

[Giro]

First, let's back up one step...

...I would just be basically working as an employee at an office just with no benefits.

If you are basically an employee who works the same schedule at the office as other employees and your boss controls your schedule, you might not be self-employed even if you want to be.  There are some IRS guidelines to determine if you are an independent contractor or if you automatically default to being an employee based on your work arrangements.

Just to be clear, I wasn't thinking about retained earnings but about dividends.  If you set up as an SCorp, you can pay yourself "reasonable compensation" and then take any excess and disburse it to yourself as a dividend, avoiding social security tax on those dividends and also getting taxed at the dividend rate instead of ordinary income rate, which combined will make your tax roughly 25 percentage points lower, depending on your income.

S-Corps have distributions, not dividends.  You can avoid the SS/Medicare taxes through distributions, but you will pay income taxes on those distributions as earned income, not dividends.

I've had an S-Corp now for about 16 years.  If I had it to do over again I would set up an LLC and have it taxed as an S-Corp.  That way I'd get the ease and flexibility of running an LLC, but the extra tax benefits of the S-Corp.  This link has a good breakdown on the benefits:

http://www.bizfilings.com/toolkit/news/tax-info/llc-plus-scorp-equal-best-of-both.aspx

I thought about the tax benefits a little but I would be the only employee.

That's a great situation since then you can set up an individual 401k.  You can max out your employee contributions of $18,000, plus you can contribute an additional 25% as the employer (assuming S-Corp election).  That 25% contribution doesn't get hit with SS/Medicare or income taxes.  If you retire early and have some 0% tax bracket to fill with Roth conversions over the years, you might never pay income tax on those dollars.

Thank you so much for this!

I wasn't clear on all of the intricacies of the position.  I would definitely be a contractor and not an employee.  It's a government contract and I would be a sub to the prime contractor.   

I did take into account the 53k I can set aside for my retirement when calculating my desired rate for negotiations.  That is the sole reason that I wanted paid as a non-employee.  I don't need benefits and the employer doesn't need to spend on benefits I don't want.  win/win

Now, the distributions are interesting but I still have to pay myself a reasonable salary before calling them all distributions.  What the heck is "reasonable" is what I need to research.

Good stuff.  It's definitely better for me to be self employed but I need to learn the tips and tricks in more detail. 

Thanks all!!

[Proud Foot]

Now, the distributions are interesting but I still have to pay myself a reasonable salary before calling them all distributions.  What the heck is "reasonable" is what I need to research.

This is the most important part.  Definitely consult with a tax CPA, but my understanding is when the sole income of the business is from services provided as a contractor you would have a hard time establishing a reasonable salary different than the rate you charge.

EDIT: Here is some more information on this.  https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

[Giro]

Now, the distributions are interesting but I still have to pay myself a reasonable salary before calling them all distributions.  What the heck is "reasonable" is what I need to research.

This is the most important part.  Definitely consult with a tax CPA, but my understanding is when the sole income of the business is from services provided as a contractor you would have a hard time establishing a reasonable salary different than the rate you charge.

EDIT: Here is some more information on this.  https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

I will for sure.  I have my CPA license (inactive) but I have NEVER practiced public accounting.  People give me weird looks when I ask tax questions but it's been YEARS since the exam and I have no real life experience whatsoever.  And you can learn the rules all you want, but it takes folks who have played the game to really know the best tips and tricks. 

I'm thinking the biggest benefit is what I originally thought.....solo 401K and significantly higher hourly rates.  I can deduct my expenses but that's mostly mileage and I might bother to do a home office deduction but it's minimal expense and probably not worth the hassle.

Now, I just need to secure the contract.  I'm pretty excited.  My current gig is draining the life and soul from my body and turning me into an uncaring b*tch.