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  • Forming LLC for moonlighting?

    i plan on making about 50k in moonlighting from a side medical gig this year. Is it better for me to form an LLC or s corp and get paid via that for tax deduction purposes? As opposed to a 1099.

     

    I also plan on opening a small mom and pop store to sell things in which is a separate venture.

     

    Can I do both things under a single entity or do I need separate LLC vs s corps?

     

    Whats the best way of going about this?

  • #2
    Also curious to the answer to this...

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    • #3
      Understand that an LLC is a state chartered business entity that has nothing to do with its tax status. By default a single member LLC is treated by the IRS as a "disregarded" entity. This means that with or without an LLC you file on a Form 1040 Schedule C/SE as a sole proprietor.

      You can create/elect to be treated as a sub chapter S corporation or you can create an LLC and elect it to be treated as a sub chapter S corporation. In either case you file as an S-Corp on a Form 1120s.

      An individual who will make more than the Social Security (SS) maximum wage base as a W-2 employee should almost never use an S-Corp for business income. Contrary to "conventional" wisdom you will pay more FICA taxes as an S-Corp than as a sole proprietor. The reduced salary will also reduce employer contributions to a SEP IRA or one-participant 401k.

      Also, there are almost no business deductions you can take as an S-Corp that you can't take as a sole proprietor. Another "conventional wisdom" myth.

      First, let me say that you absolutely should not rely on anonymous internet advice for the LLC/No LLC determination. This is one case where you should not be cheap. Engage the services of a local small business attorney to vet the liability issues. With that said IANAL, but I can give you some general information with regards to LLCs and liability.

      If your moonlighting side gig is the performance of medical services. You should be aware that an LLC provides little to no liability protection for the personal acts of its owner(s). Therefore, you still need the malpractice and business liability insurance. Also, because the LLC does provide creditor protection, it is virtually impossible for such an LLC to receive credit without the personal guarantee of the owner(s). So with the two main avenues of asset protection of little value, it takes specific circumstances including your state for an LLC to be beneficial.

      There is significant liability with any kind of store especially one with employees. I have no specific knowledge, but I would think that a lawyer would likely recommend an LLC. Which gets me back to my previous point, engage a professional.

      They are not remotely related businesses. They should not be combined.

       

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      • #4
        But can I  still deduct business related expenses such as a new desk, Internet, electricity, my room in my house if I don't form an LLC?

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        • #5
          Yes, as I said a default single member LLC files the exact same tax return as a sole proprietor.

          I will repeat again. There is almost no difference in deductible business expenses no matter if the business entity is a sole proprietorship, partnership, LLC, LLC/S-Corp or S-Corp.

          You can deduct all of those expenses as a sole proprietor to the degree they qualify.

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          • #6




            Yes, as I said a default single member LLC files the exact same tax return as a sole proprietor.

            I will repeat again. There is almost no difference in deductible business expenses no matter if the business entity is a sole proprietorship, partnership, LLC, LLC/S-Corp or S-Corp.

            You can deduct all of those expenses as a sole proprietor to the degree they qualify.
            Click to expand...


            So I guess than the only benefit is legal protection?

             

            Why do people form LLCs like to buy their cars under and such. For example rich people buy their exotic cars under a Montana LLC?

             

             

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            • #7
              Even that protection is fairly limited.  As a physician, you were treating the patient when the harmful act (allegedly) occurred.  You bear direct personal responsibility for your action(s) or inaction(s) and the LLC offers extremely limited protection.

              For that exotic car, you were the driver or the person who entrusted the car to the irresponsible driver, or the person who failed to secure the car to keep it from being stolen by the valets like Cameron's dad in Ferris Bueller's Day Off.  While there may be a few more hoops for the plaintiff's attorney to jump through, it's not too hard to go from a single member LLC for a medical business to the treating or owning physician.  Likewise, it isn't too many steps from the exotic car to the owner of the exotic car.

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              • #8
                Specifically a Montana llc is used because there is no state sales tax in MT. That is the only reason as far as I know.

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                • #9




                  Specifically a Montana llc is used because there is no state sales tax in MT. That is the only reason as far as I know.
                  Click to expand...


                  Other states don't have sales tax so why are they all in Montana?

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                  • #10
                    The determination of whether to set up an LLC (or a C Corp depending on state rules) and make the S Corp election is pretty involved.  Usually the 1099 income has to be pretty high for the savings to make sense.  The social security limit for 2018 is $128,700 and this limit is applied to each job.  Thus, if you are a W-2 employee you pay your portion of social security up to the limit.  If you also have an S Corp, you pay social security again on the amount reported as salary for the S Corp.  Keep in mind you are paying both the employer and employee portion of social security on your S Corp wages.  You get a credit for the employee side of social security paid in over the limit but there is no way to get the employer portion back.  Thus, you are technically double paying to a certain extent.  In this scenario, it takes an additional calculation to see if the strategy is worthwhile to pursue.  Keep in mind the savings generally for the S Corp election is the Medicare tax savings.  Most physicians who have a good amount of 1099 income should be reporting a salary for their S Corp that is at least at the social security threshold.  There is no cap to Medicare so you usually pay Medicare on the portion that you report as your S Corp salary and any other "profit" of the S Corp is not subject to this.  The gap between the S Corp salary and income needs to be pretty high for the Medicare tax savings which is 2.9% plus an additional 0.9% if income is above certain limits.

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                    • #11
                      That figure is almost exactly my comp for my various side gigs.

                      Others are correct that in this case an LLC provides no real legal protection for anything.

                      I just do everything as a sole proprietor. It really hasn't caused any issues. I know I should probably think about an EIN or at least a little "Doing business as" checking account but I keep pretty meticulous records.

                      The only thing I have found to be a little clunky is deduction of biz expenses. These are a little weird b/c I incur essentially no expenses specific to my side gigs. I have a small amount (usually <$1k/year) of unreimbursed expenses from W2 (think like a meal at a conference that is over my allowance, that sort of thing). Yet TurboTax seems to default to including expenses as part of the side gig business. I've solved this problem just by not messing around with trying to deduct these relatively small potatoes.

                      Not at all sure this is the most artful or official way to handle this but it's worked out fine so far and like I said everything is pretty carefully tracked.

                      Bottom line is if you are making $50k in moonlighting income and you are correctly tracking and filing your quarterly taxes I don't think you're going to have major issues just running things through your checking account. Would love to hear if I'm wrong on this.

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                      • #12
                        From the IRS point of view there is no difference between the accounts and transactions of a sole proprietorship and the personal accounts and transactions of the sole proprietor. As long as you can properly account for their respective transactions, just personal accounts are allowed.

                        Regardless of the position of the IRS. I still recommend a best practice of  keeping your business accounts and transactions separate from your personal accounts and transactions.

                        This is not intended to criticize any individual and is really not about the topic of this thread. However, I frequently see members of this forum avoid at all costs dotting the i's and crossing the t's of the requirements for a business, retirement plans and taxes. I sure hope that is because they are saving their enthusiasm for going the extra mile for my treatment and not doing the bare minimum there too.

                         

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                        • #13




                          Specifically a Montana llc is used because there is no state sales tax in MT. That is the only reason as far as I know.
                          Click to expand...


                          Montana also used to not have a speed limit, so some folks enjoyed the open roads...

                          Comment


                          • #14




                            From the IRS point of view there is no difference between the accounts and transactions of a sole proprietorship and the personal accounts and transactions of the sole proprietor. As long as you can properly account for their respective transactions, just personal accounts are allowed.

                            Regardless of the position of the IRS. I still recommend a best practice of  keeping your business accounts and transactions separate from your personal accounts and transactions.

                            This is not intended to criticize any individual and is really not about the topic of this thread. However, I frequently see members of this forum avoid at all costs dotting the i’s and crossing the t’s of the requirements for a business, retirement plans and taxes. I sure hope that is because they are saving their enthusiasm for going the extra mile for my treatment and not doing the bare minimum there too.

                             
                            Click to expand...


                            I think I see why you'd say that but the first part of your statement makes it sound like you're kind of endorsing my strategy suggestion to the OP.

                            The issue here for me is that this is such a relatively small amount of money and I can account for literally every dollar at any time. I absolutely NEVER attempt fancy accounting here

                            I have thought that if any of the side hustles become really profitable that I need to re-eval this strategy.

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