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Jacki and I chatted last time about Taxes and how to avoid getting in trouble with the IRS.

FHS 3: LLC vs S-Corp and the Tax Man!

Income Tax classification

Your tax classification changes the rules about how you will need to file taxes. The different business entities each have their own classifications. For example, an LLC and an S-Corp are handled different but both have flow-through entity rules. You don’t pay income tax on the business (entity) level, you pay on the personal level. Basically, what you earn at the end of the year.

If you have more than one member (owner) of the entity, you’re automatically labeled as a partnership for tax purposes. There are no maximum level of members for an LLC while an S-Corp is capped at 100.

https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

High Court Tosses Online Sales Tax Rule, South Dakota New Standard?

Virtually every state that administers a sales tax may follow South Dakota’s model after the U.S. Supreme Court established the state’s tax law as the new standard for online sales taxation.

The high court ruled June 21 in favor of South Dakota and threw out its 1992 rule in Quill Corp. v. North Dakota. Quill, which states like South Dakota for years have tried to “kill” through lawsuits and regulation, prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

Read  More: Bloomberg Daily Tax Report Article

Quick Notes from the Episode

• Register to do business with the state
• Sales and use tax versus income tax
• Rule of thumb: every state is different
• Nexus – level of activity to create presence; threshold for filing
• Allocation versus apportionment
  • Ex. sold property in a state, gain allocated to that state
  • Net income allocated based on activity in state using factors
• Apportionment factors
  • Payroll – I think just employees so not 1099 contractors
  • Property – net book value or cost, rent x 8
  • Sales
• Apportionment formulas
  • Evenly weighted 3 factor, 60/20/20
  • Sales only
• Revenue sourcing
  • Physical – tangible personal property
  • Services – Cost of performance vs market based
  • Digital, SaaS
• Prewritten “canned” software, custom made
• Leave and load, license
  • Use sourced revenue for apportionment formula
• LLC versus S corp (partners/members, shareholders)
  • Flow through entities, pay tax at individual level instead of entity level
  • Some franchise taxes based on equity: GA net worth (over $100k), TN franchise (25% net worth, min $100) and excise (6.5% net taxable inc), AL report fee ($10) and privilege tax ($100), SC min license fee $25
  • Separate s corp election in some states: NY and NJ; don’t follow fed, may just file as c-corp
  • Withholding or composite taxes and returns; instead of filing individual returns for each partner, sometimes incl on s corp return
• Sign affidavit
• State of residence taxed on 100% of income
  • Credit for taxes paid to other states, at resident state rate
  • States that do not recognize s election, corp pays tax (not pay on behalf), then subtraction for income subject to tax
  • (credit versus deduction/subtraction)
  • Timing of payments; estimated quarterly taxes, extensions, pmts due with return
  • Federal deduction for state taxes paid in year (new tax law limit $10k)
  • State credit for taxes paid related to that tax year
• International – as US citizen and resident you are taxed on 100% of worldwide income, foreign tax credit (or deduction) for taxes paid to other countries

The post FHS 31 Selling Across State Lines and Taxes appeared first on The Freelancer Head Start.

Business entities

Three are a few business entities that you’ll be picking as a business owner. A sole proprietorship, partnership (not covering sub classifications LP, LLP), LLC,
C-Corp and S-Corp. Based on how you’ll be classifying yourself for taxes, choose a business entity that works with your business plan.

Income Tax classification

Your tax classification changes the rules about how you will need to file taxes. The different business entities each have their own classifications. For example, an LLC and an S-Corp are handled different but both have flow-through entity rules. You don’t pay income tax on the business (entity) level, you pay on the personal level. Basically, what you earn at the end of the year.

If you have more than one member (owner) of the entity, you’re automatically labeled as a partnership for tax purposes. There are no maximum level of members for an LLC while an S-Corp is capped at 100.

https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

Liability

Your liability is what you are on the hook for if something forces you into bankruptcy or a lawsuit. You are essentially protected when you create a Business Entity.

• Do not cross the “corporate veil”
• Business entity legally separate from its owners (create for liability protection or name recognition if Sch C business); entity liable, not owners or members
• May be different according to state of organization, so check on that
• Liability includes creditors/lender, customers, suppliers, or other owners
• Business assets used to pay off business debts, owners lose what has been invested in LLC, not personal possessions including house or car
• Exceptions include illegal or fraudulent activity
• Business liability and professional liability insurance should be considered

 Formation

Each state has different rules about forming a Business Entity.

• State Articles of incorporation/organization $100 – Georgia
• State Annual registration and license $50 informational form – Georgia
• Federal employer ID # FEIN – Found on the IRS.gov website
• Partnership agreement is a good idea to complete even if you don’t have a partner. You never know where you business will grow.

Tax structure: LLC vs S Corp

• Both Flow Through Entities (FTE), so main difference is how business owners pay Self Employment (SE) taxes (Medicare and SS)
• LLC Pros: more flexibility in management (voting, ownership), distributing profits, and fewer recordkeeping obligations
• LLC Cons: pay SE tax on all income
• S Corp Pros: don’t pay SE taxes on net income (but have to take reasonable salary, typically understated)
• S Corp Cons: fewer than 100 members, no foreign LLC or nonresident alien owners, no corps or partnerships, basically only individuals;
  • Proportionate distributions, take a reasonable salary which creates payroll filings
• S corp: pay reasonable salary on W-2 to owner which will pay medicare and SS taxes, that amount can be deducted from business profits, and remaining about is not subject to SE taxes, additional withdrawals taken as distributions
  • Capital accounts (contributions, net income, separately stated items, TE income, ND exp, distributions)
  • SE tax = 15.3%; SS 12.4% on first $118,500, Medicare 2.9%, (additional 0.9% on high income wage earners $250k Married Filing Joint(MFJ) and $200k single). Half deducted as above the line deduction when arriving at AGI

Tax filings

• Financial statements (BS, IS), open own checking/bank account and keep separate records
• Tax forms: 1040, 1065, 1120S, k-1s both
• Threshold: any activity, really when start earning income;
  • Can deduct $5k each start-up and org costs (phased out over $50k), amortized SL over 15 years, 180 months
  • Net earnings from SE => $400 sch SE filing
  • Estimated tax payments => $1,000 total tax liability
  • UET make sure to pay in 100% PY (110% if over $150k), 90% CY tax liability, actual or expected/annualized (70% GA)
  • Due dates 1120s and 1065 3/15, 1040 4/15

The post FHS 3: LLC vs S-Corp and the Tax Man! appeared first on The Freelancer Head Start.