Jump to content
The forums have been archived and are now read only. Years of great info saved for your reading pleasure. Thank you! Visit us on Facebook: https://www.facebook.com/NakedInvestor/ ×
The Naked Investor Forums
Sign in to follow this  
Mr Saint

Business Income or Self-Employment??

Recommended Posts

DaveT,

 

I operate my investing business under a sole member LLC. I also am self-employed as a real estate appraiser part-time. As tax season looms, a question has come up that I'm wondering if you maybe could help me out?

 

Would it be advantageous for me to filter my self-employment money through my business? I realize I'll end up paying taxes on it either way, but I'm wondering if one way would be better than the other. My wife doesn't work, so my investing income and my appraising income is all the money that is coming in. Are there gross errors in my thinking here? Set me straight, I really have no idea when it comes to tax time.

 

Thanks a lot,

Share this post


Link to post
Share on other sites

Mr. Saint,

 

I'm interested in hearing a response to this as well. I'm set up exactly the same way.

 

I know as a single-member LLC there are not specific requirements to file a separate return for the business. You can basically file like a sole proprieter, using the appropriate schedules to disclose all income and claim expenses/deductions.

 

I'm thinking that maybe you should set up your part-time appraiser business under a different single-member LLC with it's own bank account.

 

My experience with the IRS is that the cleaner you can keep things the better. They like to see clean audit trails.

Share this post


Link to post
Share on other sites
I'm thinking that maybe you should set up your part-time appraiser business under a different single-member LLC with it's own bank account.

That's something I hadn't thought of, Mark. Are LLC dispersement tax rates that much lower than self-employment tax? Or is it all dissolved under personal income anyway?

 

Things that make you go... :huh:

Share this post


Link to post
Share on other sites

I think you all need to have a long conversation with your personal tax advisor.

 

An LLC, S-Corp, C-Corp, Sole Proprietor are all business entities with each having different strengths for a particular situation. Additionally, the LLC can be organized as a partnership, a corporation, or a disregarded entity. The business entity that is right for one person may also be completely wrong for another. Each has its own form of tax reporting as well, and tax treatment on income is not the same across the board. Choose the wrong business entity for your investment strategy and you may end up paying more in total taxes than you might have needed to.

 

Choice of business entity may also affect your ability to take certain business deductions.

 

If you believe you do not pay self employment taxes on LLC income, you also need to have a serious conversation with your personal tax advisor. For now, let me just warn you that the single-member LLC treated as a sole proprietor reports its income and expenses on Schedule C. Your net income is taxed as ordinary income at your marginal tax rate, AND self-employment taxes are calculated on Schedule SE.

 

You might be able to reduce the self-employment taxes somewhat by operating a Subchapter-S Corporation. In this business entity, if you take a reasonable salary, then the rest of your corporate income can pass through to the shareholders as a dividend. The dividend is reported on your Schedule B, while your "salary" is subject to the same self-employment taxes as a sole proprietor. The difference here is that half of your employment taxes are a deduction to the company, reducing your taxable dividend.

 

I am not a corporate tax specialist, so I must defer more detailed discussions to your personal tax advisors.

Share this post


Link to post
Share on other sites
Guest JOHN HASLACH, CPA, MST

Your businss should be run through an S Corporation to control the Self-employment taxes.

 

John K Haslach, CPA, MST

Share this post


Link to post
Share on other sites

John,

 

How would that make a difference? Of course answering this question requires you to offer free tax advice, but if you don't mind.....

Share this post


Link to post
Share on other sites
if you take a reasonable salary, then the rest of your corporate income can pass through to the shareholders as a dividend.

If you don't take any salary, then all of your income is treated as self-employment income subject to ordinary income taxes and self-employment income taxes. Taking a reasonable salary allows the balance of your S-Corp income to be passed through as a dividend free from self-employment income taxes.

Share this post


Link to post
Share on other sites
Sign in to follow this  

×
×
  • Create New...