taxes, llcI’m getting ready to become an LLC for a side business of my own. I’m not leaving my day-job though which has 401k, Healthcare, and all of that wonderful stuff. Not to mention I love my day job.
Since I’m already losing money to Social Security and Medicare is this amount reduced? For example:
In 2010, the Social Security Wage Base was $106,800 and the Social Security tax rate was 6.20% paid by the employee and 6.20% paid by the employer. A person with $10,000 of gross income had $620.00 withheld as Social Security tax from his check and the employer sent an additional $620.00.
Source: http://en.wikipedia.org/wiki/Social_Security_Wage_Base
While
For self-employment income earned in 2013 and 2014, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Source: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes
How is this handled come tax season? This seems like I’m going to end up paying 6% of day job, plus an additional 12% from side work. Is that just how it is or will it be adjusted to account for still having my full time job?
You don’t need to individually figure the percentages for each portion of the withholding. You just need to fill out the forms and run the prescribed calculations which will figure your total tax liability to cover Social Security, Medicare, and federal income tax.
As far as what gets paid from where, at the end of the year your total tax liability will be the same regardless of when or how you pay it, assuming your LLC income flows through to your personal income tax statement (e.g., if you have a schedule C or schedule K-1 for your small business), although you open yourself up to penalties if you did not pay the majority of your taxes up front or throughout the year.
If you always get a hefty refund, your full-time job may cover enough of your self-employment earnings so you don’t need to do anything extra. However, if you do need more withheld, you could opt to fill out a new W-4 for your full-time job and request additional withholding, or you could make annual or quarterly estimated payments on your expected self-employment earnings using form 1040ES. If the income from your LLC is seasonal, there are special provisions for that so you don’t have to make large tax payments before you actually generate the income.
See http://www.irs.gov/irspup/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes for more information.
Disclaimer: this is based on my personal experience and should not be construed as legal or financial advice applicable to your particular situation. Consult a tax professional for a more definitive answer specific to your case.
As I understand it, your impression is correct: You have to pay the 6.2% for Social Security from your prior job, plus the self-employment rates for your side business. If your combined salaries happen to exceed the Social Security Wage Base at the end of the year, you may be eligible for a partial refund, but that doesn’t mean you don’t have to withhold it (and pay it to the government) in the meantime.
Important note here: The above may be inaccurate. This is not legal or tax advice; you should contact an accountant and, if necessary, an attorney in your state for advice specific to your situation.
This is the one area where an S-corp has advantages over LLC. In both situations your profits fall to the owners’ personal income every year, but with an S-corp you can declare a salary for yourself as an employee of that S-corp. It’s on that salary that you pay self employment tax. So you can lower your overall self employment tax liabilities by lowering your salary. Just be aware this is a place where the IRS watches for tax evaders so you shouldn’t pay your $5000.00 as CTO or something like that. As long as it’s fair market value it’s perfectly legal to do this. So if you plan on taking in $110,000.00 in revenue, and you pay your $50,000 in salary then you only pay 12.4% on $50,000 instead of $106,000.00. Doing this would save you $6,944.00 in self employment tax.
Something else to be aware of is that this salary you pay yourself is the basis for 401K contributions. I know you said you have a day job that covers this, but another thing you need to be aware of is that as a company you can declare your own 401K program with its own employer match program. The employer match will be a percentage based on your salary and the IRS has maximums. That program must be offered to all employees to be fair, but doing this allows you to fund your own 401K program and match it with company money going above the normal $16,500.00 ceiling most employees hit. The max you can sock away is $50,000 with employer match and employee contributions. It also lowers your tax burden for yourself too as that contribution is coming out of company profits.
You need to make a fair amount of money on the side for this to be lucrative, but should whatever you’re doing take off you have the information. You may choose to fund your own 401K from your side business instead of taking the 401K from work depending on their program/match.
I am not a tax professional, but this is the arrangement that my tax professional helped me setup.
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