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Tax strategy for next 2007

I am trying to get everything in order for planning my tax strategy for this year, and wanted to double check something... Last year I made 165K, and my MAGI was around 120K. I work as a contract consultant, so obviously the SE tax was a bitch. I am a sole proprietor, mostly because I do not need the liability shield, so doing LLC offers little advantage from a tax perspective. Now I also considered doing subchapter S, but at the time (a few years ago), it did not seem to offer that much benefit either. My logic was that the "reasonable salary" that I pay myself would most likely have to be over the cap on the SS portion of SE taxes. Thus, my tax savings would only be around 2.9% (even less when you factor in the deduction of 1/2 SE tax). At that time, it seemed like a lot of paperwork to go through to get that few %. Is my logic flawed?

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Reply to
kyle
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wrote

Seeing that the default for a single member LLC is a Schedule C anyway.

Depending on the state fees and such, you are correct. The costs would include state filing and any annual fees, the costs to maintain payroll services (forms preparation and filing), a corporate return to prepare and file, just to name a few. The costs could easily exceed the tax savings. There may be, however, non-tax reasons to form a corporation, and you may want to at least keep it in mind down the road.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Reply to
Paul Thomas, CPA

Nope, you're right on target. The extra costs of operating as a corporation would probably negate any tax savings of the 2.9%. HOWEVER; you might still consider the LLC route because your default tax treatment is still schedule c with which you're already familiar. In fact you MAY, I say MAY, be able to "do it yourself" on the web. Check your state's secretary of state web site. Remember though, that what I say here is no substitute for adequate legal counsel which would charge you at least 800$ (in these parts) for the LLC formation. ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Probably not. As a "consultant", any entity that's taxed like a C-corporation makes little sense. So it's S-corp or sole proprietor. Liability shielding with a corp should be compared with the simpler mechanism of insurance. Non tax reasons ought to point the way. Clients are often reluctant to engage sole proprietors because of potential employee vs. contractor issues. If that is not a factor, then why bother with even a subchapter S? This perception changes if you're not really a "consultant" but actually a contractor that isn't involved in business that might identify you as a "qualified personal service corporation", if you plan to employ people, if you want to retain earnings from one year to another for some reasonable business purpose, or simply if you anticipate wildly varying income from one year to the next.

Reply to
Tony Cox

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