Full Time Employee with Side LLC Business - QUESTIONS

[RockSplat]

I am 31 years old, married filing jointly.

I work full time for my employer making around $91,000. My employer matches my 401(k) a total of 3% when contributing up to 6% so I am currently set at 6%.

I have a side business LLC that will make about $42,000 this year. Next year it will probably be a lot less -- more like $24,000.

My wife makes $20,000 so this brings my total income this year to $153,000. If I subtract what I put in my 401(k) this brings my tax value to $147,540 (153,000 - 5460).

I've always used Turbotax in the past to do my taxes and this worked great for me. I'd still like to if I can get by with it.

Questions...

1) Should I max out the ROTH this year for me and my wife or instead invest this money in a tax deferred account such as a SEP IRA, Traditional IRA or 401(k)?

2) I've been saving 25% of my earned LLC income into a separate savings account. I have not yet paid any estimated taxes this year. Should I go ahead and pay the estimated taxes now or can I wait until I file my taxes in April 09? If now, what is the deadline to not receive a penalty?

3) OK, here is the big question: Should I use a CPA? I still feel that my tax makeup is very simple. I've used Turbotax for the past 8 years or so and prefer to continue using it unless I should instead hand this off to a CPA.

4) I do not have any employees and simply provide consulting sales and service in my LLC. Is there a possibility that I would be better off incorporating? I suppose I would just be doing this to save money on taxes. I really do not have many expenses for the LLC.

Thanks!

[Martha]

A few thoughts: I do not see a strong need to form a corporation. You already have an LLC. If you formed a corporation, you would likely form an S corp which would give you pass through taxes, the same as the LLC. It would be hard to argue successfully that you could take out part of the income from the corporation as dividends and thus shield them from some taxes. This is because it is a personal service corporation. The liability protection for the LLC is the same as the corporation. You are personally liable for your own negligence whether you have a corporation or not.

As far as the estimated taxes, because you also have a job with withholding, you might be able to avoid paying a penalty if your withholding is high enough to cover 110% of your previous year's tax (100% if your income is below a certain amount). Otherwise, you will owe a penalty for failure to pay estimated taxes. I assume that you have been paying your self employment tax.

CPAs? Can't really answer that. We still use a CPA even though I am sure that I could do my own taxes. Never made the transition to turbo tax and it would take some fussing because we have a rental property and lots of K-1 income.

A CPA might be helpful with deciding the best way to plan long term for retirement and what accounts are best for you to maximize. A lawyer is helpful for the best business structure.

Note my signature line.

[RockSplat]

Thank you for the information.
I have not yet paid self employment tax. The income was very recent.

What are the penalties for failure to pay estimated tax? My adjusted gross income last year was $100,000 so I am about $40,000 over this year.

Do you have any idea how much a CPA will cost?

Thanks for the information.

[Martha]

I have to take off, you might want to read this IRS publication:

Publication 505 (2/2008), Tax Withholding and Estimated Tax

[Marquette]

My thoughts, in the order I thought about them

3)
I use an enrolled agent to do my personal and LLC taxes. The cost, around here, is much lower than a CPA. An enrolled agent is just as, or more so, versed on tax codes as a CPA. The CPA is also licensed to audit the books of a public company; something your LLC is not.


1)
I'm a little fuzzy on the rest, but this is roughly how we filed last year. Talk to someone that's up on things.

You can contribute 20% (I think) of your LLCs profits to a SEP IRA. This is in addition to any personal contributions you make to a 401k and a Roth. The SEP contribution will directly lower your tax burden. My wife and I are both on the LLC so it was split between a SEP for each of us. Note, this is the employer side only. You, as the employee side, may not be able to contribute to the SEP IRA at all. Down the road, you will be able to roll a 401k (when you leave your employer) or any other rollover IRAs to the SEP if you want to consolidate.

We maxed out 401k, couldn't contribute to Roths, and pulled 20% of the LLC money into SEPs.

2)
As I understand it, if you met or exceeded your tax liability from 2006 (should be ok if you have a regular job with regular withholdings), then you shouldn't pay a penalty if you wait to pay taxes. Increasing withholdings from your paycheck for the next few months may help with that.

4)
For the amount of money you're talking about, I think an LLC might just be easier overall. One of the benefits if you incorporate is that you can retain money in the company and then take it out as you need. Or, you can draw a 'reasonable salary' and then take the rest of the money as a dividend (never felt comfortable with this personally, but I know many that do this)