LLC Consulting Taxes

[Closet_Gamer]

I recently set up an LLC that I will use for consulting/advisory services. I've set up a seperate checking account and gotten an EIN.

Wondering if anyone has experiences they can share in regard to taxes.

I know that I will owe 15.3% on income to cover both sides of FICA + Medicare. I believe that the LLC is a dis-regarded entity for federal tax purposes, so I owe those taxes regardless of whether I actually "pay" myself or not.

Two questions:
1 - I will have business development and other expenses. For example, in Q1 let's say I spent $50 on a business development trip. I also billed $200 to a client. Can I net the BD expenses against the billings? So that I am liable to pay taxes on the $150 rather than the full $200?

2 - Do you have to file a specific form quarterly to say "This is the employer-side FICA due on my business" and another to say "Here is the FICA + Medicare due on my employee side", or does it just roll into your overall tax obligation so a general estimated tax payment will work?

Any other advice?

Thanks!

 

[CaliKid]

I don't know about #2 but for #1 don't think of it as quarterly but annual. Write-off every possible business expense you can. Get a good tax person, do your own research, etc.... I am not a tax professional but have written off a lot of stuff in my own businesses. Your goal should be to take every legitimate deduction you can take. Business development is likely pretty broad as I imagine you talk with everybody about your business or you should! Everybody is a potential client or a potential referrer of a client. Think broad not narrow! Don't do anything illegal but certainly take everything that is legal.

 

[Closet_Gamer]

I don't know about #2 but for #1 don't think of it as quarterly but annual. Write-off every possible business expense you can. Get a good tax person, do your own research, etc.... I am not a tax professional but have written off a lot of stuff in my own businesses. Your goal should be to take every legitimate deduction you can take. Business development is likely pretty broad as I imagine you talk with everybody about your business or you should! Everybody is a potential client or a potential referrer of a client. Think broad not narrow! Don't do anything illegal but certainly take everything that is legal.

Thanks!

 

[Aerides]

1 - yes, this will be part of your 1040, and the costs will go against the revenues.

2 - unless you are going to be making a good sum, you might want to just file annually, and your tax filing will say what you owe. Remember, you can now contribute to a self funded IRA, a SEP-IRA for your business, and an HSA against earnings, so you might well net out a very much smaller sum than you think, owing very little at the end of the year, thus rendering the quarterly exercise as overkill. Yes it all rolls together and you don't need to separate employer/employee when you are a sole proprietor, LLC or otherwise.

Just make sure you know what is deductible, and what you can prove and have documented.

 

[Closet_Gamer]

1 - yes, this will be part of your 1040, and the costs will go against the revenues.

2 - unless you are going to be making a good sum, you might want to just file annually, and your tax filing will say what you owe. Remember, you can now contribute to a self funded IRA, a SEP-IRA for your business, and an HSA against earnings, so you might well net out a very much smaller sum than you think, owing very little at the end of the year, thus rendering the quarterly exercise as overkill. Yes it all rolls together and you don't need to separate employer/employee when you are a sole proprietor, LLC or otherwise.

Just make sure you know what is deductible, and what you can prove and have documented.

Super helpful. Thanks I wouldn't have thought about the IRA, etc.

 

[cathy63]

Your quarterly estimated tax payments will cover both your FICA and income taxes.

You'll need to add a Schedule C and Schedule SE to your tax return for each year you operate this business. I suggest downloading the Schedule C instructions and reading them now so you know what records to keep. There are a few things where business decisions made in the first year affect what you can do later on and those are also detailed in the Sched C instructions.

 

[Sunset]

Super helpful. Thanks I wouldn't have thought about the IRA, etc.

It took me a while to learn as well. I got a self 401K from vanguard which included an IRA and a Roth portion.
Then I could contribute as the employer and the employee, actually have 2 logins as well.

The annoying thing is if it hasn't changed, you set it up now and can start using it next year. Hopefully that has changed.

https://investor.vanguard.com/accounts-plans/small-business-retirement-plans/individual-solo-401k

 

[Closet_Gamer]

Your quarterly estimated tax payments will cover both your FICA and income taxes.

You'll need to add a Schedule C and Schedule SE to your tax return for each year you operate this business. I suggest downloading the Schedule C instructions and reading them now so you know what records to keep. There are a few things where business decisions made in the first year affect what you can do later on and those are also detailed in the Sched C instructions.

Good advice. Thanks!

 

[Closet_Gamer]

It took me a while to learn as well. I got a self 401K from vanguard which included an IRA and a Roth portion.
Then I could contribute as the employer and the employee, actually have 2 logins as well.

The annoying thing is if it hasn't changed, you set it up now and can start using it next year. Hopefully that has changed.

https://investor.vanguard.com/accounts-plans/small-business-retirement-plans/individual-solo-401k

I will check that out. Thanks!

 

[target2019]

You can duplicate your 2023 fed filing, and open a Schedule C to enter numbers for your scenario.

If the business starts to really take off, you may find that the growing receipts produce far more profit each year, but expenses may not grow at the same pace.

 

[Closet_Gamer]

You can duplicate your 2023 fed filing, and open a Schedule C to enter numbers for your scenario.

If the business starts to really take off, you may find that the growing receipts produce far more profit each year, but expenses may not grow at the same pace.

Thanks. I hope that happens. In year 1 though, I expect to not bring much in.

 

[PlayinwithFIRE]

If you setup a home office for your business, you also get the fractional

fraction = (home office sq ft/ house sq ft) tax reduction on all your utilities (electricity, internet, water, sewage etc) as they are conceivably used for the business. So pick the biggest room in your house


PWF

 

[G-Man]

Timely topic. I'm thinking about setting up an IT consulting LLC targeting small businesses. I don't expect to bring much in. Are there any tax benefits of including my wife as a partner in the business?

Would love to hear from others on the steps they have gone through to setup an LLC and some of the unknown business tax deductions.

 

[Aerides]

Timely topic. I'm thinking about setting up an IT consulting LLC targeting small businesses. I don't expect to bring much in. Are there any tax benefits of including my wife as a partner in the business?

Would love to hear from others on the steps they have gone through to setup an LLC and some of the unknown business tax deductions.

We included DH on our LLC even though it's 99% just me. That way he can also do an IRA contribution.

 

[Aerides]

If you setup a home office for your business, you also get the fractional

fraction = (home office sq ft/ house sq ft) tax reduction on all your utilities (electricity, internet, water, sewage etc) as they are conceivably used for the business. So pick the biggest room in your house


PWF

This is much harder than it seems to parse out accurately, with documentation that doesn't trigger an audit. Unless you have a mortgage and big house expenses and can prove that the office is used exclusively for business and nothing else...ok.

But if it's also a spare bedroom or storage or a back up gaming or TV room? Nope.

 

[G-Man]

We included DH on our LLC even though it's 99% just me. That way he can also do an IRA contribution.

Same here. It will be 99% me. Have you ever been audited by the IRS? Just trying to make sure what not to do to trigger an audit.

 

[target2019]

Thanks. I hope that happens. In year 1 though, I expect to not bring much in.

It might help to keep a written journal to write down what you bought, and might be a partial or total business expense. I maintained separate checking and Amex card for a very long time to help with the year end tasks.

One tip is that you should consider necessary purchases in December. For example, when I had a good year (keep track of your invoices), I'd buy a business machine (printer, computer, copier) to replace something old and out of prior depreciation.

What you can and should deduct depends on the type of business you're pursuing.

 

[cathy63]

Timely topic. I'm thinking about setting up an IT consulting LLC targeting small businesses. I don't expect to bring much in. Are there any tax benefits of including my wife as a partner in the business?

Would love to hear from others on the steps they have gone through to setup an LLC and some of the unknown business tax deductions.

A single member LLC can be a disregarded entity for tax purposes, meaning that you just report the income on your own tax return on Schedule C. Adding a second member to your LLC makes it a partnership and then you have to file partnership returns (form 1065) and issue K-1s to the members for reporting on their 1040(s). I'm pretty sure this is true even if the two members of the LLC are spouses, but maybe someone else knows otherwise.

If you do not incorporate, then instead of doing a partnership return, you can just file two Sched Cs, one for each spouse, dividing all the income and expenses from the business in half. Doing that gives you both credits for the FICA taxes and lets you both have a solo 401(k), but you would lose the protections of the LLC struture.

Your spouse does not need to be involved in the business on paper or otherwise in order to make a regular IRA contribution. Any married couple filing MFJ can contribute to both spouses' IRAs or Roth IRAs even if only one of them has earned income. It's only if you want the spouse to have a Solo 401(k) or SEP that you have to treat them as a partner or employee.

 

[G-Man]

A single member LLC can be a disregarded entity for tax purposes, meaning that you just report the income on your own tax return on Schedule C. Adding a second member to your LLC makes it a partnership and then you have to file partnership returns (form 1065) and issue K-1s to the members for reporting on their 1040(s). I'm pretty sure this is true even if the two members of the LLC are spouses, but maybe someone else knows otherwise.

If you do not incorporate, then instead of doing a partnership return, you can just file two Sched Cs, one for each spouse, dividing all the income and expenses from the business in half. Doing that gives you both credits for the FICA taxes and lets you both have a solo 401(k), but you would lose the protections of the LLC struture.

Your spouse does not need to be involved in the business on paper or otherwise in order to make a regular IRA contribution. Any married couple filing MFJ can contribute to both spouses' IRAs or Roth IRAs even if only one of them has earned income. It's only if you want the spouse to have a Solo 401(k) or SEP that you have to treat them as a partner or employee.

Lets assume it is a single person LLC (just the husband). Right now, we file our personal taxes as married filing jointly. Can you file your business taxes with your personal MFJ taxes and will any business losses offset any tax payment for your personal taxes?

Hopefully its clear on the question I'm asking.

 

[cathy63]

Lets assume it is a single person LLC (just the husband). Right now, we file our personal taxes as married filing jointly. Can you file your business taxes with your personal MFJ taxes and will any business losses offset any tax payment for your personal taxes?

Hopefully its clear on the question I'm asking.

Yes, if you have a single member LLC, then you just report that income or loss on your Sched C as part of your normal MFJ return with your spouse. It gets added to or subtracted from all your other income before the tax on that income is calculated. So if your total income is lower than expected due to the business having a loss and your tax for the year ends up being less than the amount you had withheld from your job, you'll get a refund.

 

[Rianne]

Yes, if you have a single member LLC, then you just report that income or loss on your Sched C as part of your normal MFJ return with your spouse. It gets added to or subtracted from all your other income before the tax on that income is calculated. So if your total income is lower than expected due to the business having a loss and your tax for the year ends up being less than the amount you had withheld from your job, you'll get a refund.

DH has an LLC but for the most part, retired last July. He will have $2500 residual income that carried over to 2024. Can he contribute the entire $2500 to his tIRA? He'll have a few expenses.

 

[cathy63]

DH has an LLC but for the most part, retired last July. He will have $2500 residual income that carried over to 2024. Can he contribute the entire $2500 to his tIRA? He'll have a few expenses.

Assuming no other earned income, then his contribution is limited to net business income minus the deductible part of self-employment tax.

It ends up being 93.25% of the number on Schedule C line 31.

 

[G-Man]

Yes, if you have a single member LLC, then you just report that income or loss on your Sched C as part of your normal MFJ return with your spouse. It gets added to or subtracted from all your other income before the tax on that income is calculated. So if your total income is lower than expected due to the business having a loss and your tax for the year ends up being less than the amount you had withheld from your job, you'll get a refund.

Thank you so much cathy63 for responding. I love this forum because there are some knowledgeable folks on a wide range of topic. I'm glad I joined this forum more than 15 years ago.