Beginning a new business - life coaching

[Celeste9]

I am completing certification and will open my own coaching business.  I want to ensure my personal savings and real estate are protected from anything in my business.  I am currently retired living on social security and a couple of annuities as income.

1) What type of entity would work best? LLC?

2) As an independent life coach, sole proprietor what are the taxes pay? Do I still have to pay SSA / Medicare?

3) What tax implications do I need to take into consideration as a sole proprietor?

Thank you

[Mike9241]

you're asking a legal question, not a tax question. see a lawyer for 1)

2) if it is not a  hobby - losses 3 out of 5 years you pay income taxes and self-employment taxes on the net income (ie social security and medicare)

3) you will likely need to pay estimated taxes if you have net income.  there are probably many other tax considerations that are beyond the scope of this forum see a tax pro. 

[Opus 17]

@VolvoGirl has a primer with lots of links.

1. This is a legal question.  LLCs offer some liability protection, but it depends on the state, and it's not ever perfect protection, although it can be substantial.

2. As either a sole proprietor or single member LLC, you file a tax return containing a schedule C.  You report your gross income and deduct ordinary and necessary expenses.  You pay income tax and self-employment tax on your net income after expenses. SE tax is the self-employed  version of social security and medicare tax and is 15% because you are paying both the employee half and the employer half.  Your net income also flows to your main form 1040 where it is combined with all your other income and your deductions and credits are applied.

@Mike9241 's comment about the SE tax is incomplete.  If you have a "hobby", you must pay income tax on your income, but you don't pay SE tax and you can't deduct expenses.  The difference between a hobby and a business is discussed here.    https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax...

If you fail to earn a profit 3 out of 5 years, the IRS will generally assume you are running a hobby and not a business, unless you can prove otherwise.   (For example, a friend has a "home catering business" and used that as the reason to buy a very expense new oven and range, which they deducted as a business expense.  But if the business doesn't show a profit, the IRS is going to take away the deduction for what turns out to be a personal expense disguised as a business expense.)  I wouldn't worry about this for now.  I'm sure you will be successful.

3. Keep good records.  You may also have to make quarterly estimated tax payments based on your expected net income.

[xmasbaby0]

2) As an independent life coach, sole proprietor what are the taxes pay? Do I still have to pay SSA / Medicare?

Yes, you do.   Even when you are receiving Social Security benefits, if you continue to work and receive W-2 income or self-employment income you have to pay for Social Security and Medicare.

TAX ON SOCIAL SECURITY

Up to 85% of your Social Security benefits can be taxable on your federal tax return.  There is no age limit for having to pay taxes on Social Security benefits if you have other sources of income along with the SS benefits.  When you have other income such as earnings from continuing to work, investment income, pensions, etc. up to 85% of your SS can be taxable. 

 What confuses people about this is that before you reach full retirement age, if you continue working while drawing SS, your benefits can be reduced if you earn over a certain limit. (For 2017 that limit was $16,920 —for 2018 it was $17,040—for 2019 it was $17,640— for 2020 it is $18,240; for 2021 it is $18,960,  (For 2022 it will be $19,560) After full retirement age, no matter how much you continue to earn, your benefits are not reduced by your earnings; your employer will still have to withhold for Social Security and Medicare.

To see how much of your Social Security was taxable, look at lines 6a and 6b of your 2021 Form 1040

https://ttlc.intuit.com/questions/1899144-is-my-social-security-income-taxable

https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable

You need to file a federal return if half your Social Security plus your other income is $25,000 when filing single or head of household, or $32,000 when filing married filing jointly, $0 if you are filing married filing separately.

Some additional information:  There are 13 states that tax Social Security—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.  These states offer varying degrees of income exemptions, but four mirror the federal tax schedule: MN, ND,VT, and WV

[Mike9241]

I did mention income taxes

you pay income taxes and self-employment taxes on the net income (ie social security and medicare)

[Opus 17]

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@Mike9241 wrote:

I did mention income taxes

you pay income taxes and self-employment taxes on the net income (ie social security and medicare)

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I did not mean to offend.  I thought your comment about SE taxes and hobby income was incomplete.  An ongoing business activity with a profit motive should be reported as a business, even if there is a loss.  While the IRS will usually assume that a business with too many losses should be recharacterized as a hobby, this can be rebutted.  And of course, a business with a loss won't incur SE tax or income tax, only if it shows a profit.