I formed a single member LLC in Missouri in 2012 for contract work that Wound up not having anything flow into it. My wife picked up a contract in July of this year and elected to do a 1099 from the client paid to a bank account using the EIN of the LLC.
From what I have gathered, the LLC is considered a disregarded entity by the IRS and we only need to file additional paperwork on our annual personal taxes. But I'd really like verification on this with quarterly business taxes due this week.
Edit: My autocorrect hates me. Fixed nonsensical words.
Well that was done incorrectly ... the person paid your LLC instead of your wife ? So ... you have income to report due to this error ( unless you can get that changed ... if this is for 2015 I doubt they will accommodate you) so you will have to then 1099 your spouse so that she can enter it under her SS# on a Sch C to get SS credit for it.
The LLC is *your* disregarded entity, not your wife's. If the contract was picked up in July of "this year" (tax year 2015? or July of 2016) and your wife did the work, the 1099-MISC needs to be in your wife's SSN. Try and get it corrected.
July of this year (2016, not 2015). Also the 1099 is going through her but the money is simply deposited into the LLC's direct deposit account.
Just move the money to a personal account that your wife has access to and then make sure the payer has the correct payee information so that the 1099 at the end of the year is correct. Give them a correct form W-9 so that they have the correct info in writing.
Right now it is a simple correction for the payer ... but wait until the 1099 is issued in Jan it could be a big deal.
So I'm confused... she's on the bank account and I was going to file an amendment to the llc paperwork to add her as a member. Am I going down the wrong path here? We used the LLC to separate business and personal expenses.
Adding your wife to the LLC without knowing exactly what you are doing and what the consequences are could be a big mistake.
A single member LLC is a disregarded entity. You normally treat it as a small business/self employed/independent contractor and file a schedule C with your personal tax return. You have the option to treat it as a corporation instead by filing a special form. <a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies">https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies</a>
If two spouses operate an unincorporated small business together, they can choose to treat it like 2 separate small businesses on schedule C. Each spouse has a schedule C that reports half the income and half the expenses. Or, they can choose to treat it like a partnership, and file a separate partnership return. The partnership return for the corporation issues a K-1 statement to each partner, and the K-1 statements are used to file a personal tax return instead of schedule C. <a rel="nofollow" target="_blank" href="https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/small-business-self-employed-other-business/entities/entities">https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/small-business-self-employed-other-business/entities/entities</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/election-for-husband-and-wife-unincorporated-businesses">https://www.irs.gov/businesses/small-businesses-self-employed/election-for-husband-and-wife-unincorporated-businesses</a>
An LLC with more than one partner, even if they are spouses, MUST be treated as a corporation or partnership and file a separate return and issue income statements to the partners.
Also read this for much much more.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2133106-how-should-a-husband-wife-llc-file">https://ttlc.intuit.com/questions/2133106-how-should-a-husband-wife-llc-file</a>
And the real question was estimated tax. Yes, your wife will most likely need to pay estimated tax on the net income after expenses. Due dates are
April 15 for income from Jan-March
June 15 for income from Apr-May
Sept 15 for income from June-Aug
Jan 15 for income from Sept-Dec. (they are not all 3 months each)
Payments can be made on the IRS web site, be sure to indicate that the payments are for a 2016 form 1040ES and be sure to use your wife's SSN on the payment https://www.irs.gov/payments
If you are already planning to file jointly and have your withholding set up for your normal situation, then the estimated payment should be 40% of the net income after expenses (15% self-employment plus 25% federal). You may also need to make an estimated state tax payment (3-10% depending on the state.)
For a more precise estimate you can use form 1040-ES or Quickbooks self-employment edition.
If you are already having enough tax withheld from your regular paychecks that you expect a refund larger than the estimated tax payment, then you can skip the payment and just get a smaller refund.
So is there something I should do correct this situation? We formed the LLC basically as a buffer to consulting under and protect us from liabilities... I had no idea it was going to result in being taxed 40% each quarter 😕
You really need to get educated ... sitting down with a qualified tax pro before doing anything else would be wise so you can learn what you are doing and the tax consequences behind your choices.
The tax will be whatever it is no matter what structure you use. For example, you could make a consulting corporation and pay yourself and your wife salaries and issue W-2s. The corporation might show no taxable profit and all the income will go to you on your personal tax returns, where your net tax would be about the same, just with more paperwork for the corporation.
If you are "middle class", married filing jointly and make (let's say) $75,000; the first $75,000 is taxed at a blended rate that will average about 13%. But every new dollar you bring in will be taxed at 25% federal. Every dollar you bring in period is taxed at 15% for social security and medicare, when you are an employee, you pay 7.5% and the employer pays 7.5% (and that probably holds gross wages down); when you are self employed you pay both shares for a total of 15%.
If you make less than $74,000 combined then the estimated tax on new dollars earned may only need to be 30% (15% federal plus 15% self employment).
Thanks a ton all (especially Opus17 and Critter#2) for the help. I've scheduled a meeting with a CPA to figure this all out. In the mean time, with the due date being tomorrow, should I file an extension?
You don't get an extension for quarterly payments.
I would go ahead and make a 30% or 40% payment (depending if your total yearly income after deductions will be less or more than $74,000) under her SSN on the IRS payments site.
This will be correct both if you keep her business as a schedule C business, or if you add her to the LLC. (Because, partnership income is reported to the partners on a form K-1 and does not have withholding, so the partners still must make estimated payments.)
Okay so just so that I understand, while I need to make the payment today I don't actually file until end of year. Is that correct?
Correct, all you have to do is make a payment under your spouse's SSN. If you want to mail a check, you can use the tear-off voucher on the last page of form 1040-ES. If you make the payment online, be sure to select that it is for third quarter 2016 1040-ES.
At this stage the IRS only wants their money. There are various forms and methods of calculating the estimated payment needed, but all of that is just an estimated. Your tax return that you will prepare in March or April will list all your income, all your deductions, calculate your tax, account for all your withholding and payments, and tell you if you owe more or get a refund. That will be the definitive word on what you owe for the year.
I don't think the bank account will be a large issue. It is possible and legal to run a schedule C business using only a single business/personal account, although that certainly makes bookkeeping more difficult, and I would always recommend having separate business and personal bank accounts and credit cards whenever possible.
If this is a one-shot, transfer the money into your personal account and forget about it. The IRS probably won't come looking and if they do, show them the proof this was a clerical error. If your wife might have more contracts in the future, or to clean up the bookkeeping on this one, open an account in her own name with either an EIN or her SSN and transfer the money.