LLC and S Corp for 1099 Job

[Choontan]

Let's say if I am making $160k for my 1099 job and my spouse has a W2 job...

Question 1) Should I form an LLC and/or S Corp for my 1099 job?  Or what should I do?

Question 2) What are the steps to form an LLC and then structure it as an S Corp? I believe the S Corp election is within 60 days of obtaining an EIN or LLC, right? What forms to file? 

Question 3) If I need my spouse to help me with admin stuff, bookkeeping, etc. for my LLC or S Corp, does my spouse need to be a member of the LLC as well?

Question 4) What are the pros and cons of an S Corp vs. an LLC structured as an S Corp?

Question 5) What TurboTax software products we will need for both personal and 1099 job/business?

Thanks in advance!

[rschule1]

You have a lot of questions- I'll tackle the first one.

Question 1) Should I form an LLC and/or S Corp for my 1099 job?  Or what should I do?   

Answer: Firstly check with your contractor/employer since it might not allow payment to an LLC or S Corp. If allowed, then an LLC with an S Corp election (IRS form 2553)  is probably the best way to proceed in that it will likely help save on self-employment taxes. However with the benefit comes more paperwork such as filing an S Corp tax return-Form 1120s and all required employment tax returns since under S Corp rules you will be required to take a fair market W2 salary from the S Corp. 

[JBedford]

Hi, @Choontan , thanks for the question! To answer:

1) Unfortunately, we do not offer advice on business entities. I can tell you that a single-member LLC is what's called a "disregarded entity" for tax purposes, so it will have no real effect on your tax return. An S Corporation has both advantages and disadvantages that you should carefully consider, there is no right answer. An S Corporation will add a level of complexity to your taxes and business operation, however. This IRS article goes into more detail. 

2) Again, advice on how to form an LLC is "out of scope" for us here at TurboTax. 

3) Regardless of your business entity, if your spouse is actively working in the business, then she is called an "active participant", which may have tax consequences. 

4) Again, not something I'm allowed to advise on, I'm afraid. 

5) Finally, a part of your question that I can fully answer! We offer several products that will allow you to do your personal return, which if you are a single-member LLC, a sole proprietor, or even a Qualified Joint Venture with your wife, will include your business income and expenses as well. "Home & Business", "Self-Employed", and "Premium" would all cover this situation. Within those, we offer "do it yourself", "assisted", and "full service" options. However, if you form an S corporation, then you will need to use TurboTax Business to file a business return in addition to your personal return. 

Hope this helps, please let me know if this raises additional questions! 

[Joe_D-CPA-PFS-CFP]

Hello Choontan,

Thanks for the questions. I will do what I can to answer these questions in general:

Whether you should form an LLC or an S Corp requires some in-depth analysis that cannot be provided in this forum. It may be best to engage a qualified tax pro to answer this question. There are state laws and other issues that vary from state to state. Not to mention a comprehensive understanding of your business operations and goals.

The steps to form an entity vary from state to state. In general, it may be best to engage an experienced CPA or attorney when creating a State entity. CPAs cannot draft legal documents, an attorney is required for that.

There are various online sites that can help with this that layout the steps and costs.

Some basic steps are:

• Check with the Secretary of State for name availability of your entity
• File the required forms
• Pay the fee
• Determine the structure of the entity (C Corp, S Corp, LLC, LLP, etc.)
• Articles of Incorporation or an LLC member agreement must be drafted
• Obtain Federal EIN

In general, a multi-member LLC will be classified as a partnership by the IRS initially. You have the option to be taxed as a partnership, a C Corp, or an S Corp. Partnerships and S Corps are pass-thru entities and you pay the tax based on your individual rate which can be as high as 37% plus other taxes depending on your income level. C Corps are currently taxed at flat 21% on the federal level. There are many considerations to know which entity is best for tax purposes.

Use Form 8832, Entity Classification Election to make an election to be taxed as a corporation. Use Form 2553, Election by Small Business Corporation to make an election to be an S corporation. If a taxpayer doesn't file Form 2553, the default classification will apply.

A corporation or LLC must file an S-Corp election within two months and 15 days (~75 days total) of the date of formation for the election to take effect in the first tax year.

Your spouse does not have to be an owner or a member to work for your entity. Other issues may need to be considered here.

Here is a link that discusses the pros and cons of various small business entities.

In regard to software, here is a link that provides some details about Intuit products.

I hope this helps.

[Ruth C-L · Accepted solution]

Question 1) Please see my response to your other question in the other thread. In short, I believe you should. 

Question 2) You'll need to form the LLC at the state level, then request an EIN for the LLC here: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n... After you've created an EIN, you'll need to file Form 2553 with the IRS to elect to file the LLC taxes as an S Corp. You'll need to fill out page 1 and 2 of the Form 2553. 

Question 3) No, your spouse does not need to be a member of the LLC as well to perform administrative functions unless you want your spouse to be a member.

Question 4) There really is no distinction at the federal level that I am aware of as far as pros and cons.

Question 5) The TurboTax products needed depend on whether you've elected to file LLC taxes as an S corporation. If you do not make the S Corp election, you'll need TurboTax Self-Employed to file the 1099 taxes. If you make the S Corp election, you can choose TurboTax Premier or Deluxe for your personal taxes but you'll need to use TurboTax Business to file the S Corp taxes. You'll also need to file quarterly payroll tax returns and created a year-end W-2 issued to you personally by the S Corp you created. The W-2 issued by the S Corp along with the K-1 from the S Corp will then need to be included in your personal tax returns.

Ruth C-L, CPA, Attorney

[capiower]

As of 2022 tax year we are offering two new Business products:

1) Business Taxes with live assistance  https://turbotax.intuit.com/personal-taxes/online/live/business-taxes/ not available for all states yet

2) Full service business taxes - your taxes completed by a business tax professional from start to finish https://turbotax.intuit.com/personal-taxes/online/live/full-service/business-taxes/

If you have any questions you can always reach out to one of our Business tax professionals.

Michelle T

**Say "Thanks" by clicking the thumb icon in a post

[mdhubel]

Given your answer, which is excellent, the phrase "pass through" has tax implications. that  seem to be inconsistent with the current tax law treatment of this kind of income. Where pass through has a flat rate of 20% and not subject to individual rates.

Based on the description as pass through for both, does it mean that an LLC is considered pass through? And if that's the case, does it mean that to take advantage of the current lower tax rate for pass through income, without requiring electing to be an "S" corp?

[Joe Bedford EA]

You have some confusion here. There is not a separate tax rate, lower or otherwise, for pass-through income of this sort. "Pass-through" simply means that an owner's share of income and expenses "passes through" to their personal tax return, rather than the business paying taxes on these amounts. I suspect you are confusing this with the 20% Qualified Business Income deduction, which does indeed apply to owners of pass-through entities. Hope this helps! 

[mdhubel]

Yes, I am using the terminology broadly, however, what you are also stating is that there is a secondary definition to the terms Pass Through which is being used generically to describe what you state in your last sentence. Thank you for that, and I am sure there are others who do not realize that that is the case. It does raise the question as to whether or not Turbo-tax accommodates the need to isolate the Qualified Business Income deduction?

Thanks again,

[Joe Bedford EA]

TurboTax does support the QBI deduction, yes. 

[Joe D_CPA_CFP]

An attorney, knowledgeable in the state you file in, would be needed to tell us what difference there may be for liability and creditor access between the LLC taxed as an S-Corp, versus just starting off as a regular S-Corp. Those differences will depend on local law regarding LLCs. For federal tax purposes there is no difference.