to LLC or to not LLC

[illyrianeye]

I have recently contemplated whether I should created an LLC (limited liability corporation) for all the freelance work I do. Has anybody done this?

 

The only reason I am considering it is for tax purposes. Is it worth doing it for this? How does everybody deal with taxes and freelance work?

 

thanks for any comments

[Ernest Burden III]

I have recently contemplated whether I should created an LLC (limited liability corporation) for all the freelance work I do. Has anybody done this?

 

I incorporated before the LLC thing became popular. My business is a 'C' corporation.

 

Being in New York state, the worst state for taxes (followed closely by California) in the US suggests that you should. If you are in NY City there is another reason--the city's Unincorporated Business Tax. That tags you with an extra 4% or so just because you earn a living. It's barbaric. You get nothing in return, no special treatment as a business by the city. You just pay it. Of course, if you live in the city you also have a NY City income tax to pay. That was always a joy. Now that I live 35 miles north of NYC I only have two returns to file, Federal and State.

 

Being incorporated is great. As an individual you are always sweating tax deductions because you think you'll get audited. As a business its normal to pay office rent, buy computers, etc. It shows that you take your work seriously as a business.

 

The downside is that you go from $500/year accounting to $2000/yr accounting. (Your accountant may vary). The reason is that as a corporation you are required to have your books audited by a CPA.

 

By the way, whether or not you form a corporation, you do know that you are required to collect sales tax on most rendering jobs for the lovely State of New York? You must be a registered sales tax vendor and collect the money for the state and pay it to them. Or they will bury you. If you need to know more about this I urge you to join the NYSR (New York Society of Renderers). We did extensive work on sales tax for our industry about 10 years ago. Or call me. This is very important. This applies in almost if not all states in the US. It's not just NY. Remember, most of the other states follow the leads of NY and CA. I know one renderer in Mousouri who ended up with a sales tax bill of over $40,000, and that was many years ago. If you don't get it from the client the state will expect you to pay it out of your own pocket.

[illyrianeye]

Ernest, thank you for your help, that was very useful information. I will definitly give you a call or will take a look at the society for any more information. What is the tax percentage that I should include in New York as part of the fee?

[Ernest Burden III]

What is the tax percentage that I should include in New York as part of the fee?

 

Do you mean sales tax? It varies by county and city. In NYC it used to be 8.25%, but got bumped to 8.625% but that changes as of June 1 to...?

 

It depends on where you deliver the work, its the rate at their location. The state has lists of the rates. But you must be a registered vendor first.

 

It's a lot of headaches that do nothing for you, as a business owner. Also, many of our clients think they are exempt and simply refuse to pay it or even give you the paperwork needed to legally avoid paying it. So what are you going to do--turn your client in to the authorities?

 

Fortunately, the work the NYSR did (I was in charge of the project) relieved our industry of a lot of the legal liability in that situation. But it's still a problem, I have two clients right now who won't pay the sales tax and still haven't given me their 'exempt' forms. I need this crap on top of deadlines?

[illyrianeye]

Well what I have done in the past and continue to do is, give the clients a fixed fee. I estimate the amount I will be happy with and just give them one clean fee instead of charging a fee, then a tax. Do you think thats a good idea?

 

What I have not done in the past is, get someking of a tax break for all the equipment, expenses, related to my freelance work. And that is the reason I want to LLC.

[Ernest Burden III]

Well what I have done in the past and continue to do is, give the clients a fixed fee. I estimate the amount I will be happy with and just give them one clean fee instead of charging a fee, then a tax. Do you think thats a good idea?

 

No, because it's not legal. You cannot 'hide' a tax in a fee. You can tell them they are paying it as part of your fee, but you cannot collect it without telling them. And anyway, you cannot collect it without then handing it over to the state. And to do that you must be a registered sales tax vendor.

 

What I have not done in the past is, get someking of a tax break for all the equipment, expenses, related to my freelance work. And that is the reason I want to LLC.

 

You can do so whether or not you are working as a corporation. But you are better off as one, I believe.

[illyrianeye]

Ah, seems so confusing. Lets say for example, I am doing a rendering for a fixed fee of 1,500. When and how much tax do I pay to the state? I am guessing the 8% of everything you make, should be put aside for taxes.

[Ernest Burden III]

Ah, seems so confusing. Lets say for example, I am doing a rendering for a fixed fee of 1,500. When and how much tax do I pay to the state? I am guessing the 8% of everything you make, should be put aside for taxes.

 

First of all, don't do $1500 renderings in New York City. You can get better rates here.

 

Second--you aren't listening. You register with the State as a sales tax vendor, get a tax vendor number, then you add the tax onto MOST (but not all) rendering sales as a seperated line item. The client pays the tax, you send it to the state four times per year. The amount is determined by a tax table listing all NY counties and some cities (like NY and Yonkers).

 

In otherwords, you do NOT 'put aside 8% of sales', you ADD the amount (often around 8%) to your bill.

 

Join the NYSR, we'll help you.

[4DM]

Just a couple of things - although I do not work in US - I think iilyrianeye might be confusing sales tax with income tax.

 

First thing you should do is consult an accountant for an initial fixed fee.

He will be able to tell you all you need to know and do to set yourself up. What sort of structure you have will probably depend on the estimated scale of your business.

Ernest has some good advice, but if he is wrong you can't sue him!

 

Seriously, professional advice is very important. If you get it right, and understand it all clearly from the beginning, plus have someone to call if you have any problems, this will really be helpful to you.

 

As far a putting money back for tax - If it is anything like here (UK) you will have income tax to pay at whatever percentage your government sets, plus (as Ernest explains) the sales tax on top.

 

So when you take all that into account, plus your overheads, you can calculate your actual net income,( and join the club of all of us wondering why we bother, sometimes !!)

 

Good luck.

 

Cheers,

 

D.

[illyrianeye]

Ha....time to ask my clients for cash then. But reviewing the New York Renderers Society, and will probably join soon.

[John Dollus]

I would agree with Ernest and definitely recommend you go with C over LLC. With a C corporation, you will experience double taxation where the income is taxed both when it is received by the corporation and when you receive disbursements for your own compensation. With LLC, all income is passed through to the owners and taxed as income but you also must pay self-employment tax since it is treated the same as a sole-proprietorship in most cases.

 

Bottom line: find a good accountant to steer you the right direction and make him/her your best friend.

 

Ernest: That illustrator in Missouri would be Dick Sneary. It was quite the court case way back when.

[Ernest Burden III]

I would agree with Ernest and definitely recommend you go with C over LLC. With a C corporation, you will experience double taxation where the income is taxed both when it is received by the corporation and when you receive disbursements for your own compensation.

 

Yes, but the corp is only taxed on profit. Guess what--my company usually doesn't make any. The income all gets spent on deductables like salaries (me), freelancers and equipement, regular business stuff. At the end of the year there isn't much left in the company to be taxed, so I often pay the minimum tax, which may be $100. I forget if that's a Federal tax or a NY State one.

 

Obviously I pay regular income tax on the money I got as salary from my corp, like anyone who has a real job. And the company pays the FICA tax, as a freelancer you pay this but its called 'self-employment tax', same thing, same amount. Except with a copr some of the money you draw can be called something other than salary, so no FICA tax, just regular income tax. I don't know how that is arranged, that's my accountant's expertise.

 

Ernest: That illustrator in Missouri would be Dick Sneary. It was quite the court case way back when.

 

Yes, I've had a long conversation or two with him about it. I didn't use his name because I didn't want to imply that he had done something wrong, and without the full story it could appear that way. I said 'he lost'. He did, but it was on an interpretation of what the laws in his state required of an illustrator. It's far from clear. Although in NY there is now a set of guidelines that do a good job of describing how to handle sales tax relative to our field. It was the result of my work with the NYSR on the problem and I'm very proud of it:

Guidelines, in PDF

 

The language is rather stilted, but you'll get the idea. Notice how my questions (I wrote most of the questions asked) lead the state to put the liability on the client and relieve the renderer as long as he/she makes an effort. THAT was a big change.