Setting up an LLC as a Consultant

[Auditman64]

Hi Gang,

I am finally at the point where I can interview with registrars for contractual employment, and I’d also like to do some consulting work on my own in the future from time to time as the opportunities present themselves.

I’ve obtained a: "Single Member LLC" including an EIN tax ID number, and I even have business cards printed.

I sat down with a tax accountant, and was told that best thing to do would be to just file my taxes under schedule “C” and call it a day rather than try to do the whole sub-clause schedule “S” stuff which gets complicated.

My question (for all of you that have done this for years) is simply this:

Do people in our profession that double as consultants charge companies sales tax?

I was always under the impression that consulting fee’s didn’t fall under the guideline of charging sales tax. (of course I could be wrong)
I had a very frustrating conversation with a woman at my local Department of Revenue office today.

Upon asking me to explain what type of work I would be doing so she could categorize the business correctly she seemed to be completely lost.

She didn't understand: AS9100, registrars, certification bodies, aerospace audits, or consulting for Aerospace companies, and she kept insisting that I would have to categorize myself under the “Business Management Consulting Services” code which requires charging clients sales tax.

I’m absolutely fine with this if this is correct, but I walked away having this nagging feeling that the woman didn’t quite understand what I was trying to explain to her regarding the nature of the work.

Probably because she kept cutting me off in mid-sentence every time I tried to answer any of her questions.

At present I haven’t committed to anything with the Department of Revenue, and I explained to her that I would be back after I did some more research on the matter.

So if any of you seasoned experts in this field could give me some guidance I would greatly appreciate it.

Thanks in advance…….

 

[Golfman25]

A couple of things. A single member LLC is a disregarded entity for tax purposes. So all your business income and deductions will be with your personal return. Depending how big you get and what deductions/tax advantages you're using you may want to give your significant other (if available) a few % and treat as a separate company. This will reduce the complexity and likelihood of audit of your personal return.

Second, what crappy state are you in where they would charge a sales tax on consulting services? More likely than not, you do in fact fall under "business management consulting." But, here's a twist. If you do work in other states, my guess would be it is not subject to sales tax -- you'll need to find out. So you may have some challenges there keeping things strait.
Good luck.

 

[Randy]

Do lawyers & doctors charge sales tax?

LLC, Sub S or individual it's up to you. My wife is a Sub S and I work for her. We take off the usual home business deductions and get a couple tax breaks (and we always give the IRS any benefit of the doubt)

Unless you're ready for starvation alley or already have $100K of work lined up don't quit the day job

 

[Auditman64]

Thanks for the reply's guys,

I live in Connecticut, so there's that......and yes the taxes here are very high on just about everything.

The woman did explain to me that this "sales tax charge" would only be on businesses here in Connecticut, but not outside of the state.

I was also told by a separate tax accountant that the average percentage of tax paid is a whopping 30% overall, but that includes everything. (federal, state, social security, everything)

So yes, the quick math on that would be that I would have to make roughly $130.000 annually to bring home an annual salary of roughly $100.000.

As far as not quitting my day job - it's pretty much impossible to be a fulltime contract auditor for a CB, and work for a major prime performing audits at the same time.

Besides, my company is phasing all of us auditors out, and going more & more with third party sources all the time. So it's only a matter of time before our positions are completely erased, and everyone in our group is looking.

I'm confident that there's more than enough work out there to sustain me. Especially now that rev D has rolled out, and the fact that many auditors have gotten out of this game due to various reasons.

I'll definitely look into tax shelters, and other "creative" ways to move the money around so that I'm not living like a pauper, but you both pretty much confirmed what I was thinking. (why in the world would you charge a company sales tax for consulting)

I'll just find myself a really good tax guy that can navigate me through all of this so that I don't start myself out on the wrong foot.

Thanks again guys......

 

[howste]

So yes, the quick math on that would be that I would have to make roughly $130.000 annually to bring home an annual salary of roughly $100.000.

A quick note on the math: 30% of $130k is $39k, so only $91k take home. You'd actually have to make around $143k to take home $100k at a 30% tax rate.

 

[Auditman64]

Yes sir your exactly right, I was just rounding everything off.

I've been doing a lot of research on this since I wrote my original post, and it seems as though there are many loopholes in the tax code regarding how to minimize your tax contributions, and that's not even to mention all the tax shelters.

 

[Ninja]

Don't miss the fact that you have to take a salary.

You'll want to minimize this since this salary invokes additional withholdings (FICA, Medicare, etc), but it must be defensible as reasonable for the position.
What the company makes above the salary flows through to your personal (assuming LLCx1 or Type S), but avoids the additional salary related "fees".

 

[Auditman64]

Yes,

Everything you mentioned is everything I'm learning & discovering.

But if I understand it all correctly, there are many different avenues.

There is withholding taxes under schedule "C" under your own social security number, or withhold under an EIN tax ID number, or setting up your LLC as a "C" corporation or an "S" corporation, and each one involves reporting your taxable income slightly different from the next.

This is definitely something that should be left to the experts, so the hunt is on for a good tax accountant that's freakishly good at making money vanish......legally.

I appreciate the reply, thanks.......

 

[Coury Ferguson]

Just a little comment on this:

My wife and I started and incorporated into a LLC just recently (about a year ago), but in California. Your income from the LLC, can be filed with your Personal Income Taxes. Any losses can be taken from the previous 3 years or 3 years after.

We had a small retail outfit and service so we had to charge taxes (City and State) and paid them every quarter (for taxes collected). But we also had a Resale Permit.

In CA when a service was performed there was no tax required. Only from the retail product.

You need to find out, if your service is taxable, since it may vary from state to state. Contact your local State Tax Official and ask.

We closed the LLC July this year.

 

[Auditman64]

Excellent Information, and thank you very much..........