Solo Agent: Sole Propietor, Corporation, or LLC?

Jan 8, 2016

  1. MW Agent
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    I wrote this recently for another source, thought I would share it. Some of you may find it helpful:

     
  2. Chazm
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    Chazm Guru

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    Thanks for the info.

    I can't figure out why but I've talked to two accountants and they both have said I shouldn't Incorporate. I fall in the guidelines that you mention one should Inc but they told me that there wouldn't be much, if any tax savings after paying payroll taxes, unemployment, accountant fees etc.

    Maybe they aren't thinking that I would pay myself, like in your example, a $40k salary and then the remainder 30k....wait that's where I get lost. Why is the remainder $30k not exposed to FICA again?
     
    Chazm, Jan 8, 2016
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  3. pfg1
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    Nice job. Is there somewhere I can read the whole article?
     
    pfg1, Jan 8, 2016
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  4. WCMason
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    The remainder is profit, not salary, so subject to income tax but not FICA.
     
    WCMason, Jan 8, 2016
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  5. Chazm
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    Ok great thanks. I'll mention it to my tax lady and try to figure out why I'm constantly told it's not worth it for me
     
    Chazm, Jan 8, 2016
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  6. MW Agent
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    To be fair, let me be a little more precise on those figures as the above article was to show the general concept:

    $30,000 K-1 (not subject to FICA) X 14.13% (because half the self employment tax is deductible as an above the line deduction) = $4,239 savings. Minus federal FUTA of $430 (first 6% to $7,000 in income) = $3,809. Minus out the accounting costs of $1,200 per year (I use that number because that's what I charge for payroll and tax compliance) = $2,609 for that example.

    Toss it all in a SEP IRA at the 25% bracket and it's a $3,261. Add in state taxes in my home state (7%) and it goes to $3,443. If you factor in that your tax lady is likely charging to extra already to file the Schedule C beyond just a traditional 1040 return, you can add the marginal cost onto that number as well.

    One thing to keep in mind is that when you pay less FICA into the system, you are lowering your future Social Security Benefit level. That's why I'm such an advocate of throwing the savings into a SEP IRA (or similar vehicle). When I ran the benefit analysis of the SEP vs Social Security Benefit reduction for a client recently, the SEP had to beat a 0% real return over a period of 30 years for the client to come out ahead.

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    Thanks for asking. It was a blog post, that was the entire post. I started a tax blog geared to insurance agents (both agent issues and client issues), my plan is to post once per week early on Friday or Saturday morning. There is a lot of info out there I wish I would have known a lot earlier in the business.
     
  7. sirherbie
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    Yes but if your maxing out at over $118K after the writeoff and in your late 40's or early 50's then a non sep is better. In 10-12 yrs you just can't make up the tax savings up you get in a non Roth
     
  8. kuhn123
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    What's the address of your blog?
     
    kuhn123, Jan 8, 2016
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  9. sirherbie
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    what would be the difference in setting up a sub chapter S vs setting up a LLC with a sub chapter s election? I've read an agent that gets paid as an Llc doesn't have to get licensed as a llc with the state. Getting paid as an Sub chapter S don't you have to get licensed with the state?
     
  10. Newby
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    FexContractng is an LLC and we have to license on all the same states as an SCorp. It's a pain to keep up with too.
     
    Newby, Jan 8, 2016
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