Actual tax rate for self employment with LLC
There seem to be a ton of LLC related questions and I've been through most of them but I don't see anything that answers my question directly.
Right now I'm on a 1099 and it was suggested that I get an LLC for tax benefits. I've setup an LLC. My question is, what is my actual tax rate?
I live in California. I make $103k/yr. On W2 I think my tax rate was 25-28%. What is my tax rate on a 1099 and what will my tax rate be when I'm under the LLC?
I keep seeing ~15% self employment tax. But I've read it's only to cover the medicare/disability portion that an employer would normally cover under a W2. So is that a 15% in addition to my normal 25-28%?
Additionally, I have a 1099 contract that makes about $17k/yr. I want to move that under the LLC as well. Would the change anything as far as the tax bracket?
I'm paying ~$28K in taxes a year with W2 and my additional 1099 work. What would I be paying while under self employment using an LLC?
As an LLC, do I still have to take out my own taxes or are they withheld like a W2? I'm assuming I have to manage that and that's why I need to understand my tax rate.
LLC was setup as a sole proprietor and is a pass-through. I added both myself and my wife.
1 Answer
Who gave you that advice? Take tax advices only from licensed tax professionals (CPA, attorney or EA).
There's no tax benefit in LLC. If at all, you'll pay more taxes, especially in CA with its $800 franchise tax and LLC fee. For income tax purposes LLC is a disregarded entity, and you're taxed at your normal rates, whether you're a LLC or a sole proprietor. You file schedule C either way.
Self employment tax covers both the employer's and the employee's portions of the FICA taxes. When you work as an employee (with W2), the employer pays the employer's portion.
Why did you add your wife? Does she do any work? Because now not only that you have to pay taxes to the State and file CA FTB form 568, you also need to file Federal form 1065 for the partnership you've created and issue K-1 to your wife and yourself. Why on earth would you want that?
Bottom line - go to a proper tax adviser, and have him/her sort this mess out for you.
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+1 lol, thanks for the slap or reality :) I was given that advice several times for different reasons. When negotiating hourly rates for contracts, I wasn't able to get desired rates unless it was a corp-to-corp. I also wish to protect myself should anything go wrong since I have a very large international client I do work for where I'm responsible for expensive equipment. – Dustin Davis 11 years ago
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That's an entirely different thing. Liability is the main reason to create an LLC (its better than corp tax-wise and bureaucracy-wise). But you should talk to a lawyer, as LLC may not protect you from your **personal** mistakes, only from the mistakes of others (your employees, for example). – Littleadv 11 years ago
