1099 contractor can save by changing how
their money is taxed. In both examples, the
contractor is single, has no dependents and
no itemized deductions:
Example 1: Contractor makes $150,000
and uses their SSN for filing their Form
1040. For the 2013 tax year, the Adjusted
Gross Income (AGI) would be $140,942.
Using the $6,100 standard deduction and
the $3,900 exemption deduction, the taxable
income is $130,942. Federal tax is $29,957
PLUS another $18,116 for Self-Employment
tax, equaling a total federal tax liability of
$48,073 for the year.
Example 2: Contractor makes $150,000
and is paid as a Limited Liability Corporation (LLC) taxed as an S-Corp under an Employer Identification Number (EIN#). The
only downside to an S-Corp is the contractor is required to pay themselves a “reasonable salary” and file an additional tax return
which costs a little extra – generally about
an extra $1,000 per year. Here are the numbers for the S-Corp: A $150,000 income,
less an $80,000 “reasonable W-2 salary,”
less $6,120 employer FICA taxes paid, less
the $1,000 for payroll & tax return processing. That gives the contractor/owner of the
LLC a Form K-1 profit of $62,880.
Now back to the contractors Form
1040. There is now a W-2 of $80,000 from
the LLC plus the $62,880 K-1 from the
profits of the S-Corp. Those two combine
for an AGI of $142,880. Subtracting the
standard deduction and exemption amounts,
there’s a taxable income of $132,880, bringing the total federal tax due to $30,500 for
2013.
The Tail of the Tape
Reporting income directly on a Form
1040 resulted in a tax liability of $48,073.
Reporting the same income under an LLC,
being taxed as an S-Corp, and paying a
“reasonable salary,” even with the additional operating expense of $1,000; only
incurred a federal tax due of $30,500 . . . a
savings of nearly $18,000.
Fewer taxes paid to the IRS and more
hard-earned money in the contractors’
pocket equals a happy contractor with less
stress, providing a high level of productivity,
knowing their hard work is increasing their
net worth.
Point out the tax benefits to 1099 contractors and it’s a win-win for the company
and the contractors.
Chase Insogna, CPA, CGMA is Managing Partner of
Insogna & Stewart, CPAs based in Austin, specializing in paperless QuickBooks and income tax preparation. www.iscpapc.com
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