***I AM NOT AN EXPERT. THIS IS NOT ADVICE. DO NOT EVEN TAKE IT ANY OF IT AS A SUGGESTION FOR YOUR OWN TAXES OR BUSINESS. THIS IS A PERSONAL EXPERIENCE. IF YOU WANT REAL ANSWERS, SCHEDULE A MEETING WITH A TAX LAWYER OR CPA YOURSELF. DO NOT MAKE ME BAN YOU FOR BEING STUPID. THANK YOU.***
As I have mentioned, Mr. BFS and I really didn’t know how we were going to proceed tax-wise now that we are both working from home. Tons of people have suggested we incorporate and form an LLC but nobody could really tell us where to go from there. So we scheduled a one-on-one meeting with a tax lawyer. Here is what we have figured out for our own situation:
Should We Form an LLC?
Not right now. As it was explained, an LLC offers an extra layer of protection for a business with assets and employees. Personal liability is still personal liability. Since our business is in the services industry, whatever we say or do still falls under personal liability. So the protection of an LLC only makes sense if we want to protect ourselves from an employee’s or outside partner’s personal liability. We don’t have employees or outside partners. Plus, there are extra taxes associated with an LLC after a certain income level is reached in Texas. So an LLC would open us up to even more taxes without having any real benefits for us.
As the nice man explained, if you run someone over with your company car while out for business purposes, you are still personally liable for that accident and hopefully have insurance to help you out since your assets are on the line. If one of your employee’s runs someone over with the company car while on business, they are personally liable AND you could be personally liable and your assets would be up for grabs if you are not incorporated. But if you are incorporated, the employee is personally liable and the business is liable instead of you, so your personal assets would be protected.
As of right now, it is just Mr. BFS and myself, and we are a legal entity of one married couple as seen by the eyes of tax law. Whether a sole proprietorship or an LLC, we are going to be held personally liable for anything bad anyway. Now that we know that, we are looking into our insurance options as it would be very sucky indeed to lose everything over one business mistake. Thankfully, we aren’t in a life or death business though, so most issues that we may have to deal with could be handled in small claims court if necessary.
How Should We Pay Ourselves?
I wanted to know if we needed to legally be declaring that we pay ourselves a salary or do we just draw from our income? The difference boils down to using a W2 versus filing our business profits and expenses on a Schedule C. Since there was no tax advantage to a W2 in our case and we are staying a sole proprietorship, it just makes sense to file everything on a Schedule C after all. So no big change there for us, yay!
How Should We Handle the Paypal 1099-K and other 1099’s?
Paypal is now required to send a 1099-K to anyone that brings in over a certain amount of cash through Paypal…that would be me. That wouldn’t be an issue at all except I also distribute payments out to my ad clients, so I am not actually making what the 1099-K says I am making. Also, some of my clients sent me basic 1099’s for cash that is already taken into account on the 1099-K, so that income was actually double-reported to the IRS. Needless to say, we asked what the heck we should do.
It ends up that it really is no big deal. We should report the 1099-K income, report the 1099 income, show the overlap, state the payment distributions as expenses, list all other expenses, and we will end up showing the net income that needs to be taxed. Apparently, even if the IRS has questions, they will send a “matching letter” before unleashing their fury. We can respond to that letter explaining the whole mess and showing our complete records, and they will take a look, realize we are not trying to falsify anything, and all will be well. The trick is having VERY thorough records, which is not a problem at all for us since that is a huge part of our business anyway.
Should We Mash Together my Blog Income and my Business Income?
Yes. In the IRS’s eyes, it’s fine to report all of my blog income and blog business income on the same Schedule C. Yay, one easy answer.
So, after one 30 minute meeting, it ends up that Mr. BFS and I are already doing what we should be doing as far as taxes go. Woot! This very nice tax lawyer was kind enough not to charge us for his time either. But we did ask him about his rates for doing our taxes for us if we decide not to do them ourselves. With our records being as straight-forward as they are, and the fact that he noticed how “organized” I am (aka, anal as Mr. BFS chimed in), he quoted us $300-$400 a year to handle it all. We are seriously considering taking him up on that offer since that seems more than reasonable considering the 10-20 hours it usually takes us to do them anyway. Yay for the decisions of self employment.
Anything interesting that we forgot to ask?