Should Independent Contractors Form an LLC or an S-Corp? (Tax Reducing Strategies for VIPKID Teachers)
Independent contractors are rightfully concerned about taxes taking a large chunk of their earnings. If you are an independent contractor, you are taxed at a higher rate than an employee. You are taxed a personal income tax as well as a self-employment tax (Social Security and Medicare). This is approximately 30%, but it could easily be more or less depending on your personal financial situation and the state in which you are located. Always consult with a tax professional.
If you are a VIPKID teacher with a base pay of $7.50/class, $19/hr drops to around $13/hr. If you speak with a tax adviser, you will find that there are strategies to reduce your tax liability. One of the tax strategies that you may be considering is forming an LLC taxed as an S-Corporation or forming an S-Corporation. Forming a business entity is not for everyone, but here are four reasons why you may want to form a new business.
1. You are working as a full-time independent contractor.
If you are earning less than $30,000/yr, the expenses of forming a business, filing corporate taxes, etc. may be cost-prohibitive. You may not be saving more in taxes than you are spending on forming a new business. This is all dependent on your long-term plans and personal financial goals too. For some people who are planning to do independent contractor work for a long time, the early investment into forming a business may be worth the initial upfront cost.
The $30,000/yr is a general rule of thumb. Remember that if you have more than one independent contractor gig, the aggregate income, after business expenses should equal at least $30,000/yr. If your spouse is also an independent contractor, you can place him or her on payroll as an employee of the business in addition to yourself. Remember that the tax-savings benefits you may see vary depending on your personal financial situation, the state you reside in, the number of children you have, and more. The tax savings could range from being negligible to saving you thousands. Again, consult with a tax professional.
2. You have an online presence.
Independent contractors who have an online presence may want to consider forming a separate business entity. This means VIPKID teachers who operate a Facebook page, who post YouTube videos, who create props for sale, etc. The reason for this partially has to do with your income generating activities separate from actually teaching. The main reason, however, is so that your personal assets are protected in case you get sued. There is a very low risk of getting sued, but unforeseen events do happen. Someone may have relied on information you shared to their detriment. Someone’s child may have eaten a prop or a tool (for example, magnets) you recommended and gotten seriously injured. While creating a business entity is not a foolproof way to stop someone from suing you, you can at least rest assured knowing that your personal assets such as your house are not in danger. Only your business assets will be liable so long as your business maintains its limited liability protection. For more on this, read Businesses need both accountants and attorneys.
3. You can manage additional responsibilities.
If you are an independent contractor who is getting paid in his or her own name, you only have to worry about your annual and quarterly tax filings. Forming a new business means you are taking on additional responsibilities. You may need to consult with accountants and attorneys, sign up for a payroll service, file corporate returns, file for worker’s compensation and unemployment insurance, etc. If you can find a professional who eases the process for you, you may not have the added stress, but you will still have additional paperwork.
4. You want to access some of the benefits that come with having a small business.
If you have a full-time job that does not offer you retirement benefits, you already max out your individual retirement contributions, and you want to save more, a small business offers retirement plans that individuals cannot access. For example, in 2018, you can contribute up to $55,000 with the tax-deferred SEP-IRA plan. Small businesses can also offer other tax savings benefits that you should discuss with your tax adviser.
If you have any questions about forming a new business, contact Kimberly Shin at email@example.com.
Disclaimer: This article is provided for educational and informational purposes only. An attorney-client relationship is not formed by visiting this website, commenting on this post, or submitting information through the Contact Us form. The information provided here is not intended to, and should not replace, advice from a licensed attorney in your state. Kimberly Shin Law Firm PLLC disclaims all liability with regard to any and all actions taken or not taken as a result of information contained here.