Starting a company for my contract work in US?

Question

Hi, I am in the US (east coast) and have done chunks of contract work before and gotten 1099s, and paid a bunch of taxes and never claimed any work expenses.Can anyone give advice about what is the smart way to collect contract income? I am also upgrading some work hardware currently which is expensive. I've heard anecdotally that some small businesses only pay tax on profit. I am hoping there is a way to set up an "entity" for myself that pays for and owns the hardware, and then the contract payments go to the company (for which I would be an employee), and then I don't have to pay taxes on all of the income since it is covering expenses (and maybe the business keeps the money too, I'm okay with not taking that money as a salary until a later date). (But ultimately, income will outpace expenses for the year).Does HN have any advice for an individual contractor with notable expenses?

welder · Accepted Answer

Yes, definitely create an LLC (pass-through business). A business bank account (Azlo.com) helps keep things organized but isn't required. You take "owner draw" by transferring money to your personal bank account. Pay all expenses through your business bank account and claim them as expenses to reduce your taxable income. If your expenses are high, this could save you a lot of money on taxes. You can even amend past 2 years of taxes to retroactively claim these expenses.
Some things to watch out for with an LLC:
* Your taxes are no longer due in April. With an LLC you'll get a late payment fee if you don't pay "estimated" taxes by Jan 15 each year.
* You're taxed for any LLC income regardless if it's kept in your business bank account or not. Your business income is taxed on your personal taxes (pass-through business) unless you create a C-Corp, which means filing two taxes each year.
* You can't do payroll, take salary, nor get health insurance through an LLC. For that you need to classify your LLC as an S-Corp within ~75 days after LLC created.
* You have to pay a yearly business tax, sometimes hundreds of dollars depending on your state. Therefore, make sure you dissolve your LLC if you stop contracting.
I recommend Stripe Atlas for creating an LLC.

alexanderrofail · Answer

I actually just did this for myself. I don't have many expenses (rent, phone bill, some lunches, a few hardware purchases) but I would advice setting up an LLC/c-corp/s-corp on something like LegalZoom (or competitor) then open a business banking account for that c-corp. You then give that business banking info to whoever is paying you. Then you pay yourself from the business account. My bank (FVC) even lets me pay bills directly from the business banking account. I also use a very simple spreadsheet to track income, expenses, and salary.