7 ms·

You can't put yourself on salary unless the business entity is a corporation or an LLC taxed as a corporation. Even if you do payroll for yourself you still hav

You can't put yourself on salary unless the business entity is a corporation or an LLC taxed as a corporation. Even if you do payroll for yourself you still have to file a 1099 and a schedule c. For a freelancer a Corp is a bit overkill and you get taxed twice.

kls 16y ago
Which you should be if you are in the US. A freelance should be a S-Corp and pay themselves a "reasonable" salary. To not do so you are throwing a huge chunk of money away on employer FICA. Basically you are pissing away 8% of you income if you are not a S-Corp and that is just in taxes. When you factor in the tax deductions a corp can take the savings are astounding. Someone up stream mentioned that a freelancer should hire a secretary and stop doing the office work for $100 hr. My though is the first thing a freelancer should do is outsource accounting to a CPA. These people pay for themselves, second should be legal counsel, at least a paralegal after that a secretary would be a good third.
rwhitman 16y ago
A lot of folks misinterpreted this and I can't edit it. A sole proprietorship, a single-owner LLC and an S-Corp are all pass-through to your personal income taxes. Meaning that in the eyes of the government you are still self-employed and need to file a 1099 and schedule C, even if you put yourself on payroll instead of paying out on draw. I learned this the hard way. What I'm saying is that even if you have a business entity you are still technically self employed. That is unless you have a C-Corporation or an LLC taxed as a corporation, in which case yes you can put yourself on payroll and do tax withholding and can legally be considered 'employed' by the company, however you get taxed double and face a number of costly state and federal requirements not to mention new overhead costs for legal and bookkeeping etc which is in most cases not worth it unless you are earning quite a lot of money. But regardless, I don't know how much a mortgage company would care about such things. Maybe regular issue of a check from one company would be enough to suffice and I'm overblowing the issue...
gexla 16y ago
I was thinking more along the lines of building a history. Open a business bank account and a personal account. Give yourself regular payments (bi-weekly / monthly) from the business account. Perhaps then you could show your statements to the bank when asking for a housing loan. You would be demonstrating that even though the income of your business is up and down, you are able to provide yourself a steady living wage and that you have reserves to smooth out the bumps. Maybe this wouldn't help though, not sure. I'm a "freelancer" myself but I have never attempted to get a loan.
larrywright 16y ago
That depends on what you're doing. If you're a developer or a sysadmin or something, you need to set up a corporation to provide you some level of liability protection. I'm not a lawyer/tax expert, but my understanding is that this is not something you could do without at least an LLC in place. If I'm wrong about this, someone please correct me.
- rada 16y ago
  You do need an LLC for liability protection but you don't need to pay yourself a salary. Instead, you take whatever you want as pass-through income distribution.
  - larrywright 16y ago
    Ah, ok. That makes sense. Can you only pass through a portion? In other words, keeping some back for expenses like computers, cell phones, hosting, whatever?
    - gexla 16y ago
      Yes you would keep a certain amount of money in the company accounts for expenses. The company expenses would have to be paid by the company (as opposed to your personal income which is passed through to you) for these expenses to be tax deductible (right? I'm not a tax guru either.) @rwhitman I wasn't necessarily referring to a salary. I know that you can't pay yourself a salary as an employee when you are the owner of the sole proprietorship. As the owner in such a case, essentially you are the company, not an employee. As I mentioned in my other reply. I'm thinking that giving yourself regular payments from your business account would be a better way of showing a regular and steady income than showing the more crazy activity of the business account I think the biggest problem is that he simply couldn't give a straight answer to questions. He could only say he is a freelancer and he works for himself. He could have said that he is a sole proprietor and that his company name is x.
    - rada 16y ago
      You can pass through whatever you want but you should pay all the expenses through your LLC, otherwise you "pierce" the liability veil. TIP: presuming you are in the US and you are married to someone who has a full-time job, you can save a large chunk of money if you sell 99% of your company to your spouse, have them be a passive partner, and distribute 99% profits to them. (Ask your accountant for details).
samatman 16y ago
A properly managed S corporation avoids double taxation while providing the liability and legitimacy benefits of doing business as a corporation. That or an LLC should be in place any time someone is doing business; if you aren't working for one, make one. The benefits vs. the ~ $250 a Delaware corporation costs are huge.

kls 16y ago

Which you should be if you are in the US. A freelance should be a S-Corp and pay themselves a "reasonable" salary. To not do so you are throwing a huge chunk of money away on employer FICA. Basically you are pissing away 8% of you income if you are not a S-Corp and that is just in taxes. When you factor in the tax deductions a corp can take the savings are astounding. Someone up stream mentioned that a freelancer should hire a secretary and stop doing the office work for $100 hr. My though is the first thing a freelancer should do is outsource accounting to a CPA. These people pay for themselves, second should be legal counsel, at least a paralegal after that a secretary would be a good third.

rwhitman 16y ago

A lot of folks misinterpreted this and I can't edit it. A sole proprietorship, a single-owner LLC and an S-Corp are all pass-through to your personal income taxes. Meaning that in the eyes of the government you are still self-employed and need to file a 1099 and schedule C, even if you put yourself on payroll instead of paying out on draw. I learned this the hard way. What I'm saying is that even if you have a business entity you are still technically self employed. That is unless you have a C-Corporation or an LLC taxed as a corporation, in which case yes you can put yourself on payroll and do tax withholding and can legally be considered 'employed' by the company, however you get taxed double and face a number of costly state and federal requirements not to mention new overhead costs for legal and bookkeeping etc which is in most cases not worth it unless you are earning quite a lot of money. But regardless, I don't know how much a mortgage company would care about such things. Maybe regular issue of a check from one company would be enough to suffice and I'm overblowing the issue...

gexla 16y ago

I was thinking more along the lines of building a history. Open a business bank account and a personal account. Give yourself regular payments (bi-weekly / monthly) from the business account. Perhaps then you could show your statements to the bank when asking for a housing loan. You would be demonstrating that even though the income of your business is up and down, you are able to provide yourself a steady living wage and that you have reserves to smooth out the bumps. Maybe this wouldn't help though, not sure. I'm a "freelancer" myself but I have never attempted to get a loan.

larrywright 16y ago

That depends on what you're doing. If you're a developer or a sysadmin or something, you need to set up a corporation to provide you some level of liability protection. I'm not a lawyer/tax expert, but my understanding is that this is not something you could do without at least an LLC in place. If I'm wrong about this, someone please correct me.

rada 16y ago
You do need an LLC for liability protection but you don't need to pay yourself a salary. Instead, you take whatever you want as pass-through income distribution.
- larrywright 16y ago
  Ah, ok. That makes sense. Can you only pass through a portion? In other words, keeping some back for expenses like computers, cell phones, hosting, whatever?
  - gexla 16y ago
    Yes you would keep a certain amount of money in the company accounts for expenses. The company expenses would have to be paid by the company (as opposed to your personal income which is passed through to you) for these expenses to be tax deductible (right? I'm not a tax guru either.) @rwhitman I wasn't necessarily referring to a salary. I know that you can't pay yourself a salary as an employee when you are the owner of the sole proprietorship. As the owner in such a case, essentially you are the company, not an employee. As I mentioned in my other reply. I'm thinking that giving yourself regular payments from your business account would be a better way of showing a regular and steady income than showing the more crazy activity of the business account I think the biggest problem is that he simply couldn't give a straight answer to questions. He could only say he is a freelancer and he works for himself. He could have said that he is a sole proprietor and that his company name is x.
  - rada 16y ago
    You can pass through whatever you want but you should pay all the expenses through your LLC, otherwise you "pierce" the liability veil. TIP: presuming you are in the US and you are married to someone who has a full-time job, you can save a large chunk of money if you sell 99% of your company to your spouse, have them be a passive partner, and distribute 99% profits to them. (Ask your accountant for details).

samatman 16y ago

A properly managed S corporation avoids double taxation while providing the liability and legitimacy benefits of doing business as a corporation. That or an LLC should be in place any time someone is doing business; if you aren't working for one, make one. The benefits vs. the ~ $250 a Delaware corporation costs are huge.