Freelancers and Taxes: An LLC’s Perspective
When I was laid off from my last “secure” paying job I mentioned to my wife that I wanted to go into business for myself. With two small children at home, a mortgage to pay, and enough other expenses hanging over our heads, this option seemed somewhat crazy. Fortunately, a severance package and unemployment helped to ease my transition to freelance work and I managed to have some additional work lined up to get me started.
One of the first things I did was to set up my business as an LLC: a limited liability company. I used the services of LegalZoom to organize my company, saving myself some money over the services of a tax attorney. The advantages of running an LLC include: legal protection from suitors in the event I am sued for work that I have done. They can go after my business assets, but not my personal assets. In addition, the whole way of paying myself has changed: I don’t receive a paycheck, but I do make disbursements. These disbursements are not subject to social security taxes, but they are taxed on the federal and state level. Still, with tons of deductions every year [I pay our family's medical bills for starters], our disbursements are fairly low. Livable, but low. Plus, I take advantage of IRA contributions for my wife and me. We are a one income family, something we decided to do even before children arrived on the scene.
The disadvantages of an LLC are few. Start up costs are more and you have to register with the state to keep everything in order. Still, the little extra legwork is worth it and marketing myself as an LLC has been useful especially when I tell employers that I have officially set up myself as a business. Employers seem to appreciate that I made a little extra effort to formally organize myself. In addition, some are happy not to have to furnish 1099 forms for work that I do for them.
Is an LLC right for you? That depends on what you want from one. Contact a tax accountant to gain more information. After nearly four years of business, I have grown to appreciate what an LLC offers and my customers seem to recognize that advantage as well.
This is something that I may look into when I am 18, just as a side job for graphic design and possibly article writing. I know I don’t want to do this full time as it is a risky business for income, but I would like to try it for some extra money. Now, as an LLC, are you claiming any revenue from websites as the business too? My biggest concern with anything is paying taxes as I know they won’t be much, I just want to do it right so I don’t get myself into any trouble.
Hi Mike,
Yes, I claim all income as revenue including what I charge to build sites for people, my AdSense income, articles I write, you name it.
An LLC gives to me many advantages including that I don’t actually “pay” myself instead I take out “disbursements” from the business. This means that I don’t have to declare social security and some other taxes. Instead, what I make via my LLC is business income.
Starting a side business part time is great. If it takes off, you can make it your full time scheme, otherwise it can be a great way to bring in some residual income.
Regards,
MattK
Thanks,
I was wondering what do you think an average startup cost would be for a business such as the one you ran. I know there aren’t too many fees besides starting the business. I can never really find on the internet how much something costs as prices seem to vary, but if I ever went with the LLC path, my costs should be similar to yours, if you don’t mind sharing. Also, did you have to advertise your business a lot, or did business mostly come to you?
Prices can vary and you don’t need an attorney to help you set up a limited liability corporation (LLC). Instead, you can use an organization such as the The Company Corporation to help set up your business.
With an attorney you will probably pay about $2,000 to file with your state; with a private company maybe $700. They’ll act as your agent to the state for a separate fee, but I do all of my own bookkeeping and filings, so I represent myself and save the $150 fee.
As far as business goes, some of it comes from my contacts in the aviation industry, while much of the rest is through advertising and word of mouth.
FYI, small businesses are the background of the US economy and employ up to 70% of the workforce; small businesses are considered any company with 500 or less employees. So, some are not really all that “small” after all.
[...] I received a nice letter from a young man last week asking me if I would mentor him about the fine art of managing an LLC. You see, he was responding to something that I had recently written about the topic and thought that I could help him out. Like me, he is a freelancer trying to make his way in this business. [...]