Nowadays, many people work as freelancers, especially with the growth of the gig economy. You might be wondering if setting up a limited liability corporation (LLC) is necessary for you to operate as a freelancer. No, you don’t need an LLC to freelance, but it can have some benefits. That’s the quick answer.
An LLC is a type of legal entity that shields the owners’ private assets from the obligations and liabilities of the company. You are a single proprietor by default as a freelancer, which implies that your company and you are one and the same in legal terms. This renders you personally responsible for any debts or legal actions arising from your company. However, creating an LLC removes you from your company so that in the event of legal complications, your personal assets are not at danger.
No, is the response. An LLC is a pass-through entity for taxation purposes, which means that the owner’s personal tax return is where the business’s income and losses are disclosed. Taxes are not paid by the LLC itself. As a result, you don’t file your personal taxes and LLC taxes simultaneously. Instead, you must include information about your company’s earnings and outlays on Schedule C (Form 1040), which is a component of your personal tax return.
Start-up expenses are still deductible even if you are currently unemployed. Up to $5,000 in start-up expenses can be written off by the IRS in the first year of operation, and the remaining expenditures can be amortized over a 15-year period. Start-up costs cover things like advertising, website creation, accountancy, and legal fees. However, you can only write off a maximum of $5,000 in startup expenses if you do not make any money in the first year. How Do LLC Owners Get Paid, Then?
Depending on their preferences and the associated tax consequences, LLC owners may get their pay in a variety of ways. One approach is to receive a salary as an employee of the LLC, which entails paying payroll taxes on the salary. Another option is to take a distribution of earnings, which is not taxed as payroll but is instead included on the owner’s personal tax return. Depending on the LLC’s performance and the agreement among the owners, the distribution amount may change.
The answer is based on the particulars of the firm. For taxation reasons, an LLC and a S Corp are both pass-through entities, meaning that the earnings and losses are passed on to the owners’ individual tax returns. In terms of payroll taxes, S Corp outperforms LLC in some ways. S Corp owners are permitted to take a salary while avoiding payroll taxes on profit distributions. Businesses with substantial profits may see significant tax savings as a result of this. S Corp, on the other hand, has more requirements and formality than an LLC and might not be appropriate for all enterprises.
To sum up, while you don’t necessarily need an LLC to freelance, it can have some advantages like liability protection. As a freelancer, you must include business revenue and expenses on your personal tax return, and even if you haven’t earned anything yet, you can still deduct start-up costs. The option of how LLC owners are paid depends on both their preferences and the associated tax consequences. S Corp offers some advantages in terms of payroll taxes despite LLC also being a pass-through entity. To choose the proper organization for your business, it’s vital to speak with a tax expert.
If an LLC chooses to be taxed as a corporation or partnership, they must submit quarterly tax payments to the IRS. Based on the LLC’s income and expenses for the quarter, projected tax payments are often used to pay these taxes. To avoid penalties and interest charges, LLCs must keep up with their tax duties.