LLC for freelancing?
April 18, 2009 6:53 PM   Subscribe

How do I prepare myself for freelancing with regard to taxes?

I intend to start doing freelance web design and hosting work, and want to set myself up properly for tax purposes. But I have no idea what I need to do.

I won't be doing work outside of my state (I'm in the US), if that matters. But I will need to purchase software and whatnot for the work and would like to be able to expense it.

Should I incorporate or form an LLC? Or something else? Are there any good books on the topic? Please advise, freelancing mefiers!
posted by the matching mole to Work & Money (10 answers total) 23 users marked this as a favorite
Take some small business classes at your local community college. Not only will they tell you a lot of what you need to know, they will be deductible as a business expense. Plus, you will then be able to go to the college's bookstore and get the student rate for any new software that you may need to purchase. This is a big perk, especially on things like Photoshop.

You don't need to set up an LLC, but I would recommend it. In many states it can easily be done through the secretary of state's web site.

You will probably want to set up a separate business bank account to simplify things.

Keep track of all your receipts and mileage. The IRS like mileage written down in a journal or notebook, instead of in a spreadsheet, if they ever audit you.

For financial software, we use Quicken - the business edition - and it works fine for generating invoices and tracking expenses. Good luck.
posted by Ostara at 7:07 PM on April 18, 2009

Recommended to me, but I haven't purchased yet:

Self-employed Tax Solutions
posted by sharkfu at 7:13 PM on April 18, 2009

Nolo Press has several good offerings:

Working For Yourself.

Doing the self-employed thing is actually easier than it appears.

There's not much difference between working within an LLC and just being a sole proprietor (which is an informal business arrangement), not until you've got significant assets you want to set up apart from your private life.

I actually formed a C corporation last year and it's been pretty easy to set up. ~$300 to start and there's an $800/yr minimum fee but that's waived until next year's filing.

C Corporations are a great candy store of benefits if you can actually generate the income from within them -- ~$40,000/yr of retirement savings, paid medical insurance, getting income via stock dividends, etc.

But if you expect to make less than say $50K then just being a sole proprietor is the way to go. You can still write off all your business expenses on your 1040 via Schedule C.
posted by mrt at 8:48 PM on April 18, 2009 [1 favorite]

Check with your local state, but keep it simple and register as a sole proprietor. Beyond that, make absolutely sure you bank 25% of your earnings to pay for taxes. Keep receipts for utilities and rent in a special place. If you're feeling really energetic, keep a daily log of business activities, and link these activities to your receipts.
posted by KokuRyu at 9:16 PM on April 18, 2009

But if you expect to make less than say $50K then just being a sole proprietor is the way to go. You can still write off all your business expenses on your 1040 via Schedule C.

I disagree. I would (and did) start a single-member LLC. It's taxed as a sole-proprietorship, doesn't require a Federal employer ID, and grants you limited liability.

The biggest reason to do this is to simplify life for your clients. If you're not an LLC, and you charge a client more than $600 in a year, they have to go through the tax reporting process (1099). While big companies usually have experience handling unincorporated freelancers, small ones (and other single-member organizations) frequently do not have any experience with it at all. It's a lot more appealing proposition, on the part of my clients at least, to write a check to my LLC, write off the expense, and never think about it again than it is to write a check to me, fill out the forms to request my social security number, write off the expense, and report the transaction.

The second reason is confidence. I don't know your field, but mine (software engineering) is filled with wannabes who claim more expertise than they can deliver. Some clients are wary of that. But, setting up an LLC tends to show that you're at least committed (and "real") enough to pay the filing fee and list your (business) address in the public record. Your clients know they can find you if they need to.

The last reason is compartmentalization (the "limited liability" in LLC). Basically, and with some exceptions, if you have a company of some sort, the company is liable for debts and not you personally. So if some former client (or competitor) of yours takes legal action, only the assets of the LLC can be touched (with some exceptions). In order for this to work, you absolutely have to compartmentalize your money.

You have a personal account, and you have a business account. You must never, never write a check for a personal expense from the business account. And, I'm told it's better if you never write a check for business expenses from your personal account. In both situations, transfer the cash to the appropriate account (with appropriate accounting), and then pay the bill.

So, in your situation (which sounds similar to mine), I'd do the following (in order): 1) hire an accountant (maybe one who'll work on a sliding scale with your revenue); 2) start a single-member LLC; 3) Get a bank account for said LLC; 4) Profit.
posted by Netzapper at 9:24 PM on April 18, 2009 [3 favorites]

As an LLC you can elect to be taxed like a corporation and get the C corp benefits (paying for insurance, etc) -- definitely something to talk to a lawyer or accountant about.

Make sure you file your estimated self employment taxes quarterly or you'll be penalized.
posted by katemonster at 10:03 PM on April 18, 2009

The big thing is to pay your quarterlies. (Or in other words keep back at least 30% from every pay check for takes.) And keep receipts for every single thing that could be a business related expense. Not only purchases, but travel for business, home office, etc. Everything else can be dealt with by the tax professional you will hire later. (Emphasis on "will hire")

The Sole Proprietorship vs LLC vs Corp completely depends on your type of business, how much money you're making, and your state. Talk to two or three professionals before creating a business entity. It can save you lots of money, or it can cost you lots of money, but it depends on more things than AskMe can reliably answer. For example my business only saves me money the years I'm making more than about $200K.
posted by Ookseer at 2:25 AM on April 19, 2009 [1 favorite]

Would not recommend a C-Corp for a web consulting business. A sole proprietorship, LLC or S-Corp would be more appropriate.
posted by zippy at 9:21 AM on April 19, 2009

IAAL but IA Not Your Lawyer, but I would set up an entity for asset protection reasons if you ever get sued. I actually defended a website developer in a lawsuit so this possibility is not necessarily remote. Netzapper describes the benefits and things to do pretty well --like setting up separate bank accounts and not commingling funds.

I would only set up an C-corp only if you make an S-corp election with the IRS (this is an easy form and must be done soon after setting up the C-corp). Email me if you want to be bored with the tax concepts of reasonable compensation, disguised dividends and double taxation. I rarely set up C-corps for people though (with or without the S-corp election) because of corporate formalities that need to be followed are a bit more stringent (in TX anyway) than other entities and an LLC usually suffices to get the benefits without the burdens. I usually set up LLC's for people in your position based upon the information you have shared.

Also, (in TX) sole proprietorships or DBAs are not considered separate entities and offer no asset protection (not good).

Best to talk to a good lawyer (preferably not one that is REALLY old). I have seen many ancient, small town lawyers set up C-corps (sadly without the s-corp election sometimes) for their clients when an LLC is a much better solution--I think it is just because they are more familiar with them, have the forms already drafted and aren't current as to the benefits of the LLC (which is a newer-type entity) over the C-corp with the S-corp election.

I have also seen very knowledgeable CPA's who can explain the tax benefits of each type of entity but CPA's aren't necessarily looking at the asset protection (personal liability) issues. I would get recomendations and interview CPA's and lawyers to see if you can guage their competency levels.
posted by murrey at 1:58 PM on April 20, 2009

Make sure you are setting aside enough money to pay your self-employment tax (15.3%) and income taxes (varies depending on your income tax bracket, deductions, etc. -- use an online tax calculator to estimate) since your taxes won't be withheld from your checks anymore and you don't want to get a nasty surprise on April 15.
posted by Jacqueline at 2:09 AM on April 25, 2009 [2 favorites]

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