File Federal Taxes Online: Federal Taxes - Freelancers and Taxes: An LLC's PerspectiveHow To Reduce

Federal Taxes - Freelancers and Taxes: An LLC's PerspectiveHow To Reduce

Thursday, March 15, 2007

Freelancers and Taxes: An LLC's Perspective

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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 corporation. 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.

Tip! Without putting too much pressure on yourself, make dates or appointments to work on your taxes. A day for compiling information.

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.

Tip! Generally, the four types of taxes include service fees and charges; franchise tax or surcharges; sales use or special taxes; and federal excise tax.