Investor · Evansille, WI · Member since 2017 · 105 posts · 29 votes
Hi all, I am looking for advice on how to help my dad out with getting his business going. I have set up a Single member LLC for him, and am wondering if I should put him on payroll with his other employee(s), what would be the best thing to do as far as taxes and accounting go? Right now this is a small operation (under 75K gross/year), but we are hoping to get it to grow. He does mainly decks and other exterior work, but does a little of everything.
Also, does anyone know of any resources or guides to learn how to categorize expenses and do bookkeeping for this type of business?
A SMLLC that is taxed as a disregarded entity should not be running payroll for its owner.
If your dad wants to take money out of the business he should do that as an 'owner's draw' or 'owner's distribution', which will be a balance sheet movement. Depending on taxable income of the LLC, your dad's other taxable income, projected growth of the business, and your dad's goals for the business, an election to have the LLC taxed as an S Corp or a C Corp might make sense now or in the future. If the LLC is taxed as an S Corp or C Corp, running payroll for your dad and issuing him a W-2 becomes possible.
Best to consult a tax CPA/EA who will examine all facts and circumstances.
A SMLLC that is taxed as a disregarded entity should not be running payroll for its owner.
If your dad wants to take money out of the business he should do that as an 'owner's draw' or 'owner's distribution', which will be a balance sheet movement. Depending on taxable income of the LLC, your dad's other taxable income, projected growth of the business, and your dad's goals for the business, an election to have the LLC taxed as an S Corp or a C Corp might make sense now or in the future. If the LLC is taxed as an S Corp or C Corp, running payroll for your dad and issuing him a W-2 becomes possible.
Best to consult a tax CPA/EA who will examine all facts and circumstances.
General rule:He should get reasonable w2 income as well as profit by way of dividends to minimize SE taxes. Personal Circumstances and goals will have to be discussed a cpa for exact answer.
Get a CPA to Figure it out and provide the best strategy and let your dad concentrate on selling the jobs and completing them.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Carl Fischer "General rule:He should get reasonable w2 income as well as profit by way of dividends to minimize SE taxes."
That would be correct if OP's father has made or intends to make an S election for the LLC.
Since OP did not specify tax status of the SMLLC, we're left to assume no alternate election was made, and the LLC carries the default tax status: 'Disregarded Entity'.
A DRE should not be issuing W-2s or 1099s to its owner as it's effectively dissolved for federal income tax purposes and there's no distinction between the owner and the LLC.
The only thing I would add is that the net income from the SMLLC that the owner receives will be subject to Self Employment Taxes, which would include social security and medicare. However, those amounts are not paid through payroll deductions. They are paid by the sole owner through their quarterly estimated payments and annual tax returns.
From the IRS website:
An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.
If he is making $75k gross, which would be before any expenses - there is nothing fancy to do at this level. Keep things simple, do not create any payroll for him and focus on making more money.
Now, if he makes $75k net, which is after expenses - then he needs to consider an S-corporation and W2 payroll for himself.
Bookkeeping is simple, really: record everything he spends for business in any form that is simple for him: old-fashioned notepad, Excel or Google Sheets if he knows how to use them or apps like Expensify or TaxBot.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Carl FischerHe asked the “best” way so don’t you think he should elect “S”?
As @Michael Plaks pointed out, there is a quantitative analysis. If the LLC's net taxable income is less than $50k, generally an S election would not only not be favorable, it would result in a worse holistic ROI than a disregarded entity. The overhead of administering a corporation for tax purposes needs to be factored in as well.
Beyond the quantitative analysis of the LLC, there are other quantitative factors and also qualitative factors:
-What does OP's father's tax picture look like outside of the LLC? Is he already maxed out on SS tax?
-Does OP's father plan to grow the biz and then flip/sell it in 5-10 years?
-Is OP's father willing to go through the compliance hoops of administering a corp for tax purposes?
-Does he plan to bring on equity investors in the future? Will any be C Corps or Partnerships?
A "yes" to any of the above questions may indicate an S election is less attractive.
That is why I suggested he get with a cpa and work his specific circumstances.
We're in agreement and both mentioned this in our OPs.
Doesn’t he have to issue w2s for the employees as a DRE or any other entity or election?
Yes he does if they're properly categorized as employees and not ICs or owners... Not sure where you're going with this though, it doesn't change any of my answers.
@Michael Plaks Exactly. OP already stated the figure was gross revenue. We know the LLC is running payroll, so there should be at least wages expense, payroll expense, and payroll taxes expense to decrease the gross number. Unless there was a miscommunication, net income of the LLC will be less than gross.
We cannot rely on the terms used on this board. Just because someone said gross, does not necessarily mean that he referred to what we call gross - which is why I tried to clarify.
Also, I very much doubt that the father has employees, although the word was used. Most likely, they meant occasional subs on 1099s.
My read is that their operation is simple and small at this stage. No need yet for tax planning or for hiring someone like us. Just the fundamentals of running a business. I could be wrong, of course.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Michael Plaks True, but I have to give people the benefit of the doubt that they know basic definitions of words unless there are flags that words are being misused or something isn't adding up. Otherwise I'd drive myself crazy crazier. ; )
Where do we draw the line? Do we take OP at face value that he has a SMLLC? Perhaps it is MM or an Inc?
Investor · Evansille, WI · Member since 2017 · 105 posts · 29 votes
7y
Thank you all for the information and advice!
To clarify, yes I mean "gross", I am just now getting involved, but I suspect his "net income" would have to be around 20k. He does not have another job outside of this, and he has one "employee". He is actually paying out labor in cash right now and does no bookkeeping at all. That is why I am getting involved at this point. Does he end up paying more in taxes because of the self employment tax than he would by being on a payroll, or does it come out to be the same?
To clarify, yes I mean "gross", I am just now getting involved, but I suspect his "net income" would have to be around 20k. He does not have another job outside of this, and he has one "employee". He is actually paying out labor in cash right now and does no bookkeeping at all. That is why I am getting involved at this point. Does he end up paying more in taxes because of the self employment tax than he would by being on a payroll, or does it come out to be the same?
At $20k, there is no benefit of setting up payroll. It's not worth the hassle. Double this - and then we may have room to play with SE tax.
Paying in cash, as you know, is an awful business practice. Make him stop it. Checks or PayPal. And this is not an "employee", as I suspected.
@Michael Plaks True, but I have to give people the benefit of the doubt that they know basic definitions of words unless there are flags that words are being misused or something isn't adding up. Otherwise I'd drive myself crazy crazier. ; )
Where do we draw the line? Do we take OP at face value that he has a SMLLC? Perhaps it is MM or an Inc?
I hear you. I always try to read between the lines and ignore the terms which are often used incorrectly. Maybe it's my Eastern European upbringing. ;)
Investor · Evansille, WI · Member since 2017 · 105 posts · 29 votes
7y
Correct, he is not currently an "employee", but I plan on getting him a payroll set up by January, that way he can right off the expense of labor, and he's doing things legitimately. Is that not the right move?
Correct, he is not currently an "employee", but I plan on getting him a payroll set up by January, that way he can right off the expense of labor, and he's doing things legitimately. Is that not the right move?
He can write off labor already, because he did pay for it. But, if audited, it will be very difficult to defend.
The correct procedure is to get the contractor's SSN (have him complete Form W9 and verify against his SS card) and warn him that he will have to pay taxes on everything he was paid in 2018, including cash already paid to him. Issue Form 1099-MISC to him in January.
Payroll means withholding taxes from his pay and turning those taxes over to the IRS. Setting up payroll is more hassle, but it is the right thing to do. It will save your Dad's helper from falling behind on taxes.