What is the best taxation for me?

[stebbinsd]

What is the name of your state (only U.S. law)? federal

I'm starting an Ebay store that I plan on LLCing. The plan here is for me to simply buy some inventory, sell it on ebay, and pocket the profit. Nothing more, nothing less.

My instincts tell me to have it taxed as a sole proprietorship. Here is my flow of logic; please tell me what (if anything) is wrong with it.

- If I set aside my own salary as a business expense, then I will face double taxation; once on my salary, and another on the profits of the LLC (a la dividends) that I give myself.
- By that same logic, if I check to be taxed as a C corp, I, myself, will face triple taxation!
- No one else is helping me except the Post Office (to mail the items), so partnership is out.

By process of elimination, sole proprietorship seems to be the best course of action. Would you agree?

 

[LdiJ]

What is the name of your state (only U.S. law)? federal

I'm starting an Ebay store that I plan on LLCing. The plan here is for me to simply buy some inventory, sell it on ebay, and pocket the profit. Nothing more, nothing less.

My instincts tell me to have it taxed as a sole proprietorship. Here is my flow of logic; please tell me what (if anything) is wrong with it.

- If I set aside my own salary as a business expense, then I will face double taxation; once on my salary, and another on the profits of the LLC (a la dividends) that I give myself.
- By that same logic, if I check to be taxed as a C corp, I, myself, will face triple taxation!
- No one else is helping me except the Post Office (to mail the items), so partnership is out.

By process of elimination, sole proprietorship seems to be the best course of action. Would you agree?

With an S-corp or an LLC electing to be taxed as an S-corp you would not face double taxation. You are taxed on the profits once. Some of that may be from a paycheck issued to you, and some of it may be from passed through profits, but you are only taxed once on the same dollar.

A C-corp results in double taxation, not triple.

Operating as a sole proprietorship is probably the way to go to start, but one of the advantages of making an S-corp election is that as long as you are paying yourself a reasonable salary (with full withholding) for the work you are performing, you can avoid self employment tax on any remaining profits.

 

[stebbinsd]

With an S-corp or an LLC electing to be taxed as an S-corp you would not face double taxation. You are taxed on the profits once. Some of that may be from a paycheck issued to you, and some of it may be from passed through profits, but you are only taxed once on the same dollar.

A C-corp results in double taxation, not triple.

One of us is confused.

If I set aside some money for my salary, then I'll essentially become my company's CEO, with 100% ownership as a sort of "incentive." At that point, my salary and my dividends should technically be considered two different incomes, right?

one of the advantages of making an S-corp election is that as long as you are paying yourself a reasonable salary (with full withholding) for the work you are performing, you can avoid self employment tax on any remaining profits.

What are the two different tax rates? Any chance I can get those two directly juxtaposed?

 

[LdiJ]

One of us is confused.

If I set aside some money for my salary, then I'll essentially become my company's CEO, with 100% ownership as a sort of "incentive." At that point, my salary and my dividends should technically be considered two different incomes, right?


What are the two different tax rates? Any chance I can get those two directly juxtaposed?

I think that you may be very confused.

If you file a Schedule C, all of the income (whether you set some aside for your "salary" or not) will be included on the Schedule C and you will pay self employment tax on the entire profits. (including your salary)

If you file as an S-corp (or an LLC electing to be taxed as an S-corp) Then its possible for you to have a salary, with regular withholding as an employee of the S-corp or LLC, and any remaining profit (over and above your reasonable salary) would flow through to schedule E on your personal return, and would be pass through income not subject to social security or medicare taxes. However, it would still be taxed at personal income tax rates. You would not have any dividend income.

If you were a C-corp, and an employee of the C-corp, then any salary properly paid to you would be an expense of the C-corp, but any profits in excess of your salary would be taxable income to the C-corp, and then if distributed to you as dividends as well, you would then have double taxation.

Double taxation refers to the same dollar of income being taxed twice.
That can only happen if you are a C-corp.

It would probably be in your best interest to get yourself a face to face consulation with a local tax professional.

 

[stebbinsd]

So, what exactly is the difference between the dividends of an S-corp, and the profits of an LLC being taxed as an S-corp?Wouldn't the profits I give myself as the President of my LLC be taxable, independent of my salary?

I think the main reason we're having so much trouble is because I'm not being clear on what I mean. When I said double taxation, I didn't mean the same money was being taxed twice; I meant I have two incomes that are taxable at two different rates, just like if I owned stock in a company I work for; I would first be paying employment tax, followed by reporting my quarterly dividends every January, and since I'm the only employee at the LLC, I have to both withhold my own employment taxes (since I'm my own employer). Since my salary and profits are two different incomes, I pay a total of two income taxes.

If I were taxed as a C-corp, then I would be paying my own employment taxes, as well as paying double taxation on the profits, hence triple taxation, in a sense.

Is that where we were confused, or did you know that's what I meant all along?

 

[LdiJ]

So, what exactly is the difference between the dividends of an S-corp, and the profits of an LLC being taxed as an S-corp?Wouldn't the profits I give myself as the President of my LLC be taxable, independent of my salary?

I think the main reason we're having so much trouble is because I'm not being clear on what I mean. When I said double taxation, I didn't mean the same money was being taxed twice; I meant I have two incomes that are taxable at two different rates, just like if I owned stock in a company I work for; I would first be paying employment tax, followed by reporting my quarterly dividends every January, and since I'm the only employee at the LLC, I have to both withhold my own employment taxes (since I'm my own employer). Since my salary and profits are two different incomes, I pay a total of two income taxes.

If I were taxed as a C-corp, then I would be paying my own employment taxes, as well as paying double taxation on the profits, hence triple taxation, in a sense.

Is that where we were confused, or did you know that's what I meant all along?

I understand what you are saying, and you are STILL confused.

Don't use the term "double taxation" unless you mean the same dollar of income being taxed twice. There is also no such thing as triple taxation.

What I am trying to make you understand is unless you are a C corp, there will be only ONE tax rate for you, and that will be your regular income tax rate. It is immaterial how you divide the income up (regular salary vs profits) its still all going to be taxed at your regular income tax rate. The only thing that could be at issue is your self employment taxes (social security and medicare), and that would only be a potential issue if you make an S corp election.

I spent a lot of time writing out two posts trying to explain it to you. Since you still don't understand what I am explaining, I do recommend that you get a face to face consult with a tax professional because it will probably be easier to understand in a face to face conversation.