LLC and S Corporation question?

[FreeLancer768]

What is the name of your state? California

Respected forum members,

First of all, I am a fulltime Uber and Lyft driver, rideshare driving is my one and only source of income. Last year my CPA suggested that I should open an S Corporation and that I can pay less taxes. He gave me the figures without the Corporation, and with Corporation. And the difference in the amount of taxes looked significant. So, I opened an S Corporation and, according to him, I paid less taxes in 2019. Now my questions are. And one question is regarding my car, and one regarding filing my taxes myself to save CPA fees.

1) How come I paid less taxes? How does an S Corporation help you pay less taxes? Does the tax code have such a thing or my CPA just wanted to make some money out of me. He charged me $1000 to prepare the S Corporation for me.
2) Since S Corporation has headaches of yearly statement of purpose etc, I don't want that headache anymore. I want to dissolve it and open an LLC instead. Will an LLC help me pay less taxes like an S Corporation? I read an article online in which it said that I could open an LLC and then ask the IRS to treat it like an S Corporation, and it will help me just like an S Corporation when it comes to saving some money on taxes.
3) When I bought the car brand new, next year I paid way less taxes. How does a brand new car for Uber/Lyft help you pay significantly less taxes? Does IRS treat purchase of a brand new car differently? How does that work?
4) My CPA charges me double for individual and corporate tax. I want to do it myself. What software should I use? What software do CPAs use. How do they send everything to IRS, like my account information etc, and then IRS takes money from my account in April?
And what if I mess up things while filing taxes myself? Will IRS penalize me, or I will be given chances to keep trying and trying until I have filed my taxes correctly? I really want to learn everything and do everything myself. I mean my business is simple, driving for Uber/Lyft. I should be able to do it myself and save CPA fees. $1000 CPA fee can do so much for me. I could go on a vacation with that money.

I will really really appreciate your kind and informative replies.

Thank you so much in advance. God bless!

 

[Taxing Matters]

The main difference here is how the FICA (Social Security & Medicare) taxes are done. When you are sole proprietor (which includes a single member LLC that has not elected to be treated as a corporation), you pay FICA tax on your entire profit from the business. For self-employed persons FICA taxes are known as self-employment (SE) tax. It's the same tax computed at very nearly the same rate as FICA taxes for employees. The self-employed person figures out his net income from his business using Schedule C (and perhaps other forms/schedules to go along with Schedule C depending on the details of the business). Schedule C is part of the your personal income tax return. Then the profit from Schedule C is used to compute the SE (FICA) tax using Schedule SE.

But when you have a corporation and you work for the corporation you are no longer self-employed. Now you are an employee of the corporation. With a S-corporation, all of your profit from the corporation will end up on your personal return, but it will look different. And the FICA taxes will be handled differently. This is because as an employee, the corporation pays you a salary or wage and the corporation deducts that salary/wage from its income. This means the business income that ends up on your personal return is less but now you have salary income. In the end, the income tax side numbers work out pretty much the same as for being self-employed, it's just now split between business profit and salary/wages.

The key to the tax savings is that you pay yourself a reasonable wage/salary as an employee. If the salary or wage is lower than the profit you'd have as a self-employed person you save FICA tax because now instead of paying FICA taxes on all your profit like you do when you are self employed you instead only pay FICA taxes on the salary/wage the corporation paid you.

As a very simple example, suppose that as a self-employed driver you'd make $75,000 net profit for the year after deducting all your expenses. So your Schedule C would show $75,000 in net profit and would be included as part of your income on your income tax return. That $75,000 would be used to start the computation of your SE (FICA) taxes. The rate on FICA taxes is 15.3%, so your FICA tax on $75,000 would be $11,475.00. For the corporation, the net profit before your salary of $50,000 is still $75,000. But now the corporation deducts your $50,000 in salary. So the profit from the business that goes to income tax is $25,000. But you aslo have $50,000 in salary for income, too, so you still end up with $75,000 in total income on which to pay income tax. So, for income tax being self employed or using the corporation both gets you $75,000 taxable income. However, with the corporation, only the $50,000 in salary is subject to FICA tax. So that's 15.% of $50,000 = $7,650. This means that you saved $3,825.00 in FICA taxes ($11,475-$7,650). I've greatly simplified this to illustrate how this works, the actual numbers here would turn out just a bit different. But it gives you an idea of how the S-corporation can save you tax.

Note that ultimately you do have to pay yourself a reasonable salary when using the S-corporation. This means your corporation will need to pay you what it would cost to hire someone to do your job. If that rate is less than the profit you make from the business then there will be some FICA tax savings for you. How much savings will vary on the details of your business and total income that is subject to FICA. Sometimes the savings just isn't enough to make all the extra paperwork that goes with a S-corporation worthwhile.

As far as I know there is no consumer level tax preparation software for S-corporation returns. The software tax professionals use is not cheap and not as consumer friendly to use. Preparation of S-corporation returns can get complicated depending on what all the business does.

 

[LdiJ]

I will add some additional information regarding an LLC.

An LLC is a disregarded entity for tax purposes. A single member LLC defaults to a sole proprietorship so SE taxes (FICA) would be paid on the entire profits. A Multiple member LLC defaults to a Partnership where again, SE taxes would be paid on the entire profits. The only way that an LLC can provide the same savings as an S-Corp, would be for the LLC to make an election to be treated as an S-Corp, therefore an LLC would not be any different in your particular scenario. You would have to do the same paperwork that you do now.

The only way to reduce paperwork is to either switch to an LLC that defaults to a sole proprietorship, or to simply go back to being a sole proprietor. However, there will be no tax savings there. There would however, be the benefit of higher Social Security credits.

 

[davew9128]

I'll also point out the CPA wasn't doing you any favors since CA's AB5 considers you an employee not a contractor, and for non-CA viewers, forming a legal entity isn't a valid end around of that determination.

 

[FlyingRon]

Well, AB5 really doesn't change that much other than providing explicit statutory guidance for what is a bunch of regulatory interpretation and a little case law. California or not, not only you need a corporation but the corporation needs to, in turn, treat the workers as their employees.

 

[davew9128]

Well, AB5 really doesn't change that much other than providing explicit statutory guidance for what is a bunch of regulatory interpretation and a little case law. California or not, not only you need a corporation but the corporation needs to, in turn, treat the workers as their employees.

I disagree. This specific issue is addressed in AB5. I run into quite a bit with certain types of industries where the default Federal treatment of contractor is now employee for state purposes. A lot of people stated they would simply form corporations and bypass the law, by having their corp get paid. AB5 specifically doesn't allow that.

 

[LdiJ]

I'll also point out the CPA wasn't doing you any favors since CA's AB5 considers you an employee not a contractor, and for non-CA viewers, forming a legal entity isn't a valid end around of that determination.

I thought that wasn't fully decided yet? Wasn't there a stay of some sort because of a court case? Maybe my memory is faulty?

 

[davew9128]

I thought that wasn't fully decided yet? Wasn't there a stay of some sort because of a court case? Maybe my memory is faulty?

There was an injunction on behalf of interstate truckers from a federal judge. Uber and Lyft have filed suit, but a judge denied an injunction a couple days ago.

 

[FlyingRon]

I'm not going to argue with you if you refuse to listen to what I am saying. Good day.

 

[davew9128]

I'm not going to argue with you if you refuse to listen to what I am saying. Good day.

I heard everything you said. There were many changes in AB5 from the prior regulatory and case law interpretation with regards to exemptions for specific occupations (which would include most of the regular posters of this sub-forum). I know some of the people who lobbied for those exemptions.
My point is that forming a corporation for non-exempt services in CA such as ride sharing isn't going to have the desired result of still being a contractor. If it wasn't clear before Dynamex, it is now.

 

[FreeLancer768]

Thank you friends. Your wonderful replies are really appreciated. God bless!!!