So iI just started my own business as a software development consultant. and I have a couple of questions on how to go about taxes
I have a registered software consulting LLC in Wisconsin and was planning to report it as a S-corp for taxes, with me as the sole employee. First of all, it's a good idea to set up my business this way? I don't mind the paper-work and keeping track of expenses since I already do that. I just got my first contract for 200k a year in California, and i was thinking of giving myself a salary of around 70k, and a 401k matching. Is it lawful to have the company pay for my rent and perhaps meals (if possible) as well?
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posted: Nov. 10, 2016 @ 2:01p
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posted: Nov. 10, 2016 @ 5:16p
Congrats on your first contract! I think the scope of what you need to learn is outside what you can learn on this forum. I don't have a specific reference but I would google business deductions to find the laws.
I would not have the business pay for your rent, except you can take a home office deduction if you have one. Meals with clients or employees can be written off, some during travel. Most at 50% but some at 100%.
You also must pay yourself a reasonable salary. There is no strict definition of reasonable per the IRS. I'm glad you're looking at $70k and not something like $20k/yr. However, if your income is derived from providing your time as consulting (rather than a product or service with employees) you're going to have a harder battle. It also maybe depends on your growth plans in the next few years. It's unlikely you'll be audited on your first few years but if it's a pattern and you still have no employees, it might be harder to argue you are charging $200k, doing all the work yourself, and only paying yourself $70k. On the flip side, no one is watching you so they'd have no idea what you're really up to.
I won't comment on the 401k as qualified retirement accounts aren't in my wheelhouse at all....but maybe google the term "solo 401k"
Lastly, I think it would be wise to spend an hour with a lawyer and accountant. Most will meet with you for free the first time and if you really want to leverage your education, meet with several and as you learn you can get more in depth with your questions. Sounds like you're making money right off the bat so there isn't really an excuse not to spend $500 or so getting some professional and legal advice.
+1 to frogger IMHO LLC taxed as s-corp is the best option. 1) Open a solo401k plan (you may have to hurry up because the deadline is 31 dec). 2) Make your LLC contribute 25% of salary and you add a fixed 18k to 401k. (Assuming you did not contribute to a 401k earlier) 3) If you have a spouse, pay him/her some salary (upto 24k). 4) Consider opening a roth solo 401k if you are confident that 2 birds in bush are better than 1 in hand. 5) When traveling to CA, your meals/lodging/car are fully deductible. 6) This falls in the gray area: If you are not rooted in WI, consider establishing residency in a cheap cheap apartment in FL or TX where state income tax is 0. And 'travel' to CA for business. 7) You cannot pay yourself outrageous per diem since you are the owner of the LLC.
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