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I am taking on a side project where I will be making a little under $100 US an hour for a few (5-10) hours a month. I do have a LLC already established in the same industry (fitness/teaching) in Arizona, however the contracting that I will be doing is more technical in nature (Programming).

I have not been offered an employment contract, so I believe that it will be a straight contract payment. I am trying to figure out if it is better from a year end tax perspective to have the payments issued to the LLC and pay myself from the company, or simply cash/withhold on my own as personal income? To date, the LLC has produced no income, I set it up in anticipation of starting a side business just before all the lockdowns occurred.

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  • Better from what perspective?
    – littleadv
    Aug 5, 2022 at 20:54
  • @littleadv - Personal year end taxes, I edited the question.
    – JohnP
    Aug 5, 2022 at 21:03
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    LLC is disregarded for tax purposes unless you explicitly elected to treat it as a corporation. So it wouldn't matter at all.
    – littleadv
    Aug 5, 2022 at 21:19

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If you file to treat your single-member LLC as an S-corp, then there would be an opportunity to shield some income from payroll taxes. https://www.adp.com/resources/articles-and-insights/articles/s/s-corp-payroll.aspx

But with small earnings, perhaps it's not worth the complication of S-corp treatment.

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  • You cannot shield income from your own personal services via S-Corp, you can only shield goodwill/employee earned revenue.
    – littleadv
    Aug 6, 2022 at 1:25
  • @littleadv regarding FICA, I've never heard any S-Corp rules defined that way. AFAIK the rule is you must pay yourself a reasonable salary (which is subject to FICA), and if your income is beyond that you could consider distributing it, regardless of whether that additional income came from your personal services or not. Have the rules recently changed or are we talking about different things (or am I mistaken)?
    – TTT
    Aug 7, 2022 at 22:53
  • @TTT we're talking about different interpretation of the rule. What is "reasonable"? If you charge $300/hr but pay yourself for your own work $100/hr - where do the $200/hr the client paid you go? What is the client paying for? It's either your name/reputation (aka goodwill) or that's the real reasonable pay.
    – littleadv
    Aug 7, 2022 at 23:17
  • @littleadv OK, I actually like your statement as a good theoretical definition. I feel like the practical definition is less stringent, but audits have a degree of subjectivity anyway so who knows... My gut feeling has always been that if your salary is more than the SS maximum, then you're probably pretty safe. Furthermore, of all the case studies I've read regarding S-Corp reasonable salary decisions, I don't think I've seen a single one where the IRS determined it should have been $200K or more (annually).
    – TTT
    Aug 8, 2022 at 16:05
  • Yeah, if it is above SS limit then you're not saving anything really. But the real difference between S-Corp and self-employment shows when you start having employees.
    – littleadv
    Aug 8, 2022 at 16:47
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I am trying to figure out if it is better from a year end tax perspective to have the payments issued to the LLC and pay myself from the company, or simply cash/withhold on my own as personal income?

If you have a single owner LLC there is no difference in tax treatment. You could do something else, but that seems needlessly complicated for this relatively small income.

Keep in mind that the "LL" in LLC provides liability protection. If you accept work you will likely have to sign agreements that are a legal exposure risks for you, e.g. indemnification, confidentiality, non-compete, guarantee of ownership etc. There is a vast number of laws, patents, copyrights, licenses etc. so it's impossible to know for sure that everything you write will be free & clear.

In the unlikely case that you run afoul of something like this, the LLC does provide good protection. It discourages anyone from going after you, since there simply isn't a lot to be gained.

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LLC is disregarded for tax purposes unless you explicitly elected to treat it as a corporation. So it wouldn't matter at all.

If you're working in a State other than Arizona and want to use the LLC - you may have additional registration, reporting and taxes just because of the LLC usage (e.g.: California is very expensive for LLCs domestic and foreign). If you don't expect any liability issues then you'd probably be better off keeping it simple (check with your attorney).

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