This is not my experience. My costs are higher, but the costs offset and then some by tax advantages.
Sharing here, to give a picture of what a real single person LLC looks like, compared to a vanity hobby LLC as described by OP.
I'm a contractor with a registered LLC S-Corp in the US. Almost all of my income is 1099 from one source. I was converted from W-2 to contract when my employer was acquired, my job role did not change. You might call me a misclassified full time employee. I could report this of course, and then I would burn my professional contacts and lose my job. So I don't.
I hire myself, pay myself a fair market rate as a salary, and run a payroll just for me. And I provide myself a few benefits from the LLC, like health insurance.
I'm required to keep up with a pile of quarterly and yearly fillings between the state, county, city and IRS. This is a non trivial amount of time and effort. I have to maintain separate business books and bank accounts in coordination with my accountant. I don't actually get to access the money I earned until it exits the business entity through a controlled process. I have to file business taxes separate from personal taxes. I still have to pay quarterly estimates on my personal taxes too.
My family health insurance is roughly $12k this year. If I purchase that insurance directly, I use post-tax income to do so. I'd pay ~$4k in taxes to take home the ~$12k income used to buy health insurance. But when the LLC buys the health insurance and provides it as a employee benefit, the ~$12k is not taxed.
The salary I pay myself is taxed at ~37%. The same as if I just filed as self employed. But the business income I earn over that salary is taxed at ~20%. This is the biggest advantage. The gap between a "fair market value" for my role, and my actual contract rate. In that gap, the LLC structure saves me 20% on taxes by labeling that portion of income as "shareholder profit disbursement".
Rough yearly costs:
$150 registered agent service
$150 state registration filing
$2500 tax prep and account services throughout year
$1500 payroll services, including payroll tax filings
Where I come from, if they went back and looked at the years you were only earning what would normally be employment income from the single employer, they would classify it a "personal services corporation" and move any income in the company you declared as corporate income into your personal hands, tax you at personal rates and make you pay interest on that difference for the time you had it misclassified.
Your jurisdiction might not do that, but I'd be damn careful and if you are liable that way, they might let you off the hook on the interest if you went back and declared it correctly before they do.
IncandescentGas · · focus · HN ↗
This is not my experience. My costs are higher, but the costs offset and then some by tax advantages.
Sharing here, to give a picture of what a real single person LLC looks like, compared to a vanity hobby LLC as described by OP.
I'm a contractor with a registered LLC S-Corp in the US. Almost all of my income is 1099 from one source. I was converted from W-2 to contract when my employer was acquired, my job role did not change. You might call me a misclassified full time employee. I could report this of course, and then I would burn my professional contacts and lose my job. So I don't.
I hire myself, pay myself a fair market rate as a salary, and run a payroll just for me. And I provide myself a few benefits from the LLC, like health insurance.
I'm required to keep up with a pile of quarterly and yearly fillings between the state, county, city and IRS. This is a non trivial amount of time and effort. I have to maintain separate business books and bank accounts in coordination with my accountant. I don't actually get to access the money I earned until it exits the business entity through a controlled process. I have to file business taxes separate from personal taxes. I still have to pay quarterly estimates on my personal taxes too.
My family health insurance is roughly $12k this year. If I purchase that insurance directly, I use post-tax income to do so. I'd pay ~$4k in taxes to take home the ~$12k income used to buy health insurance. But when the LLC buys the health insurance and provides it as a employee benefit, the ~$12k is not taxed.
The salary I pay myself is taxed at ~37%. The same as if I just filed as self employed. But the business income I earn over that salary is taxed at ~20%. This is the biggest advantage. The gap between a "fair market value" for my role, and my actual contract rate. In that gap, the LLC structure saves me 20% on taxes by labeling that portion of income as "shareholder profit disbursement".
Rough yearly costs:
$150 registered agent service $150 state registration filing $2500 tax prep and account services throughout year $1500 payroll services, including payroll tax filings
Rough yearly tax advantage:
$15,000
ikidd · · focus · HN ↗
Your jurisdiction might not do that, but I'd be damn careful and if you are liable that way, they might let you off the hook on the interest if you went back and declared it correctly before they do.