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Put the profits into the LLC and distribute it the next year as capital gains. Not earned income so gets taxed at lower bracket and no SS or medicare taxes.Originally Posted by zengrifter
Let me die in my sleep like my Grandfather.
Not screaming in agony like his passengers.
That doesn't sound right. LLCs are generally pass-thru on income. And, you must (and should) pay SS and Medicare. If you don't pay them through withdrawal, you must pay them through unincorporated income tax.
Last edited by Norm; 03-09-2013 at 05:14 PM.
"I don't think outside the box; I think of what I can do with the box." - Henri Matisse
Do you pay SS and medicare on your passive investments? The money is distributed as a capital gain, not as income. You didn't make the money, the corp. did and it distributed the profits to the shareholders.
Let me die in my sleep like my Grandfather.
Not screaming in agony like his passengers.
Careful here. I believe you can chose to have an LLC taxed either as pass-thru income, or as a corporation. If pass-thru, you pay ordinary income tax. If as a corporation, you could declare capital gains on your personal income tax if the distribution was profit, not salary. But, in that case, the LLC would also be taxed for income prior to distribution and you would end up double-taxed.
I'm far from expert. This would definitely require an accountant.
"I don't think outside the box; I think of what I can do with the box." - Henri Matisse
Yes, the LLC is taxed first, but the combined rate is lower than your individua lincome tax rate rate as you are avoiding the almost 15% SS and medicare taxes, and paying capital gains tax rather than income tax.
You absolutely should not do this on your own, and most certainly need a good accountant. Nor should anyone take tax advice from a chat room.
Last edited by shadroch; 03-10-2013 at 10:55 AM.
Let me die in my sleep like my Grandfather.
Not screaming in agony like his passengers.
Norm is right here. Shadroch, I believe you are conflating business income with capital gain or dividend income. Business income, from a partnership, LLC, or S-Corp, is ordinary income.
If you are unincorporated, you pay income and payroll tax on all of your winnings. If you incorporate as a C corp, you pay corporate income tax, then dividend rate (not capital gains rate) when your receive distributions. There are some arcane exceptions that would re-categorize your distributions as something other than a dividend, but they are WAY outside of the scope of anything you would be doing as a professional gambler (usually moving capital property around, selling stock, etc.)
Now, if you incorporate as an S Corp, you would pay income tax on everything. But, you would only pay payroll tax on the part categorized as "salary", while the part categorized as business income would not be subject to payroll tax. The IRS expects you to pay yourself a "fair" salary, but the controversial issue here is "what is a fair salary?" and I can't answer that question without giving tax advice.
Also note that, when setting up an LLC, you can choose to be taxed as either a C corp or S corp. So, your legal entity is an LLC, but your tax entity is a C corp or S corp.
The Cash Cow.
Make sure you have a tax precedent where they allowed someone else to do what you are doing if you are painting outside the lines. The IRS will flat out tell you you can't do something you can until you show where they allowed another to do the same. Then they are like oh okay. I know someone that was audited twelve years in a row and was told each time he couldn't do some of the stuff he did on his taxes. In the end each one was accepted as submitted in the long run. The thirteenth year they tried auditing this person again but he said he would take legal action for harassment and hasn't been audited since.
Its not painting outside the lines. I have this set-up for my comic business, and have for the last decade or so. While most hobby dealers use a different method, this metho has been audited and shown o be acceptable to the IRS. discussions with my accountant tell me that if i were ever to pursue BJ fulltime, it would be best to operate it as a separate. corp.
Let me die in my sleep like my Grandfather.
Not screaming in agony like his passengers.
I guess we have different definitions of painting outside the lines. My definition is it will trigger an audit and need to be able to be successfully defended. Like I said just because you can successfully prove what you did was legal the IRS will tell you at the audit it is not until you show otherwise. Many people lose out when they haven't done anything wrong because they are not prepared to defend actions that are likely to trigger an audit. Tax accountants may not want to have you use these because they might not want to deal with an audit. Many are no doubt fine with it and have established a relationship with the IRS that makes these knee jerk audits less likely.
Last edited by Three; 03-11-2013 at 10:22 AM.
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