Wife is a dental hygienist and several of her friends have started LLC's due to the way they're being paid as contract workers now. We're in Colorado and I'm most likely just going to setup a meeting for her and a CPA but was wondering if it would make sense to just start the LLC now and then look at doing the S-Corp later, but wasn't sure if there is a threshold of earning that makes sense?

Thanks

I'm not in colorado, I'm Texas, but we set up a S Corp when we opened last year. Saved a bunch on taxes. You have to pay yourself a salary and take the standard employment taxes out. But you skip self employment taxes. Anything made over the salary counts as dividend income and not subject to employment taxes. At least that was how I understood it.

Also, the LLC should buy her a work vehicle.

agdaddy04 said:

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Wife is a dental hygienist and several of her friends have started LLC's due to the way they're being paid as contract workers now. We're in Colorado and I'm most likely just going to setup a meeting for her and a CPA but was wondering if it would make sense to just start the LLC now and then look at doing the S-Corp later, but wasn't sure if there is a threshold of earning that makes sense?

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Regardless of whether you do an S-Corp or LLC, make sure you keep all business money seperate from personal money. For sure have separate accounts and keep them separate.

S corp set up is under an LLC and it's only a pass through entity. All shows up on personal returns.

agdaddy04 said:

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Wife is a dental hygienist and several of her friends have started LLC's due to the way they're being paid as contract workers now. We're in Colorado and I'm most likely just going to setup a meeting for her and a CPA but was wondering if it would make sense to just start the LLC now and then look at doing the S-Corp later, but wasn't sure if there is a threshold of earning that makes sense?

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Many attorneys (I am not an attorney) will advise forming and LLC and then making the S election. They suggest doing so for better liability protection. Fewer formailties to mess up (e.g. shareholder meetings, board meetings, etc.) and your CPA or your attorney can discuss charging orders with you (my understanding is that matter varies by state). If you go this route, you have a set time frame in order to make the election.

Also, if you do go with the LLC then make an S election, be sure that whoever does your LLC documents doesn't include any language (such as special allocations) that would bust your S election from day one. Alert them that your intent is to form an LLC and be taxed as an S corporation. Typical boilerplate language will often mirror partnership language and include the problematic wording. This mistake is not unusual. (Less likely to happen with a single member LLC though.)

She is in no better tax situation if she forms an LLC and does not make an S election than she would be in working as a contract worker without an entity, all on Schedule C and all of her earnings would be subject to SE tax. The game we all play is on how much salary to take (that part is subject to social security and medicare, plus the company match) versus the amount taken out as a distribution (some call that a dividend, but it isn't) that is not subject to SE tax. Get your CPA's opinion on that split. Some of us are more aggressive than others. Personally, I pushed the envelope on my own further than I should have but was never examined. Then you can run the numbers to see if the savings of being an S corporation offset the cost of an additional tax return and the quarterly and annual payroll report preparation. She could likely do the payroll reporting if she has the time, just get someone to show her the first go round. Will also have a franchise report, but she can certainly do that herself.

You can also go up to like $66k for contributions to your solo 401k but that # is based off what you pay yourself in salary. So if have the ability to contribute a lot then it makes sense to actually pay yourself a higher salary.

Tax savings from additional contributions >> extra SE tax paid.

Some work for multiple places

Gotcha. Sorry didn't read the article. Just figured if working for multiple would be independent contractors.

The ability to work for others is one of many factors consider when determining whether a person is an employee or an independent contractor.

People forming an LLC or other entity typically underestimate the time involved and recurring administrative cost involved.

Quarterly filings and all the other bs that goes along with it may not seem like a lot now, but it adds up. It's another time suck that distracts from your primary job.

Best thing you can do in this type of situation is get set up with an accountant to keep track of all this stuff and keep filings up to date.

So I caution people to factor in the cost of that unless they like the constant drone of administrative paperwork and have the time to burn.

Thank you for this information as well. It seemed weird to me. She currently works part time for a dentist, and she is considered an employee there. It's not necessarily working out there and she's been approached by other offers that seem to all pay as contract workers. That's apparently how they also handle temp workers in Colorado. Colorado is a little different in that hygienists can own their own practice, but she's not looking at starting her own right now.

combat wombat said:

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As a CPA, I would seriously doubt that a dental hygienist qualifies as an independent contractor.

These are the Texas "rules". https://www.twc.texas.gov/files/businesses/form-c-8-employment-status-comparative-approach-twc.pdf

I realize you're not in Texas, but I can't imagine that the rules are all that different. I would consider anonymously reporting all of these dentist treating employees as independent contractors.

Here's an article from the Colorado dental Association. https://cdaonline.org/news/latest-news/is-a-hygienist-an-independent-contractor-or-employee/

Your wife is losing MONEY (employer taxes that she has to pay herself), benefits, and protections because ignorant or crooked dentists don't want to pay their share of employment taxes.

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The worker classification issue and determination would be a federal matter, not a state matter. The hygienists would be employees and I don't think there is any doubt about it. Employers have misclassified workers for several reasons, sometimes every employee. Not only to save on employment taxes (the SS match but also state and federal unemployment, but also to exclude them from insurance benefits, and (more in the old days) to keep from having to provide them pension benefits.

Though I am retired now, one thing I have seen a few times in the past couple of years is when a construction company (pipelines and the like) will grossly underpay some of their people (I have seen it with inspectors and job foremen mostly) say $20 an hour instead of $70 an hour. Then pay them $80 a day because they use their own pickup, $40 a day for using their own laptop, $50 a day for using their lowboy trailer, $60 a day for use of their own side by side UTV. They also get per diem, which is legit, but the employer treats all these other payments like per diem, i.e., no reporting to the employee. All they get is a W-2 for the $20 an hour.

Another pitfall is trying to look at tax treatment and liability risk in the same way.