Would anyone here that trades their own account as a member of an LLC know if the trading gains are subject to social security and/or self employment taxes? Also, are you required to pay quarterly estimated taxes?
I cannot imagine that trading income would ever be subject to payroll taxes. But, money withdrawn from an LLC may be subject to those same taxes, if paid in the form of salary. Unfortunately, I am not that familiar with LLC taxation vs. sole proprietor or c-corp taxation and cannot give you a direct answer. Regarding quarterly reporting. Maybe. The LLC must file a form 941 on a quarterly basis if the company has any employees.
I understand that the IRS or Tax Courts have not acted on this particular issue directly, yet... My acct and atty say that it might be (egads) up to an individual IRS auditor and his supervisors to decide on what course to take. I certainly wouldn't want to be the test case on this particular issue. If you haven't already spoken to a tax professional about this, I would suggest that you do so Cheers
Section 475(f) is the applicable section of the tax code. I assume the question relates, in general, to FICA taxes on a "professional" trader. The LLC makes a mark-to-market election. The income paid to the trader is CAPITAL GAINS INCOME THAT RECEIVES ORDINARY INCOME TREATMENT. Consequently, the income should be exempt from FICA taxes. I'm not a CPA, but I did fail the CPA exam 20 years ago (and, no, I didn't stay at a Holiday Inn Express last night). That's why I'm a trader. This situation was reviewed for me by a tax attorney at a very prominent firm. He agrees there's no SS tax. Unless you deal with a CPA who has done traders' returns, the CPA will probably insist you pay SS Taxes. My CPA tells me I don't need to also make a mark-to-market election. However, if you are not trading through an LLC, I suggest going to www.irs.gov and do a search on "trader taxes" This will bring up a nice little IRS publication on the subject. It's pretty clear after you read it. If you find anything different, please post. Now, here's a little problem I wasn't aware of---if you make over $128,500 per year, your itemized deductions are phased out at the rate of 3 % of the excess to a maximum of 80% reduction!! So, don't make too much money!!!!!!!
Here's an old thread that answers a lot of tax questions from thestreet.com: http://www.thestreet.com/talk/chats/786189.html
wait a minute - the IRS whacks everyone with a social security tax. As far as I know, if you're employed, you and the employer share the tax, and if you're self-employed, you have to pay the whole thing yourself (somewhere near 13%). Why would it make any difference if you are a trader instead of a doctor or accountant with his own business? seems you'd still have to pay the SS tax, whether you're classified as a professional trader, an LLC Member, whatever. Otherwise everyone would start LLC's, no? If I'm wrong, please let me know.
If you are a meat (if meat doesn't work call it real estate) salesman and you are holding meat real estate for delivery. you charge a five percent markup for the meat/re. Now you buy a huge shipment of meat and overnight it is determined that your meat is the only meat in the u.s. without mad cow. Your meat goes up from being worth 10,000 to 100,000. Your commission is normally 500 now, five thousand. How would you pay your taxes. Would pay ss on 5,000 and call the 90,000 profit a cap gain or would you pay ss on 95,000. I made this analogy up and who nows maybe you will tell me it is a futures contract but it should illustrate why you might not always have to pay ss tax. two - while I was researching this issue I actually read and I still find it hard to believe that if you set up a business as a certain type of a corp and pay a reasonable salary, you do not have to pay ss on the distribution to shareholders and in certain corps this distribution is not subject to double taxation. I wondered how come my tax friends did not advise me to incorporate my non-trading business when I had one.
Prior to taking on the challenge of trading full-time, I had a career as a tax attorney, my specialties being the taxation of pass-through entities, corporations, financial instruments, and international transactions. I mention this because it astounds me that people who daily risk tens if not hundreds of thousands of dollars in this business don't pay a few hundred bucks an hour for competent counsel. One should be careful to not freely give legal advice in a forum like this and one should be even more careful to not take such advice seriously. And that goes double for tax advice. When it comes to taxes, there are just too many issues that a layperson (and this includes all non-tax lawyers) cannot begin to comprehend. This is not intended as professional advice, but I will state the following. Whatever position a taxpayer takes on his return, the primary concern is whether that position will be upheld if challenged by the IRS. If the taxpayer's position is not upheld, back taxes and interest must be paid, which is not necessarily a bad thing considering the time value of money and the less-than-100-percent chance of an audit. The pain comes from the penalty for taking an unsupportable position. However, this penalty can be avoided if the taxpayer relied on "substantial authority" for his position. I won't go into what constitutes substantial authority. Any tax lawyer worth his salt should be able to advise his client to avoid such penalties. Paying for good counsel is never a bad trade.
I am searching for the appropriate entity within which to trade; LLC, Limited Partnership (C Corp. as GP), or other. Can anyone suggest a professional who can advise me about this. I am in California.