this is exactly what i'm trying to say to this guy- you have multiple choices and it is up to you,how to report your profits(if any). but one have to define his goals first. need health insurance,high retirement plan contributions? form entity,report it as earned income,don't need it? report it as plain capital gains. Income Shifting or Income Splitting,write of expenses-simple LLC with Pass-through taxation and so on..
I got this quote from a website: "In other words, you don't ever actually make an "llc vs S corp" choice. Rather, after setting up an LLC, you either accept the default tax accounting classification... or you elect to have the LLC treated as a regular, C corporation or as a Subchapter S corporation." You'd have to look up the difference in taxation between C corp and S corp yourself.
I don't know about you all but here is what I am thinking... You want to pay yourself so that you can contribute to your retirement plan from trading... you first need to pay this 15.3% tax. What kind of investment do you have now that pays you a 15.3% return? Think about it. I feel that money in my pocket is always better than in the government's pocket. By the time you are eligible to collect your SS... You may be long gone before the government pays back what you have contributed over the years. And the Social Security may be bankrupted by then. Do you have faith in this #1 ponzi scheme and the US federal budget deficit acceleration? When you are employed taking a W-2, you have no choice but let your employer deduct the 7.65% from your pay. Now that you have a choice, you are willing to pay the 15.3%?
i'm not paying myself anything either,no SS taxes for me. for same exact reasons you mention above. however-it might be worth it to pay absolute minimum SS taxes,to meet the required minimum and be eligible for SS at the retirement age. i would appreciate,if someone can explain to us how SS works and if i'm right or wrong. would it be possible for guys like us(traders) to pay less and collect later more than we did contribute to SS? Thank you!
Opt789, You mention that you donât have to pay yourself a salary in an LLC and thus can avoid SE taxes. How do you get your money out of the LLC then? My understanding is that there are two ways to remove money, salary and cash distribution. Are you saying that you donât pay yourself a salary and just do cash distributions to avoid the SE taxes?
Yes, but I use a partnership not an LLC myself so what I do doesnât apply to your question, but an LLC is a pass through entity where all your income or gains are passed directly to the members of the LLC per the operating agreement (earned income passes as earned income, capital gains pass through as capital gains). So it all depends on how you set up your LLC, like how many members there are, and how exactly the operating agreement is set up because that should lay out exactly how it all works and how any salaries are paid or cash distributions are taken. Another example of how knowledgeable professionals are needed to do this correctly. If anyone is truly a profitable trader then the costs of a professional attorney to set up your entity and a knowledgeable tax person will be pretty irrelevant to your bottom line. Two posters have stated that it is better to have your money now rather than pay a salary that is subject to SE, but think about paying yourself something like 60k and putting most of that in a deductible retirement plan so federal taxes on it will be negligible. Now you have a lot of money in a retirement plan (without paying any federal/sate income tax â just the SE tax) and it now grows completely tax free. For some people that it a great way to build wealth, but for others it might not be all that useful depending on all their particular circumstances.
I may be wrong on this as I am not familiar with the details. But I think there is a limit on how much you can contribute your pay to a retirement plan. And I don't believe it can be "most". Let's say you decided to pay yourself $60k a year. I don't think you can contribute like $50k for your retirement plan after you pay out the SE tax. And that should be tax deferred not tax free I think.
I was saying it âgrowsâ tax free. As to the other, you are right I was not clear enough because it gets very complicated, e.g. defined benefit plan vs. defined contribution plan. All of that is not only beyond the scope and complexity of this website, it goes beyond most sites because there are many ways to do things depending on who you are and what you are trying to accomplish. My only point was there is not right answer for all traders even if they appear to be basically similar at first glance.
with all due respect...go ONE page back and re read my post once again..oh....you don't have to....here is the quote- http://www.traderstatus.com/whyanentity.htm # Good way to allow you the ability to create "earned income" and thereby make tax deductible retirement plan contributions of $44,000+ each for yourself and for family members, including young children. yes..up to 49K EACH and every YEAR. off course it's not going to be 90 or 99% of your salary: http://en.wikipedia.org/wiki/SEP-IRA http://www.ehow.com/how_2089596_determine-maximum-sep-ira-contribution.html