[smileysteve]

* Should you create an LLC? It's a pass through tax entity, and as an individual developer, you are not abstracting much liability here.

* Should you incorporate? Maybe, see the next point.

* You should consider an SCorp, your overall payroll tax liability can potentially be reduced. You should talk to your tax lady more.

* LLC does not affect your taxes much. You will have an additional ScheduleK to file each year.

* Should you be a W2 employee of the LLC? If you're an owner and employee, you need to not be w2. If you form an SCorp you should make yourself w2 and pay yourself a minimum reasonable market salary (i.e. 100k instead of 200k) year. You can then dividend yourself the other 100k, which will save 15% (payroll tax) and potentially move your income into capital gains instead of payroll tax.)

Other advice, make sure that you look into all deductions you may be able to receive (especially if you don't have benefits through another employer). This includes health insurance, retirement, benefits, use of car (it's a meeting not a daily commute if you travel onsite), use of house / office, domain names, server costs, business equipment (new laptop / mobile devices), and business services (part of your cell bill, part of your internet).

[loumf]

The whole W2/SCorp thing you are talking about is a commonly held belief, but there are details you are getting wrong that change its efficacy.

1. There is a maximum income for the payroll tax which in 2014 was 117,000. Which means that in your example (making 200k and only paying on 100k), would not save them tax on 100k. They would only have needed to pay on 117k. So they are saving payroll tax on 17k, which isn't worth the trouble.

2. This person has a regular job. Lots of engineers already make more than 117k, so they might already be maxing the payroll tax. In that case, they save nothing.

3. The way that many try to game the system is to try to report that the "reasonable market salary" is low -- which might work if you don't already have a job doing what your 1099 work is. If you do, you might have a hard time explaining that to the IRS. If you only do 1099 work, you can site labor statistics (and the median might be in your favor).

The whole SCorp thing that you see recommended works best if you

1. Make near or more than the payroll max (117k)

2. Live in an area of the US where the median developer salary is low, say 50k.

3. Do not have a long salary history of making a lot more than that in that area.

In that case, you save the payroll tax on 117k-50k. Even if you make 200k, you only save the tax on 117k-50k.

I am not an accountant, and this is not accounting advice.

[smileysteve]

Thanks for pointing out those issues, especially given my example.

One thing upon further thought on the 117k. Self employment and W2 in an Scorp involve paying both the employee portion and the employer portion. ~15%. The 117k limit applies only to the employee side and only to social security (not medicare/OADI).

Beyond payroll taxes, it is possible that the Scorp might be able to have some income below the additional ordinary income on tax rates. (Mostly on true if the Scorp can keep its income below 34% rate (at the ordinary income rate ~ 28% at 90-180k)

I am not an accountant, and this is not accounting advice.

[loumf]

Self employment tax (the equivalent of the employer side in W2 work) does max out at 117k.

It's complex, and I think that someone doing sidework would not benefit enough from an scorp to make it worth it. Someone doing it fulltime that makes a lot and can claim low normal wages should look into it.