Interesting thread so far, keep it going!
My experiences so far – a bit NY-biased b/c of state laws:
I incorporated in NY in May this year, b/c I foresaw (is that a word?) a worker classification problem. I could easily sit on the fence as a 1099 or W2 for one of the places I do work for, so I decided to just incorporate, i.e. have the client 1099 me and then I W2 myself. (I've seen how messy worker classification fights can be, and how expensive as well)
I basically bill myself an hourly rate against what I receive (“Officer's Salary”), and the excess goes to other expenses, like payroll taxes and professional liability insurance. I also don't itemize on my personal income returns; I put membership fees and other expenses against the company, i.e. AICPA & state society annual dues, state licensing fees, financial news subscriptions, new printer & laptop, payroll & tax software, office supplies, etc.
I incorporated as an “Inc” instead of a sole proprietorship b/c of the liability issues, and b/c single-person-LLCs are disregarded IRS entities and taxed as sole proprietors. LLCs also have a somewhat pricey, 6-week advertising requirement to be set up in NY. I skipped the professional incorporation, which requires extra licensing registration for audit firms, b/c I'm a small fry doing relatively low-risk stuff at the moment.
Other things to keep track of and research for your state(s):
1) If you incorporate, and essentially become an officer of a corporation or an LLC partner/member, what kind of impact does this have on collecting unemployment if you are laid off from your primary job? What kind of impact does a side job have on collecting unemployment from your primary employer, i.e. would your state consider you self-employed and ineligible? I'm assuming this is all sidework, that we're hoping to grow into full-time.
2) Does your state, or your client, require you to carry worker's compensation insurance, just in general, or on-site? This can get pricey, either through the state's program or thru private carriers.
3) I researched incorporation in about 4-5 nearby states, including Delaware. Some states don't have corporate income taxes, or might have a flat rate tax, but might have yearly reporting fees, or yearly business entity renewal fees. If you incorporate in one state, you may need to apply for a business license as a foreign entity to do business in another state (and possibly subject to the same incorporation startup fees). Keep in mind there's likely reporting required in both states as well then, as a subsidiary or affiliate. And watch out for sales tax nexus issues too…
CalCPASoon:
Check out how your state has historically, or lately, treated some of those professions you've described – hair stylists, craft fair sellers. I was recently approached about something similar, and some research yielded a very gray tax area classified under “booth renters.” (These would also include tattoo shops and spas). All have gotten more IRS and state scrutiny lately for worker classification reasons, where these agencies believe that it's a way for owners to dodge payroll taxes, i.e. if I rent a chair to an artist and collect some of their revenue, are they an independent contractor or a W-2?
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