The Taxman Cometh

I’m an engineer (Mechanical) by trade. I hated Economics in college. I’ve done decades of Turbo Tax and finally hired an accountant. You should NOT be following this for accountant advice. If you are audited and you show this to your IRS agent he should immediately arrest you for being an idiot. That being said…I have been talking to a few attorneys and accountants in preparation for 2021 taxes. This is what I think I’ve learned. This applies to Burgers (US Citizens) and Burger laws. And our tax laws are completely insane.

Nothing in this article is meant to be illegal. It could be wrong, it could be interpreted wrong…it is meant to limit your taxes but not cheat your taxes

Why do I need an S-Corp / LLC?

Good question fellow upstanding citizens. You will want an S-Corp or LLC to limit your exposure to self-employment tax. What is this tax? Well you pay it on the first $142,800 of your taxes. It’s basically Social Security and Medicare. You pay it for all of your daytime job earnings. And you also pay it for your crypto earnings upto that max.

• Traditional Earnings + Crypto: Let’s say in 2021 you earn $70,000 in your day job and $100,000 in crypto. Total earnings of $170,000. $170,000 of that will be taxed at 32% ($54,000 in taxes) and the first $142,800 will have an additional 15.3% ($21,848). Your total tax burden will be $75,848 (Yikes)
• All Crypto Income + No Corp : Now let’s say you’ve given up your day job…the calc is identical without an S-Corp or LLC because the government doesn’t care if you’re a wage earner or crypto guru, they just want their cut.
• All Crypto Income + S-Corp or LLC: This is where the magic starts to happen. Your entity made $170,000 last year. It paid you $25,000 salary. You’re still paying the 32% tax rate ($54,000) but you are only paying 15.3% of your salary ($3,825)

By creating an S-Corp in that last example you are paying $57,825 in taxes instead of $75,848 without an S-Corp / LLC.

TL:DR If you have a wage job of $125k+, S-Corp or LLC is not really required. It’s a lot of effort for not a lot of tax mitigation. If you are full-time crypto this is a nice addition to legally limit your tax responsibilities.

Do I want an S-Corp or LLC and what is a Single Person LLC?

S-Corp and LLC’s are pretty much the same. The biggest difference is that S-Corps require more bookkeeping and record keeping than LLC’s. One accountant recommended that you start your entity as an LLC. If the IRS ever says “Hey man, a person can’t be the only entity in an LLC you need to change that” then you file form 2533 and your LLC becomes an S-Corp. There are such things as Single Person LLC’s but they do not offer the same protections of an LLC or S-Corp. If your LLC or S-Corp gets sued, your personal items are not in danger of being taken. A Single Person LLC does not offer this protection and is a bad way to protect entities.

Taking the Plunge

Hopefully this helped some. If an LLC or S-Corp are right for you then it is fairly straight forward to spin one up online for a couple hundred bucks. I’m pretty sure all of the above is correct but be sure to use a real accountant when you do this stuff for realz — I am not a professional. Burger tax law is complex on purpose. Don’t let this complexity lead you to short cuts. Talk to your accountant or tax lawyer if anything is unclear, and always be sure you are coloring within the lines of law.

The site I used for mine was IncFile. It took me under an hour and was extremely simple. I chose Delaware but spoke to our lawyer afterwards and he recommends Wyoming. Wyoming has less rules and wants to be welcoming. I will have more reporting requirements with Delaware.

Also find a standard Operating Agreement online and create one. Even if the company is just yours, have the paperwork and be ready to prove your validity if asked.

Tilt is a jolly fellow with a love for Magic: The Gathering and fine cuisine. When he's not playing his favorite card game, Marco can be found in the kitchen, experimenting with new recipes and exploring new flavors to share with his friends and family.