Self Employment Tax Question

sgbrill · Feb 28, 2013

Hello All

I have a tax question for you guys with experience in this field. I lease a seat on the CBOT and 2012 was my first year trading for myself. I have all my taxes squared away, but there is something I just can not figure out. My CPA is saying I owe self-employment taxes, but I have a few former traders telling me there is a way out. Any advice?? Thanks in advance. The link below is some info I found and not sure if any accountant on here can interpret it for me.

http://www.taxresourcegroup.com/library/memo/1284.html

1245 · Feb 28, 2013

Quote from sgbrill:

Hello All

I have a tax question for you guys with experience in this field. I lease a seat on the CBOT and 2012 was my first year trading for myself. I have all my taxes squared away, but there is something I just can not figure out. My CPA is saying I owe self-employment taxes, but I have a few former traders telling me there is a way out. Any advice?? Thanks in advance. The link below is some info I found and not sure if any accountant on here can interpret it for me.

http://www.taxresourcegroup.com/library/memo/1284.html

I believe he is correct. You received the advantages of the 60/40 tax treatment but the regulation specifically says that you can't avoid the SS payments.

tiddlywinks · Mar 1, 2013

Quote from sgbrill:

Hello All
... I lease a seat on the CBOT... My CPA is saying I owe self-employment taxes, but I have a few former traders telling me there is a way out.
...

http://www.taxresourcegroup.com/library/memo/1284.html

You lease a seat. You are required to pay SE Tax. TRADE THROUGH AN ENTITY!!
Someone else can waste their time parsing definitions of trader and dealer according to the IRS and in context to IRS Pub 550.
TRADE THROUGH AN ENTITY!!

IRS Pub 550,
Commodities trader, pg 74
A person who is actively engaged in trading
section 1256 contracts and is reg-
istered with a domestic board of
trade designated as a contract
market by the Commodities Fu-
tures Trading Commission.

Self_Employment Income, pg 42

Gains and losses derived in the ordinary course
of a commodity or option dealer's trading in sec-
tion 1256 contracts and property related to
these contracts are included in net earnings
from self-employment. See the Instructions for
Schedule SE (Form 1040). In addition, the rules
relating to contributions to self-employment re-
tirement plans apply. For information on retire-
ment plan contributions, see Publication 560
and Publication 590.

FrankSlaughtery · Mar 1, 2013

AFAIK, trading through an entity doesn't change the fact that you still have to pay SE tax if you own/lease a seat. i could be wrong.

1245 · Mar 1, 2013

Quote from FrankSlaughtery:

AFAIK, trading through an entity doesn't change the fact that you still have to pay SE tax if you own/lease a seat. i could be wrong.

You are not wrong. I was a sole prop, then an LLC. SIngle member LLCs are treated like sole props for taxes. Mulitple member LLCs are treated like partnerships. You still much pay the SS tax. Once you claim to be a professional trader, your stuck.

nutmeg · Mar 1, 2013

tiddlywinks · Mar 1, 2013

Quote from 1245:

You are not wrong. I was a sole prop, then an LLC. SIngle member LLCs are treated like sole props for taxes. Mulitple member LLCs are treated like partnerships. You still much pay the SS tax. Once you claim to be a professional trader, your stuck.

If you allow the "default" IRS treatment you are correct. But clearly you didn't do your homework regarding taxes. An SMLCC is considered a disregarded entity UNLESS you choose to be treated as a corporation. The same applies to multi-member LLC; be treated as a corp instead of partnership.

Pay yourself normal wages which means Federal, SS, Medicare etc taxes, and then distribute profits as dividends or profits via 1099-DIV or K1, depending on the type of corporate treatment (C or S) you've elected. Yup, it's alot of "work" but it can save thousands annually. Besides, the LLC can hire someone and gain further deductions.

sgbrill · Mar 5, 2013

I found some more info on the subject

If the taxpayer follows King and similar cases, gains and losses may be reported on schedule D and self-employment taxes are not relevant.

http://www.journalofaccountancy.com/Issues/2001/Jan/DayTradingAndSelfEmploymentTaxes.htm

ferrycorsten · Mar 6, 2013

you cannot totally avoid SE, but you can minimize it using a SMLLC with an S election, or an S-corporation.

also, if you elect MTM through your entity, you are not stuck. closing the entity terminates the election.

1245 · Mar 6, 2013

Quote from tiddlywinks:

If you allow the "default" IRS treatment you are correct. But clearly you didn't do your homework regarding taxes. An SMLCC is considered a disregarded entity UNLESS you choose to be treated as a corporation. The same applies to multi-member LLC; be treated as a corp instead of partnership.

Pay yourself normal wages which means Federal, SS, Medicare etc taxes, and then distribute profits as dividends or profits via 1099-DIV or K1, depending on the type of corporate treatment (C or S) you've elected. Yup, it's alot of "work" but it can save thousands annually. Besides, the LLC can hire someone and gain further deductions.

You can't do that with an LLC. General partners receive a K1, not a w2. The entity pays no tax. Only the partners as it filters down to your returns from the K1. If you pay yourself a salary each month, it would be viewed as a capital withdrawal.