I was contacted by a law firm and asked to be a confidential technical consultant on an active legal case. After reviewing their case, I agreed to do this. I think they have a good case (that I agree with), and my area of expertise and experience fits their case very well. I will not be a testifying witness, only a confidential technical consultant to the legal team. Their engagement letter I just received confirms all of this. Obviously, I cannot provide any details. I have already cleared this through my current employer's conflict of interest process and legal department. As long as I do this as an individual, no issues there.

I have a couple of questions:

1. At what point does me forming an LLC become useful? At this point, I'm considering this a one-time thing and have little interest in making this a normal side-job.

2. We've agreed on an hourly rate. Do I charge tax when I invoice them for hours? I will be reporting this income next year as guided by Turbo Tax.

LLC will protect you from general liability but in most States does not protect you from professional liability, malpractice. So, it protects you assets outside if the LLC from general creditor claims, Beyond that no use and a waste of effort.

If you are the only "member" of the LLC, it's a "Single Member LLC" and as such for IRS purposes is a "Disregarded Entity" for tax purposes so the income and related expenses will be reported on a Schedule C as a Sole-Proprietor - no difference than if you just operate as "Joe Blow DBA "The Smart Guy".

As to Sales Tax, that's a State specific thing. If your State requires Service Businesses to charge Sales Tax, then you must charge it and remit to the State for the amount of Sales Tax collected.

As a cash basis taxpayer, you record the income when received and deduct the expenses when paid.

Hope this helps.

I have provided consultation to attorneys in the past. I request a retainer up front and work off of that. Once the max is reached, no more work until additional monies received. I typically charge more for this work because it is professionally challenging and difficult. In court testimony is billed at a higher rate. Law firms will expect detailed billing. If you speak to the attorney on the phone there is a fee for that. Attorneys are very challenging and forensic work can be very lucrative. Your CV should be well written and up to date. Hope this helps.

No sales tax it is a professional service. Trust me they will 1099 you.

quote:

No sales tax it is a professional service.

Is that dependent on the state? Are there states that do impose sales tax on services?

Here in Florida, if I provide service and nothing else, there is no sales tax. However, if I sell you something tangible in conjunction with the service, then the whole ball of wax -- the tangible item and the previously tax exempt service -- becomes subject to the sales tax.

I’ve never had a consulting expert (or a testifying expert, for that matter) charge sales tax. Moat are individuals and not entities.

You meed to talk to a local tax CPA or lawyer.

I have done consulting in several states.
Each state is different. I have had to file nonresident returns in several states

A quick glance of the New Mexico tax site...

...Generally speaking, sales and leases of goods and other property, both tangible and intangible, are taxable. Unlike many other states, sales and performances of most services are taxable in New Mexico....

Never did business there. Get a local expert.

https://www.taxjar.com/states/...-nexus-in-new-mexico

quote:

Originally posted by V-Tail:

quote:

No sales tax it is a professional service.

Is that dependent on the state? Are there states that do impose sales tax on services?

Definitely. NC, for one, on certain services. article link I don't doubt there are many others.

OP: Consult your tax advisor and/or CPA.

RE: LLC. They can give some legal liability protection but those don't come for free. Do factor in the extra costs: forming it up (you'll want legal advise), getting bank accounts (fees?), additional tax return prep (Fed, and state if you have state income tax), possible state/local licenses/annual report fees, etc. Yes, those costs will be deductible on your LLC's return, but there are still net costs after tax. It may make sense, it may not, but do the math.

It may make more sense to investigate a liability insurance policy, (or seeing if you can get/extend a liability umbrella policy over your homeowners insurance that would cover this) instead.

The tax question seems simple enough and a phone call to a CPA should handle that part.
Maybe negotiate a liability insurance policy that covers you into what the law firm pays you and some sort of indemnification agreement from them.

quote:

Is that dependent on the state? Are there states that do impose sales tax on services?

^^^^^^^^^^^^^^^^^
Currently, only three states have a tax on legal services – Hawaii, New Mexico and South Dakota – which takes the form of a gross receipts tax in each state. One state, Florida, did impose a sales tax but problems with the cost of administration and enforcement led to its prompt repeal.

I own and operate a small business in Florida. I am responsible for collecting any applicable sales tax from my customers and remitting it to the state, so while not an accountant, I have been doing this for more than twenty years, have read the instructions carefully each reporting period, and have always been in compliance, so I do have an understanding of how this works.

There is no sales tax on service, unless there is something tangible sold as part of the service. Example: Suppose I pay a mechanic (auto, or airplane, doesn't matter) to adjust the framistan. The mechanic has some specialized tools, has training and certification, and the framistan is not easy to access, some other parts need to be removed, so several hours of labor are involved. The mechanic bills me five hundred dollars for this service. No sales tax.

Now, suppose that during the process, the mechanic notices that a rubber grommet is worn and needs to be replaced. He installs a twenty-nice cent grommet as part of the job. Total cost of the job is now $500.29. Sales tax is charged, not only on the grommet, but on the total $500.29.

Next scenario -- I am aware of how this works, so instead of letting the mechanic supply the grommet, I go next door to a different business and buy a twenty-nine cent grommet and pay sales tax, maybe one penny, on this. I then hand the grommet to the original mechanic, who completes the job. He has not sold me any parts, so he just charges me five hundred for the service, no sales tax.

But wait, that's not all! State sales tax here in Florida is six percent. Counties or local governments can add a "discretionary" increment. Some locations are zero, others might go up to 1.5% -- I don't know whether there's any statutory cap on this, but I am not aware of any that are higher than that.

True story -- I bought a new SIG P239 from a local store. I live in Seminole county, sales tax with the local add-on is 7%. The store is located just across the county line, in Orange county, sales tax is 6.5%. However, the store did not have the P239 that I wanted, in stock, so they got it from another branch, located in a county where the sales tax was 7.5%. Confused yet?

When I went to pick up the pistol, they had an invoice for me from the store branch where the pistol came from, showing sales tax at 7.5%. I pointed out that this was not in accordance with Florida Department of Revenue rules, that state that the sales tax should be imposed at the rate at the point of delivery, which was 6.5% at the store where I took possession. The teen-age zombie who was ringing up the sale was not able to comprehend what I was saying, I gave up and just paid the extra 1%. I could have filled out a bunch of forms and gotten a refund from the Department of Revenue, but my net would have been around six bucks for maybe an hour's work, and my time is worth more than six dollars / hour.

Bottom line: The OP asked about sales tax for service (legal consultation). The answer to his (her?) question is that it depends on the state, and possibly on local jurisdiction within the state. Check with your state Department of Revenue (or equivalent), they will be able to tell you. Also, I would suggest NOT doing this via a phone call, which might later degenerate into "he said, she said." I would write a letter with the question, so that the answer is documented in the event that there is a question down the road.

I ran my own LLC doing Consulting and Design and Programming for almost 25 years and V-Tail nailed it.

quote:

Originally posted by flesheatingvirus:


2. We've agreed on an hourly rate. Do I charge tax when I invoice them for hours? I will be reporting this income next year as guided by Turbo Tax.

I'm going to assume they hired you as a contractor. As a contractor, you're responsible for your taxes. Turbo Tax will treat this as a business. Be sure to keep track and document any associated expenses to this business. Even for capital equipment you may need to purchase to support this business even if this is only one time. This is good as there are assets that may have longer than a year's life but can be expensed completely in the year the expense occur.

You'll also have to pay both sides of the social security tax.

Rey --

You are talking about things like income tax, payroll taxes, etc.

That was not the OP's question. He was asking about sales tax, totally different from the taxes that you are talking about.

quote:

At this point, I'm considering this a one-time thing and have little interest in making this a normal side-job.

Since this is most likely a one time deal, and not a business as a going concern, it's probably nothing. I'd still talk to a CPA. Perhaps New Mexico does not legally care about a one time deal. There's a good chance New Mexico may not go through the trouble of issuing you a sales tax permit for a single occurrence.

Perhaps you could phone the New Mexico State department of whoever regulates taxes and ask them. Provided they actually answer the phone the same day, as you know since the covid crap it's tough to get anybody on the phone in government and regulation.

Best wishes to you.

quote:

Originally posted by V-Tail:
Rey --

You are talking about things like income tax, payroll taxes, etc.

That was not the OP's question. He was asking about sales tax, totally different from the taxes that you are talking about.

Maybe, maybe not. I don't see in the OP where he mentions sales tax. It was sailor1911 who mentioned sales tax. I got my idea he was talking from him talking about "reporting this income next year as guided by Turbo Tax." If there's any taxes related to Turbo Tax, it would be income tax. In any case, sales tax doesn't apply to a contractor providing services which is what he is.

quote:

2. We've agreed on an hourly rate. Do I charge tax when I invoice them for hours? I will be reporting this income next year as guided by Turbo Tax.

When I saw his question, "Do I charge tax when I invoice them for hours?" my thoughts immediately jumped to sales tax, because when I generate invoices in my business I have to mark each line item as taxable (sales tax) or non-taxable, unless my customer is a reseller, in which case s/he is responsible for dealing with sales tax and is tax-exempt from my end.

I guess that my frame of reference led me to the sales tax conclusion, so I could be off base there.

As far as Turbo Tax goes, I have not seen that for a while, but I would think that it calculates income tax due by looking at gross sales, then backing out expenses such as sales tax paid. Not sure, since I have not looked at Turbo Tax recently.

Before we get too deep in the weeds on wether to charge tax, if it is applicable, I have another question...

You agreed on an hourly rate. Why would the attorneys not assume that any taxes are not included in that agreed to fee?

Turbo Tax has a section for all expenses incurred in doing business including meals and lodging and everything else including automobile expenses. It subtracts the expenses from your gross income and then puts the final figure on your 1040.

quote:

Originally posted by ZSMICHAEL:

quote:

Is that dependent on the state? Are there states that do impose sales tax on services?

^^^^^^^^^^^^^^^^^
Currently, only three states have a tax on legal services – Hawaii, New Mexico and South Dakota – which takes the form of a gross receipts tax in each state. One state, Florida, did impose a sales tax but problems with the cost of administration and enforcement led to its prompt repeal.

You're talking state level sales tax. There are other taxable jurisdictions. FOR INSTANCE...at least three of the Alaskan boroughs (counties) I operate in require the collection of sales tax for professional services.

OP... the advice about billing them like they bill their clients, in that you obtain a retainer which you bill against, is EXCELLENT advice. We do this for services we provide anyone associated with litigation. In our experience, the second the law firm achieves a settlement or the suit gets dropped, really the second they no longer need you, they stop paying you. If they owe you money, you'll have a difficult time getting it. It is always easier to refund a balance than to collect a balance owed.

We are very clear about rates, cancellation fees, non-accrual of interest on retained funds, taxes, and literally every other minutia involved in the contract. You cannot use enough clear and concise language when it comes to dealing with lawyers. Also, you cannot charge enough. Do not underestimate the amount of time you will spend emailing and answering phone calls for non-related questions, the scummier lawyers will waste time like this to keep billing their client. Keep in mind that every minute they email or talk to you, they are billing their client. Adjust your billing time appropriately. Just be clear about what you bill, and how you will bill. Also be clear about when money is due, and the form of payment.

Notice the trend? Everything goes in writing. Anything discussed over the phone, gets a follow-up email re-stating what was said on the call.

Whatever taxes potentially applicable outside of sales tax are of no concern to the client. When they engage you to perform a service, you should have already calculated your tax implications and accounted for them in your rates.