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Yardley CPA

Hair Stylist Filing for Corporate Status

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Client is MFJ hair stylist.  Up until now, she was receiving a W2.  With the Covid environment, beauty salons are highly requlated.  As a result, she is going to open her own business and rent a "styling room".  She is a resident of Pennsylvania and will be renting the room in New Jersey.  My advice was for her to file in as a sole proprietor in Pennsylvania which would allow her to file a Schedule C.  Does that sound correct?  I don't see the advantage of her filing as a corporation.  Is my thinking to file in PA correct?

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Reciprocity with NJ is only for compensation. If she is operating a business in NJ even as a Sch C, she will have to file a nonresident NJ return as well as the resident PA return. She'll also have her professional licensing in NJ also since that is where she is operating.

The LLC gives her liability protection but won't affect her income taxes if she is an SMLLC because it is disregarded. It will cause her to pay additional fees to incorporate and maintain that status though.

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I agree that she should register her business in NJ where she conducts business. If, she's going to register as a SMLLC or other entity. I'd also think that hair dressing requires some state licensing and maybe local health department fees/paperwork. Again, in NJ where the business will be conducted.

If her biz is a NJ entity, the entity will file a NJ return. Then, unless a C-corporation, she'll have pass-through income to her federal return which results in a NJ non-resident personal return as well as her PA personal return. If a C-corp, she'll have a W-2 from NJ and still have the NJ NR and PA resident.

As Judy says, the SMLLC won't give her much legal protection, especially since she's the one providing the services. So, she'll want a good insurance policy on her business (no matter what form it takes) in NJ.

It's so much easier to "go up the ladder" to a more structured entity as time goes on and needs change. But, "going back down the ladder" usually has a tax impact if she decides later that she doesn't want the extra reporting requirements, costs, whatever of a formal entity.

In fact, going from an employee to a business owner is a leap in the best of times. Has she really thought through what adding a new state into her regulatory and reporting mix will cost her in time and money?

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Thank you both for responding.  She is licensed in New Jersey as a cosmetologist.  She lives in PA.  She will complete the paperwork to file as a PA LLC, allowing her to complete a Schedule C.  She will obtain the necessary insurance.  At some point, she may move the business into PA, that is why I suggested setting it up on PA.  Thoughts on this? 

I know she will need to file NJ Non-Resident. 

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And, register with the NJ secretary of state as a "foreign" LLC and get her insurance for her NJ location and any local biz licenses and board of health licenses in NJ. Register for NJ sales & use tax, probably. I don't have any NJ clients, but I would guess (with what I know about NJ) that there still is more paperwork, some annual. NJ has something funky about worker's comp for a SMLLC, or used to, maybe that owner has to opt out. Spend some time on the NJ websites for the SOS and Revenue and S&U Tax and Health Dept. and...

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