What are the tax differences between having someone pay my business versus paying me personally?
I will be working for someone else for a while, running a couple of dog training classes at her facility. I'll be gaining experience doing this before I set out on my own. For tax purposes, should I have her pay me personally, or write checks to my business? I don't have a tax ID number for the business yet. I read that I don't have to have one as a sole owner/member of an LLC. I haven't decided whether to file business taxes separately or not. I want to do whatever is the smartest and most efficient.
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Jun 24, 2014
First a sole owner is your name. A business name s a DBA and should be file in your hoe county. LLC is another type of organization an must have a Federal ID. Dog training at her facility does she tell you when to work, provide all equipment you may really be an employee. If you are being paid as being self employed keep track of all miles and any expense you may have. You are subject to self employment tax f you make a profit of over $400.00 There are many issues involved here Do you have a local SBA maybe get some inf. from them to help your choices.
Jun 22, 2014
Your question - for tax purposes, should I have her pay me personally, or write checks to my business?
You can’t choose whether you are an employee or independent contractor. It is a fact and circumstance test. If she pays you directly, I am assuming you are also arguing that you are a consultant. If she pays your business, this could provide more support that you are an independent contractor though a critical factor in determining the status of a consultant is also the existence of more than one client. Generally, where a consultant holds himself out to the public as being available to provide services, and maintains an independent office, the consultant may be classified as an independent contractor. The general rule followed by the IRS is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Reviewing Form SS-8 will help you make the proper determination under the IRS guidelines though this may not follow judicial law with respect to certain aspects of these rules.
So what happens if you and your employer make a mistake? That is, if your employer incorrectly classifies you as an independent contractor?
Well, there is an employer safe harbor rule under Section 530 of the Revenue Act of 1978. This safe harbor statute provides relief to employers from the IRS over the classification of workers. It also prevents the IRS from issuing regulations and revenue rulings aimed at degrading common law employment status determination. There are many rules under this section but one defense I have seen used successfully by an employer in proving a “reasonable basis” was the reliance on professional advice. It seemed fair to some courts (not all though), that when a CPA or an attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on this advice.
Your question - I don't have a tax ID number for the business yet. I read that I don't have to have one as a sole owner/member of an LLC.
For federal income tax purposes, if your single-member LLC is classified is as a disregarded entity (DE) you may use your SS # with this employer unless your LLC has employees or you are required to file certain excise tax returns. If the person you are working for requests you to complete a Form W-9, you would generally provide your SSN, not the LLC’s EIN assuming your LLC even has a EIN.
However, remember a LLC will need an EIN if it has any employees or if it is required to file certain excise tax forms. If you need an EIN, your LLC may apply for this by completing Form SS-4. Also, for practical purposes a single-member LLC may need an EIN to open a bank account or a state tax law may require your single-member LLC have a federal EIN.
Your question - I haven't decided whether to file business taxes separately or not.
You are taking the position that you should receive a Form 1009, which means you are required to file a schedule C with your tax return regardless if this falls under an LLC or not. You need to carefully account for your expenses as the IRS loves to tick and tie expenses to receipts. And yes you should hire a tax professional to help you with your taxes. If your familiar with excel you could start accounting for these expenses using this program.
You stated that your business is set up as an LLC. In general, a LLC is a business entity organized in the U.S. under state law which affords its members limited personal liability for its debts. However, when you form an LLC, remember you also have to choose how to have the entity taxed. With a single member LLC the choices are sole proprietor, S-Corp or C-Corp. You may want to elect S Corp status for tax purposes for many reasons. Here is how it works.
A LLC may elect to be treated as a corporation for tax purposes by filing Form 8832, Entity Classification Election. Once you are a corporation you then elect to be treated as an S corp by filing form 2253. If you elect to be treated as a corporation you want to elect S corp status as this is better tax wise than a corporation.
For your first election year, your corporation may file an S election at any time during the tax year preceding the election year, up to the fifteenth day of the third month of the election year (i.e., within the first 21/2 months). If the election is made after the fifteenth day of the third month of the year, the election will not take effect until the first day of the succeeding year.
Therefore, there is a choice here on using a S Corp for tax purposes though you may wish to go the LLC DE route (in this case a sole proprietor). However if you set yourself up as a S Corp (this doe not apply to an LLC set up as a DE for tax purposes) your employer would not be required to issue you a Form 1099, and you can reduce your self employment taxes by paying yourself part salary and part dividends.
Hope this helps.
May 1, 2014
I am in favor of the comments/advice given by Diane Charles, Steven Perry and Heresh Melwani. The advantage of being incorporated is at least twofold: indemnity from liabilities and the opportunity to offset qualified expenses against income thus reducing your taxable income. If my memory serves me right I doubt that as personal income your gross income would be taxable. It should depend on whether you have reached the total of your exemptions and other personal allowances.
Apr 25, 2014
I agree with most of the previous comments.
The one exception is the in the United States if you are paid $600 or more by any one person or entity your are issued a 1099 regardless of your standing as a business or individual. Also, if you are taking credit cards the credit card companies will be sending you a reporting form for all the payment they processed that went to you.
If you do not have a tax adviser I would strongly recommend you get one.
Apr 22, 2014
What is your tax jurisdiction? Specific answers will require specific information which applies to the tax jurisdiction you are located in..
Generally, you should be able to do either method but usually tax for a business income is more preferable as it is less than personal tax. Again, it depends on your specific circumstances.
I would recommend you locate a reliable tax accountant to assist you.
Apr 22, 2014
I hope I'm answering this correctly- It will always be multiple jurisdictions, as I don't plan to do any training from my home. When I was actively running my little hobby jewelry business, doing craft shows, I had a multiple location sales tax ID and filed per individual craft show. I filed the business income tax with my personal taxes, which worked out okay, as my income from that was very, very minimal.
Apr 25, 2014
your jurisdiction is also known as your tax home, the location - city and state in which the you and/or your company is located. I am located in Los Angeles, CA USA so that is my jurisdiction and where I need to look for the local and state laws that govern my business and any additional laws/taxes/information I would need to be compliant with.
May 5, 2014
Carol,
You stated that you were an LLC in your original query. Are you registered as an LLC? If so, the tax jurisdiction will be the location of your LLC.
If not, I would recommend that you create a company for your business in order to reduce the work regarding multiple tax jurisdictions and take advantage of tax breaks given to small companies. Usually, the best methods for tax purposes are through a small company setup. Most large cities have agencies that will help small businesses and entrepreneurs get started correctly. Check out your local agencies!
Apr 21, 2014
There are different rules in the different locations, in Australia if the business was in a Company it would be taxed differently, provided it passed the rules regarding Personal Services income.
I see that you are a US citizen so you would be best to be advised by a US licenced CPA or tax advisor.
Apr 21, 2014
Have her write checks to your business. Having clients pay my company, a C-corp, for my services, instead of myself, has literally saved me from paying out tens of thousands in taxes each year.
Apr 21, 2014
Though it differs in different countries, the foundational tax principle is that you are better off when your company is paid by a client rather than yourself for the reason that an employee is taxed on their gross income before any expenses are deducted. On the other hand, your company is taxed on its profits after overhead expenses have been deducted.
Apr 24, 2014
You can avoid double taxation by C Corporation pay paying yourself for the whole amount of the profit. Then you would have to pay your self-employment taxes on the schedule.
Apr 21, 2014
I'm not sure I agree with the comments about 1099's. Only Corporations (S and C-Corps) are exempt from receiving 1099's. They must be issued by mayors to LLCs, partnerships and sole proprietors.
Apr 21, 2014
so long as the business is an LLC filed on the schedule C of your personal return, not much. Every dollar of income the LLC earns (minus deductible expenses) is added to every dollar you earn before determining your tax rate.
Apr 21, 2014
Hi Carol. I agree with what most everyone has stated. As any good consultant for any business would say, "...ask your CPA...". If you don't have one, get one.
Apr 21, 2014
As a sole proprietor/single member LLC, you do not have to file separate business taxes. This is reported on Schedule C of your 1040. The difference is that if they paid your business, you will be able to deduct various business expenses. If they paid you personally, you may not be able to deduct those expenses.
Apr 21, 2014
You have a number of issues here. First, if you are paid as a contractor, from a tax perspective, if you are paid as an independent contractor and not an employee, you are self-employed. The IRS will consider you a sole-proprietor. You will have to file a Schedule C as part of your Form 1040. This is true, regardless of whether you are establish an LLC or not. To file as a business separate from your personal income, you would have to fully incorporate.
What you need to do is start keeping track of any and all expenses that you might have directly connected to your business. If you have any doubt about an expense, write it down. Let your tax pro help you determine if it is actually tax deductible.
You should sit down with a competent tax professional and develop an accounting system to use. It doesn't need to to be complicated. It can be done with an expandable file folder system and a notebook. The key is to start immediately and keep it current. If you do not want to keep up with the monthly books, hire a local bookkeeper to take care of your books. Tax time is much easier with complete records.
Steve Perry
Books, Taxes & More, LLC
678-717-9818
Apr 21, 2014
There are a few tests on whether you are an employee or a contractor. Not enough information in your message for me to determine 100% one way or another - but if you want to do a free consult, we can quickly make the determination.
If we determine that you should not be classified as a W2 employee, and you are looking at the long term, I'd suggest that you set up your business as a S-Corp / LLC. If you are doing dog training (I'm a CPA who trains Service Dogs as a hobby) - I think the extra protection of a LLC/S-Corp is good for liability/asset protection.
You would then get an EIN and separate bank account, give the person a W9 and have them pay you through this. It sounds like a lot, but its something we can do together in a few hours if you'd like.
Starting a new business for the first time is not advisable to be done via the internet message boards. You need real advice that will save you more money than the fees being charged.
Apr 22, 2014
Thanks, Jonathan. My business is already set up as an LLC. The woman I'll be working for is not setting me up as an employee- there will be no benefits, only a 1099, and I'll be responsible for keeping track of my own taxes. I am planning to set up a separate business bank account, where I will deposit her checks and that way, be able to track my income from her and set aside funds for taxes. Whether to keep the business taxes separate from my personal taxes is a big question mark for me. I also have a sole proprietorship for a hobby jewelry business (currently inactive) that I've always filed with my personal taxes. I am hoping the dog training business will grow into a "real" business, so I just want to be ready and avoid scrambling later on.
May 8, 2014
If you are going to be "gaining experience", then it sounds like you might be an employee as you would be under their control and direction.
The IRS has a form, SS-8 that you can fill out to answer this question. http://www.irs.gov/uac/Form-SS-8,-Determination-of-Worker-Status-for-Purposes-of-Federal-Employment-Taxes-and-Income-Tax-Withholding
Apr 21, 2014
There are a number of other reasons why you would want to be paid personally by this business as an employee, rather than as a subcontrator business which in my opinion you would never qualify under IRS guidelines. As an employee you would be covered by workers comp should you get bitten or injury yourself on the job. Off the book payments or subcontrator payments eliminate that coverage. Additionally, as an employee the employer is required to pay thier share of FICA on your wages. As a business that tax burden becomes yours.
May 8, 2014
You also get coverage under state unemployment insurance as well. If you folks part company and you don't find other work quickly, you may need the unemployment benefits. Also, if you didn't earn enough hours or wages before this job, this position could provide them. That happened to me once.
Apr 21, 2014
Here's the quick answer -
If you are personally paid more than $600 during 2014 (or any year), the facility is obligated to issue you a Form 1099 in January of the following year.
If you establish yourself as a business with its own tax ID number, then the facility has no obligation to issue you a Form 1099;
There are lots of reasons, tax and otherwise, as to why you should set yourself up as a business (or not). But as far as this facility is concerned, you setting up as a business only affects whether or not they need to issue you a 1099 statement.
May 8, 2014
Actually, the business in question is required to issue you a 1099 if you are a sole proprietor using your social security number or with a separate FEIN (tax ID number) and the business in question paid you more than $600 in a given year. You need to fill out a W-9 for them per IRS rules. I am presuming that you are not going to incorporate.
If you are a corporation, you are exempt for being issued a 1099. The only exception is attorneys and some professional service corporations such as those used by accountants and other designated professionals. If you do decide to go the contractor route, make sure you give the business in question a filled out W-9 for your business.
Form W-9, Request for Taxpayer Identifications Number and Certification http://www.irs.gov/pub/irs-pdf/fw9.pdf