New to contract employment and owning a business

Forum|Forum|1 year ago
August 28, 2024
2 replies
0 views

Hello,

I have always been an W-2 employee until recently. I recently started a business, and contract work.

Here are some of my questions:

My wife and I have always filed a joint tax return. She is still a W-2 employee. What are the advantages and disadvantages of continuing to file jointly with her as a contract worker and business owner? Would we use the same form as before (1040?) if filing jointly? If I chose to file on my own, what form would I file with?

When hired for contract work, what are the advantages and disadvantages, tax-wise, of using my name and Social Security Number vs. using my business and EIN?

Here are a few other questions from the prewritten list that I'm still not sure about.

I started a new business, how does that affect my taxes?
How much do I need to pay in quarterly estimated taxes?
Do I have to pay quarterly estimates on income taxes to my state too (I live in Washington State)?

Much appreciated!

Anonymous

Hi Goodenow, and thank you for your questions!

You asked:

How does starting a business effect my taxes?
How much do I need to pay in quarterly estimated taxes?
Do I have to pay quarterly estimates on income taxes to my state too (I live in Washington State)?

1.Starting a business can significantly impact your taxes in several ways, here are a few:

You may owe self-employment tax on your business income. This is the equivalent of payroll taxes for employees. The tax rate is 15.3% on your net business income.
Your tax filing status changes from individual to sole proprietor (or whatever business type you form). You report business income/expenses on Schedule C and it flows through to your personal tax return.
You can deduct valid business expenses, which reduces your taxable income. Things like supplies, utilities, vehicle mileage, etc.
You may need to pay estimated quarterly taxes to the IRS if you expect to owe $1,000 or more. The amount is based on your expected tax liability for the year.

2. Yes, if you expect to owe $1,000 or more in federal income tax for the year, you generally have to make equal quarterly estimated tax payments to the IRS.

Here are a few things to consider when determining how much to pay for quarterly estimated taxes:

Estimate your total tax liability for the year - this includes income tax, self-employment tax, and any other taxes you may owe. Consider income sources, deductions, credits, etc.
Determine how much tax you've already had withheld from paychecks or other income sources. This counts toward your total tax paid.
Calculate 90% of your estimated tax liability for the year. To avoid penalties, your quarterly payments should equal at least 90% of what you expect to owe.
Divide this amount by 4 to determine your required quarterly payment amounts. You can pay a bit extra to be safe.
Payments are due by April 15th, June 15th, September 15th, and January 15th of the following year.

3. Yes, you will also need to make quarterly estimated tax payments to the state of Washington if you expect to owe more than $1,000 when you file your state taxes. The deadlines and percentage thresholds are similar to federal estimated taxes. The payments go to the Washington State Department of Revenue. Check their website for more information. Washington State Department of Revenue

For more information on this topic, please check out the following links:

Estimated Taxes: How to Determine What to Pay and When

A Comprehensive Guide to Paying Quarterly Estimated Taxes

Common Questions About Paying Estimated Taxes

Please feel free to reach backout with any additional questions or concerns you might have!

Have an amazing rest of your day!

Terri Lynn, EA

*Please say "Thanks," by clicking the thumbs up icon at the bottom of the post.
**Select the post that answers your question by clicking on "Mark as Best Answer.”

WashingtonianiteAuthor

Thank you for your help. Still looking for answers to the first portion of my questions.

When hired for contract work, what are the differences, or advantages and disadvantages, tax-wise, of using my name and Social Security Number vs. using my business and EIN?

VolvoGirl

Employee

Yes you still file a Joint return as normal. Joint still should be the best way. You will just add Schedule C for your business. Or what kind of business entity is it? Are you a Single Member LLC? If you are not a SMLLC filing as a S Corp it is a disregarded entity on Schedule C.

It doesn't matter on your tax return if you have an EIN. You give your EIN to people who pay you so you don’t need to give out your ssn. Thats if they need to give you a 1099NEC to report what they pay you.

Theausted

Congrats on starting your business and moving into contract work! Filing jointly with your wife as a W-2 employee is usually beneficial as it can lead to lower tax rates, but it depends on your specific financial situation. You’d still use the same 1040 form if you choose to file jointly. If you file separately, you’ll also use a 1040, but you may lose some benefits available to joint filers. It’s a good idea to consult with a tax professional to determine the best option for you.

As for contract work, using your business and EIN can help separate your personal and business taxes, offering better tax deductions and limiting your personal liability. On the other hand, using your SSN might simplify things if you’re just starting out, but could have fewer tax benefits.

Regarding your new business, you’ll need to pay self-employment taxes and make quarterly estimated tax payments to both the federal government and your state (although Washington doesn't have a personal income tax, there could be other obligations). Again, working with a tax advisor would be helpful to ensure you're compliant with all requirements.

By the way, if you're managing inventory in your business, you might find this guide on [removed] useful. It can help streamline your warehouse management, especially as your business grows.