I am comfortable doing our taxes and son’s - but we have all always rcvd W2s. S2 taking new job - exciting opportunity with software startup - but he will be paid as an independent contractor, at least for now.
Did a little research - see Schedule C and SE needed.
I guess he will have to do quarterly estimated tax pymts, beginning with pymt due by 4/18.
If he was to become a W2 employee before the end of the year - does he stop making the quarterly pymts? Could not find an answer on that.
Making quarterly payments is to make sure he doesn’t owe too much money at year end in order to avoid penalty. It doesn’t have as much to do if he is W2 or not. My accountant told me to make additional payments because my firm only withheld 25% of tax on my bonus. He can stop making quarterly payments when he has paid enough taxes for the year.
As a contractor, he should be able to deduct a lot more expenses than a W2 employee. I would read up on that.
Got it, thanks. I don’t think he will have a lot of expenses - working from home - he rents - phone and laptop
I guess. His travel expenses will be reimbursed. Just something new for us.
No tax expert here but I thought the point of filing quarterly as an independent contractor was different than filing quarterly as an employee. As an independent contractor you are paying both the employer and employee portion of SS and medicare payroll taxes, so 15.3%. I’m pretty sure that if your tax payments are over $1,000 per year you are required to file quarterly, because that is the way FICA taxes are collected. Again, no tax expert here but I have filed quarterly for a nonprofit in the past.
BTW I just need to say how much I dislike employers that pay their employees (usually young) as independent contractors.
That was my first reaction too. What a pain. But it is a startup with only a few people, so I get it. It’s an interesting opportunity - doing something he is very excited about - he does not have to relocate - so lots of pros. Cons are the independent contractor bit and, of course, no benefits. It is also a great networking opportunity - so hope is the company flourishes and he becomes an employee with higher salary and benefits in the next year or it leads him to his next opportunity.
Thanks for pointing out the employer and employee portion of SS and medicare. Clearly I have more to read up on.
Basically, it sucks. It is important to track, capture and deduct relevant expenses, because that is the only compensation you get for taking 15.3% right off the top. Your son will have to pay the euphemistically named, “self employment tax”, which consists of his 6.2% Social Security tax, the employer’s 6.2% share, plus the 2.9% medicare tax. It’s a huge bite out of a paycheck, and then there will likely be state tax and possibly federal income tax.
H is self-employed and we paid estimated taxes last year and this year. Before that, we didn’t; the amount we owed on his income was manageable at tax time and either we had no penalty or a very small one. Once the kids were both out of college, our tax obligation went up considerably because of losing the dependent exemptions and the AOTC. The main problem with not paying estimated taxes, I think, is that you might end up at tax time owing a lot of money that you’ve already spent.
I think it’s really important for your son to make an appointment and sit down with a tax advisor. It’s not that expensive. Have him get recommendations from people in his field. He needs to learn what sort of documentation he needs to have, what sort of records to keep and what sort of expenditures are viable tax deductions. For my independent contractor (musician) D, as a graduation present I gave her an hour with a tax guy who specialised in her field. Cost me all of $250 and got her on the right track. Let him worry about such things.
Yes, the quarterly estimated taxes cover all those things, but you need to take the SE tax portion into account when figuring how much his estimates will be each quarter.
Ok, so Federal income tax, plus both sides of Social Security plus Medicare. Honestly, this is not looking great, given the fairly modest pay.
Yes, hour with a tax advisor is great idea. I have no idea re Schedule C deductions. He rents, and would not have an office dedicated to work - so no home office deduction. Maybe some small amounts for phone, portion of laptop used for work and some basic office supplies.
Agree that an hour with a good CPA can be well worth the peace of mind and deductible. If you have a regular CPA, you can probably get a good discounted hourly rate. Ours was willing to talk to S as a favor to us, since he did our taxes. It helped S and us have a better idea of S’s options as a solo businessman, including solo 401k .
My H and I are both independent contractors. Don’t do your son’s taxes for him unless you are a CPA. You don’t know what you don’t know. Advise him to work with a professional. There are intricacies.
I’ve always done my own taxes as an independent contractor and then solo practitioner. Basically if you read through Publication 334, it will tell you what you need to know. The main thing is to keep receipts for everything and to keep track of miles if you have any. If he’s living with you I think it would be tricky to have home office expenses (that I would definitely check with CPA!), but if he’s on his own he can dedicate a portion of his living quarters to his new job. It doesn’t have to be a complete room, but it does have to be 100% for his business. The main intricacy is if you buy something expensive for your business and you are supposed to have depreciation. The tax software does it for me.
S does his own taxes with TurboTax. He is both an employee and a owns a business he runs himself. He’s never indicated any problem filing his returns–state and federal.