ot 1099

[David Schwartz]

All of that noise really only applies to someone who’s a glutton for punishment. If you value your time, energy, and sanity, here’s what you want to do. 

NOTE: These are general guidelines that have been around for decades. But verify your choices with a lawyer and/or CPA before finalizing anything.

There are two real options.

One is if you have one single client who wants to hire you on a straight 1099 basis, and you don’t really have an office, G&A overhead (other than tax prep), or anything else that makes you look any different from an employee — in that case, set up an LLC or Corp, get a company bank account, and then get an account from PayChex or some other payroll processor to handle your payroll. They withhold and process all of your tax-related stuff, their cost is a deductible business expense, and you can pay yourself as much or as little as you like. 

The costs of the business for most folks in engineering fields will be negligable and the reduction in risks far outweigh the costs.

If you have some ideas for a long-term business building strategy, then make it a regular C-Corp or LLC taxed that way, and only take a minimal salary, leaving the rest to accrue as retained earnings. This is especially valueable if you expect to have “down time” between projects where the income stops but your expenses continue. Double-check with a CPA about the benefits for your specific situation.

The IRS regs say you can retain up to $250k by default and any other amount you can reasonably justify with corporate minutes. The business pays taxes on profits, not retained earnings, and for profits under $50k/yr the corporate tax rate (last I checked) is only 15%. (Check with the latest IRS guidelines to verify current limits.)

Business entities can be expensive, but if you want to keep a low profile and save a bunch of money, consider one from Wyoming. Don’t forget that you’ll need to have a real office address there as well, which isn’t very expensive. 

You’re going to need an EIN for the business to open a bank account. IMPORTANT: get the form from the IRS website, fill it out and file it yourself. The part where it asks for a contact person responsible for the taxes can be left blank. If you do this online, they will FORCE you to declare that info. If you read the relevant tax rules, it’s OPTIONAL. If you pay the outfit that sets up your biz entity to file this form, they will charge you $50-$75 and fill out the entire form, and you’ll need to sign it, then send it back to them to put in the mail. DO IT YOURSELF!

You might want to have a friend or family member hold some stock and act as VP of something so they can respond to written inquiries about you. You want to give the appearance that you’re an employee of this company, not a sole shareholder. This is also smart in case something happens to you. 

As an aside, if you’re just a one-person shop renting yourself out for one project after another (none that run simultaneously) then seriously consider a regular C-Corp. That’s because a lot of places will hire you on a corp-to-corp basis, but NOT if you’re an LLC! This is due to liability reasons. (If they get sued for something their client alleges you did, they’re going to sue you. If they get a judgement, an LLC can be virtually impossible to collect from and will actually cost them money while waiting to get paid. So a lot of agencies simply will not do Corp-to-LLC. Just say’n.)

Alternatively, if you have multiple clients, then it’s still a great idea to have a business entity, and it’s still a lot easier for you to use PayChex or some 3rd-party to handle your payroll. But there’s far less chance of something happening that would have the IRS come back and rule that you were actually an employee and declare your business entity as simply a tax dodge. It’s easy for them to do, and it happens. Working with a 3rd-party payroll outfit like PayChex also goes a long way towards defusing that situation as well.

Even if you drive for Uber or Lyft periodically, having a second verifiable income stream besides your one client makes a big difference in whether you might be considered an “employee” or a “contractor”.


-David Schwartz




> On Aug 19, 2022, at 4:21 PM, Steve Litt via PLUG-discuss <plug-discuss at lists.phxlinux.org> wrote:
> 
> On Wed, 2019-05-29 at 06:43 -0700, Andrew McRobb wrote:
>> Yes, you still have to report your earnings and pay taxes and I would
>> assume the feds would get idea how much you make on your employers
>> bank account statment. I wouldn't mess around not paying taxes, it could
>> very much royally bite you in the butt by the IRS down the road.
>> 
>> I suggest asking around for a good tax accountant to help you with this.
> 
> I've been 1099 ever since 1982 and I concur with everything Andrew says, and would
> like to add more. When I say "you" in this email, I mean anyone contemplating 1099
> for the first time.

-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://lists.phxlinux.org/pipermail/plug-discuss/attachments/20220820/d68e4585/attachment.html>