I am trying to make some extra bucks on side. as I am full time employee for my entire career, I have enough experience that I can do side work with very less efforts and make some extra money.
(I am in IT field)
now, with full time, i never have to worry about tax savings with deductions as it’s straight forward, and i do standard deductions.
but with having contracting work, I am NOT sure which is best in my situation
- 1099 vs corp2corp rates, and how do i maximize my tax savings while working as contractor (remote work)
- do i open a corp, and then make me employee of that corporation?
- if opening a corporation is beneficial, do i open in same state where i live? or i can choose any state(with less tax brackets) and show myself as an employee from California?
any tips, any experience you have had in the past which can help me save even extra bucks are appreciated.
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I’m pretty sure you don’t owe taxes to the state where the business is registered – you owe taxes to the state in which the business operates.
Since there’s usually no liability issues in IT work, It’s just a trade off between self-employment tax, personal income tax, and corporate income tax (if there was liability involved, that may tilt the balance towards incorporation to separate corporate liability from personal liability).
Generally it depends on your state and on how much you plan to make. CA requires you to register the business in CA, so if you register in another state, you’ll have to register as a foreign corporation in CA and pay exactly the same CA taxes as a CA-registered corporation. CA has a minimum corporate state income tax of $800/yr.
Since this income will be in addition to your regular job, your personal income tax bracket is likely to be higher than your corporate income tax bracket (due to the recent tax law changes), but because of this minimum CA tax, it all depends on how much you are going to make per year – either your minimum corporate income tax or your savings from incorporation have to exceed $800/yr.
I don’t think there’s any difference in payment rates between 1099 and corp2corp – either way the payer does not pay any taxes on your behalf. There may be something about employee benefits, but contractors are not employees and don’t have all the same benefits AFAIK.
You mentioned deductions, but didn’t ask any questions about them. Business deductions have nothing to do with being self-employed vs being employed by your own corporation. In one case you deduct expenses from your 1099 income and pay taxes on the difference, in the other case you deduct expenses from revenue and pay taxes on the difference. Either way you pay no taxes on deductible expenses. Also, the concept of “standard vs itemized deduction” has nothing to do with business deductions. You should probably familiarize yourself with irs.gov.
IANAA (I am not an accountant), but you should be able to open up an S corp and pay yourself through that. The S corp can have all the income, and you can pay yourself a nominal salary, and then receive the remainder of the money as a distribution, which doesn’t require paying of self employment tax. If you’re going to be doing a good amount of work or for a while (many years), it may be worthwhile. s corps need to be setup and that all costs money, and some additional filing requirements annually, so what you’re saving (15% in self employment tax) needs to be worth paying the extra fees annually.
See an accountant!
I am an accountant. The simple answer to your question about incorporating is… it depends. It depends on how much you think you are going to make over the life of your contracting business, how much you want to spend setting it all up before you even make a dime and figure out if this is really what you want to do, and how much time/money you want to spend monthly handling payroll rather than just taking the profits.
Agree. Ongoing compliance costs (in terms of time and money) are likely to offset any tax benefit that may be available unless you’re generating significant income.
And proof that I put my money where my mouth is: I work full time and have a side business as a tax preparer. My business is set up as a sole proprietorship. I would probably have to make at least $20,000/yr in profit before I considered setting it up as a single member LLC or Limited Partnership and dealing with the headache of payroll and all that is involved (or paying a payroll service to handle it). I’m sure there are people that will tell me the breakeven point is much lower than $20,000. But the savings aren’t that large and the initial time and effort investment is significant considering I don’t know how long I want to continue the business.
Congrats on chasing some extra opportunities. You will probably want to mention to your insurance agent that you’ll be driving to client locations. That may or may not affect your rates. Unless you incorporate, you’ll also probably want to investigate some type of liability coverage.
And learn to keep good records, unless you already do.