Small Business and Taxes

[n2ize]

I am thinking of running a small home based business on the side. Basically I would get a contract to do a job and I would fill the contract and get paid either after the work is done or, during the job if it is a long contract.

The problem I have is that I don;t know diddley about small business (self employment) and taxation. I know that if I make over a certain amount it has to be reported. However, since I wouldn't be getting a W2 form what do I use to determine how much tax I owe/don't owe ? I heard that in some cases the person who hires you may submit a 1099 form (or some number like that) in lieu of a W2 but, they don't nessesarily do it in all cases. Other things I've read recommend that I keep a record of any jobs including a ledger of jobs, hours worked, pay, dates, amount paid, etc. They also recommend that I keep a copy of all checks used to pay me or, digital transactions in lieu of a check. What it seems to boil down to is that when it comes to taxes I am sort of on my own, the IRS, State, etc. expects me to keep a record of exactly how much I am paid and then figure out from the schedules how much I owe in taxes and then to report it on the appropriate forms as opposed to a regular job where the employer does most of the record keeping for me. Or worded differently since I would be my own employer I end up wearing both hats (employer/employee) when it comes to taxes.

Am I on the right track with this ?

[W5GA]

Yes, you are. Keep copies of everything (not necessarily checks - available on demand from your bank via imaging, which is accepted by the IRS). You get to pay both sides of the income tax/social security equation. Turbo Tax is your friend here when it comes to filing, it comes with all the appropriate forms already built in, and guides you through the process. It's much easier to send in quarterly payments than it is to write a large check at the end of the year.

[KC2UGV]

Yes, you are. Keep copies of everything (not necessarily checks - available on demand from your bank via imaging, which is accepted by the IRS). You get to pay both sides of the income tax/social security equation. Turbo Tax is your friend here when it comes to filing, it comes with all the appropriate forms already built in, and guides you through the process. It's much easier to send in quarterly payments than it is to write a large check at the end of the year.

^^^ THIS

[n2ize]

Okay, thanks. So far I seem to get it. As far as the 1099 goes , is that form filled out and submitted by me ? or by the person who has hired me. And regardless of whether I get a 1099 or not, when it comes down to reporting my taxes I use the 1040 form ? Now, as far as the IRS goes, what are they using, the honor system ? I mean do they assume that I am being honest and accurate when I report how much I make and owe ? Or do they have a system from checking it to make sure my figures are accurate ? Not that I am looking to be a tax cheat or anything I am just curious as to how they manage to be sure that business are properly reporting what they make/owe. Okay, yeah sounds good on TurboTax. I might have to spring fora copy.

[KC2UGV]

1099 for work done. Or, conversely, invoice for work, charge sales and use tax, and include your operating income as part of your income on your 1040. You don't need to worry about the "Employer" part, by and large.

Yes, you are are on your own for figuring out your taxes. A good rule of thumb I've used is: X is what you want to make per hour. Charge 3x for work, and assume 2x will go to taxes and operating expenses.

I don't usually get a 1099, as most jobs are only 2-3 hour jobs, which comes under the $500 limit (I generally bill $175/hr + Travel). I do generally get them from larger jobs.

However, I would suggest talking to your tax attorney or accountant for the specifics of what paperwork you need to track.

[K7SGJ]

Holy shit, one of our very own on the way to becomming one of the 1%. Words fail me.....................

[n2ize]

Holy shit, one of our very own on the way to becomming one of the 1%. Words fail me.....................

Hah...wait till I start sheltering my millions and billions in overseas accounts... Won't that be the day :)

[XE1/N5AL]

Not a tax guy, but you will probably be using Form 1040, Schedule C to report your business profits/losses/expenses. Also, Form 1040, Schedule SE to report self-employment tax, where you get the honor to pay both halves of social security. Finally, you might have to make quarterly estimated tax payments (using 1040-ES), to avoid penalties and interest by not owing too much on April 15.

P.S.: You might run into IRS Form 4562, if you are claiming depreciation on items purchased for your business.

[W3WN]

1099 forms will be sent to you by your customer, IF you billed them in the course of the year for more than a certain amount... I want to say $500, but TurboTax will have that documented. And those forms are sent to the IRS, so if you "forget", you most likely WILL be nailed.

You can usually slide "under the radar" with small payments less than that -- though some business will file 1099's anyway. And, of course, cash isn't always documented, not that I'm recommending you do anything you shouldn't...

Keep receipts for everything. That includes your cell phone, miles driven for business purposes, the whole schmeer. A good accountant will tell you what to keep, and how to keep it.

Fortunately, these days, TurboTax and similar apps are very good at keeping things in order, but you MUST have your documentation on hand.