posted
I hope KPC can be summoned again because I just officially began work as an independent contractor for a clinic that does among other things neurofeedback therapy. Since I'm an independent contractor I have to deduct my own taxes. The only thing I've been told by a family member accountant is that I may need to fill out a W-9? My father said that I should probably setup something with the IRS so that I do taxes quarterly rather than annually, or that I might consider setting up another bank account where paycheck deposits automatically have a percentage transferred to that account.
I have no idea how to set any of this up as I've never worked like this before, I'm going to look around on the IRS's website later today but I already dread that prospect. Any help would be greatly appreciated.
Posts: 14316 | Registered: Jul 2005
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posted
The W-9 is a request for Taxpayer ID. It's a form that the company you're working for will give you for you to fill in your address and social security number for their records. No big deal at all.
At the end of the year they should give you a 1099, which will tell you how much money you were paid as an independent contractor. Then you fill out a Form SE and a Schedule C when you do your taxes. They are both very simple and straightforward forms, especially if you aren't claiming a lot of business expenses, just the income off one 1099.
Posts: 9866 | Registered: Apr 2002
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posted
He's at church. (I'm home sick.) He should be back around 2:40 PDT.
I think DKW is right on everything she said (from my limited understanding) but KPC may have more advice to give you. Posts: 21182 | Registered: Sep 2004
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posted
dkw is correct, you will get a W-9 from the company to fill out so that they can properly report your address and information on form 1099 to the IRS.
You may or may not have to make quarterly tax payments depending on the amount of money earned and whether you have another form of withholding (W-2 from another job, your wife's W-2, etc.) The general rule is, for every $3 you earn, put aside $1 for taxes.
It is important to keep reciepts and mileage logs for job-related expenses (your commute does not count, or your food, but anything off-site does, anything you buy out of pocket for work and are not reimbursed for) so that they can be used to offset the income earned on your tax return.
I would suggest you consult with a tax professional about tax planning if this is your only or primary form of income to determine what you can individually do to offset your tax liability this year and in the future and what to expect as far as paying taxes. You don't want to be surprised with a big bill at the end of the year that you didn't expect because you didn't understand your tax liability fully.
If you have any other questions I can try and answer but without knowing your household's entire situation I can only really give general advice. Posts: 137 | Registered: May 2005
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KPC: Thanks so much, I won't take up much more of your time, but here are some additional questions.
Part of my job is that I drive to people's houses to perform the feedback therapy more often than they come down to the clinic, to what extent is that tax deductible?
quote:anything you buy out of pocket for work and are not reimbursed for) so that they can be used to offset the income earned on your tax return.
I do not fully understand this. If I buy a blackberry because realistically I need one to schedule and coordinate my work does that count as a business expense if I am not reimbursed? What if instead of a blackberry I just buy a planner?
This isn't our primary source of income Mrs. BB works full time and actually makes significantly more than I do. We typically end up with the government owing us taxes so would me and Mrs. BB cancel each other out?
Posts: 14316 | Registered: Jul 2005
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posted
Okay, I don't feel like logging off right now but KPC is sitting next to me and I'm typing for him.
quote: Part of my job is that I drive to people's houses to perform the feedback therapy more often than they come down to the clinic, to what extent is that tax deductible?
That is absolutely business miles. For instance, you drive from your house to the clinic, that doesn't count, but then from the clinic to their houses and back, all the mileage would be deductible. If you drive directly from your house to the client's house, that's kind of a grey area. If you get audited it would be up to the auditor whether or not to allow the miles in that case.
quote: quote: -------------------------------------------------------------------------------- anything you buy out of pocket for work and are not reimbursed for) so that they can be used to offset the income earned on your tax return. --------------------------------------------------------------------------------
I do not fully understand this. If I buy a blackberry because realistically I need one to schedule and coordinate my work does that count as a business expense if I am not reimbursed? What if instead of a blackberry I just buy a planner?
Those would both be deductible if they are used only for business use, or partially deductible for the percentage of use that is business use (if 3/4 of what you write in the planner is business appointments, it is 75% deductible; if you use the Blackberry to play games and e-mail friends 2/3 of the time only 1/3 of the cost is deductible.) Technically as an independent contractor you should have no reimbursed expenses, because that would make you an employee. So save ALL your reciepts for what you buy to use in the course of your work (if you have to buy uniforms, equipment, etc.)
quote: This isn't our primary source of income Mrs. BB works full time and actually makes significantly more than I do. We typically end up with the government owing us taxes so would me and Mrs. BB cancel each other out?
I can't tell you specifically without seeing the numbers, but I would guess that you won't have as big of a tax bill as you would if you were the only one bringing in money. You may get a lesser refund, or you may end up owing a small-ish amount. This is something to discuss with a tax planner so you know what to expect. (If you go to a tax planner specifically for advice on this matter and how it changes your tax liability, that is also a deductible expense as legal and/or professional advice. I highly recommend it.)
Posts: 21182 | Registered: Sep 2004
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KPC/KQ: Thanks both for your time! I'm glad to have been pointed in the right direction.
Last question. You mentioned that a rule of thumb is for every $3 I make to set aside $1 for taxes. If I understand you correctly that would mean that if I make $18 I should set aside $6 for taxes?
Posts: 14316 | Registered: Jul 2005
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Yes, that is correct. In the end, you may not need it , depending on what is taken out from your wife's paycheck during the year. That rule mainly helps if the taxpayer's only income is from being an independent contractor.
Posts: 137 | Registered: May 2005
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quote:Originally posted by KetchupPrinceConsort: Yes, that is correct. In the end, you may not need it , depending on what is taken out from your wife's paycheck during the year. That rule mainly helps if the taxpayer's only income is from being an independent contractor.
Out of curiosity and I know I already used up my last question, does it make any sense then to pay taxes quarterly rather then just setting aside the funds all year and taking care of it all during tax time?
Posts: 14316 | Registered: Jul 2005
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posted
If you are not required to make the quarterly tax payments (which you shouldn't be, since you get back refunds each year), then it makes more sense to me to put it aside and gain interest on that money instead of paying the IRS early and not receiving interest on it.
Posts: 137 | Registered: May 2005
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BB, the rule is (or used to be, IANACPA) that if you pay 90% of what you owe this year, or 100% of what you owed last year before the end of the year, then you're good. If you pay less than that, then there's an automatic 10% penalty on the difference.
I think the easiest way to handle this would be if you get your wife's employer to take out extra taxes from her paycheck. She could claim zero exemptions on her W-2, and also if needed she can request an extra flat amount to be taken out of each paycheck. That way, between you, you'll still get a refund at tax time.
The alternative is to file a 1040ES, which is the estimated tax payment, 4 times a year.
Let me warn you about a trap that 3 different small-businesspeople I know have fallen into. It's sitting there waiting to bite you. First you deduct that 1/3 of gross income, and put it in a special account to be sent in each quarter. Later on, though, you run short on cash and have to pay for something business-related. So instead of getting a loan to cover it, you just borrow the money from yourself, from out of your tax account. No problem, right? Cash flow evens out over time and you'll make it up later. Come quarterly tax time and you don't have money in the account. No big deal, there's only a 10% penalty for paying later. So you decide to pay later. Come the end of the year, there's still no money in the account (what businesses want to do is slowly lose money over time, or not make quite enough to pay for everything... it takes a lot of effort and planning and also some luck to get them to make money) so then you're stuck and can't pay taxes. The one creditor that you should NEVER owe money to is the IRS.
Anyway, with your wife's salary to help out, and because you're going to be careful and prudent and watch the money wisely so that you know for sure whether you made or lost money on every job, and how much, this won't happen to you. But watch out for that gotcha. It happens to a whole lot of people.
Posts: 6246 | Registered: Aug 2004
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posted
One more thing I want to say about being a contractor and having your own business. You have to make money the first priority. I know that you probably care a lot more about the actual job you do than watching how much you earn from it. Technical excellence is a beautiful thing. Being good at what you do is really fulfilling.
But, if you do it at a small loss, over time, you will have to stop doing it eventually. The ability to help people, to do good work, to pursue excellence in your field, is wholly dependent on your ability to make money over time at that work.
So, someone involved with the business needs to be watching pennies very carefully, looking at every unit of work (be it a job, an item, or a client's hourly billing) and finding out whether you made or lost money on that unit, and how much. Someone needs to assess what the market will bear when it comes to rates, so that you're competitive but also can turn a decent profit. Someone needs to be keeping up with the latest techniques and trends in the industry, so that you don't fall behind. Someone needs to be looking at marketing your services or goods or whatever it is you sell.
Most particularly, someone needs to be scrutinizing the contracts you sign with your customers, to be sure that if additions are made to the scope of work, you're fully compensated for those additions. That's actually where you make your margins, in add-ons. When your customers are choosing a vendor, you have to keep those prices low so they choose you. Once they've chosen you and the work has begun, if there are extras, then you can charge a good margin on those extras, because the company will not be inclined to kill the whole deal over those extras. So realize that you will need to have good negotiating skillz, and when the contract is drawn up, you need to be constantly pushing for enough money to cover you.
It's easy when you're a small operation to focus on quality to the exclusion of profit margins. Just be sure to put money first of all, because it doesn't matter how excellent your work is if you can't sustain it economically.
A lot of unsolicited free advice which is worth what you pay for it. Maybe your business doesn't fit this model at all. But hopefully it will be helpful to you in some way.
They say that half of all new businesses fail within the first few years. Also they say that most successful small-business owners have at least one failed business in their past. Maybe it takes learning things the hard way to succeed. But you won't do that. You'll learn the easy way and make a big success your first time out. Good luck!
Posts: 6246 | Registered: Aug 2004
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