Full-time Employee with 2 sole proprietorships businesses (wife and I)

[millionQuestions]

Hello everyone, 

Thank you very much beforehand for your advice and responses. 

The situation: I am a full-time employee and reside in California. My wife and I have started 2 different side businesses and are really confused about the tax process for our case.

I just started reading on the requirements for a sole proprietorship when it comes to taxes but have not found cases where there are 2. 

Your help is appreciated. 

[M-MTax]

Full-time Employee with 2 sole proprietorships businesses (wife and I)

To kick this thing off you and your wife CANNOT be sole proprietors of the same business as that would defy the definition of sole proprietorship....which can only be ONE person.

Your wife can have her own sole proprietorship and you can have yours but that's it. Your wife can be employed by your sole proprietorship and you can be employed by hers but you can't own one SP together. You can own an LLC together though.

Suggest you read up on businesses and get further educated AND see a tax pro or business planning pro for advice.

There are TONS of of stuff that you need to know from local business licenses to sales taxes to liability insurance and that's just a start.

[millionQuestions]

Hey Martin, 

Perhaps a misread? ... Thought it would be understood that there are two separate businesses by my mention. "My wife and I have started 2 different side businesses"

Additionally, we have some of the requirements already processing, like our licenses.

My question was more on a very generic overview of how does it work when doing taxes while one person is a full-time employee and there are 2 side businesses as (sole proprietorships). 

Like, is there a difference between submitting with one vs with two. 

Still thanks for your input. 

[ORLinvestor]

You would input one business as a schedule C and then click the button to add another business on a second schedule C

[M-MTax]

That's right....you file a normal 1040 for federal with 2 separate SCH C's....one for each business.

[VolvoGirl · Accepted solution]

Yes you file the W2 employee income and the Schedule C self employment income on the same 1040 personal return.  You should probably still file a Joint return together.  Joint is usually the best way to file.

Be sure to assign each Schedule C to the right spouse.  That is very important.  Do you need self employment info?

Unless you set up a business as a corporation or partnership or LLC S corp you file it as self employment.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.  Here's a Schedule C  https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

You can enter Self Employment Income into Online Deluxe or Premier but if you have any expenses you will have to upgrade to the Self Employed version.  How to enter self employment income

https://ttlc.intuit.com/community/self-employed/help/how-do-i-report-income-from-self-employment/00/...

For the future, you should use a program like Quicken or QuickBooks to track your income and expenses.  There is a QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed  return....

http://quickbooks.intuit.com/self-employed

You will need to keep good records.  You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small and if you don't get the 1099NEC.

You use your own records.  You are considered self employed and have to fill out a schedule C for business income.   You use your own name, address and ssn or business name and EIN if you have one.   You should say you use the Cash Accounting Method and all income is At Risk.   

After it asks if you received any 1099Misc or 1099NEC it will ask if you had any income not reported on a 1099Misc. You should be keeping your own records.  Just go through the interview and answer the questions.   Then you will enter your expenses.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 Schedule 2 line 4 which goes to 1040 line 15.  The SE tax is in addition to your regular income tax on the net profit.  You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 14 which flows to 1040 line 8a.  Turbo Tax automatically calculates the SE Tax and Adjustment.

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

[VolvoGirl]

Is this for this year 2020 or next year 2021? What Turbo Tax Version will you be using?  You should consider using the Desktop CD/Download Home & Business version.  So you can see all the forms as you enter them and the Desktop program has several other features and advantages over the online version.

See the personal Desktop CD/Download programs here

https://turbotax.intuit.com/personal-taxes/cd-download/

[millionQuestions]

@VolvoGirl 

Wow... Thanks a lot for all of these details and recommendations.

This has given me a good intro overview of the process. 

Once again, thanks a lot for taking the time to respond. 

[millionQuestions]

@VolvoGirl 

It will be for 2021 since we just started.

[VolvoGirl]

Do you think you will have a Net Profit after expenses?  For each person separately.  You might need to pay Estimates to cover the self employment tax.

The first year you don't need to pay estimates as long as you pay in (by withholding) as much as your tax was last year.  But if you will have a big income you should send in estimates so you don't owe too much next April on your tax return.  And if you end up owing too much tax on your return you may also have a penalty.

For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:

- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:

    90% of the tax to be shown on your current year’s tax return, or

  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months).

Here are the blank Estimates and instructions…..

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

The 1040ES quarterly estimates are due April 15, 2021, June 15, Sept 15 and Jan 18, 2022.   Your state will also have their own estimate forms.

Or you can pay directly on the IRS website https://www.irs.gov/payments

Be sure to pick the right kind of payment and year.....2021 Estimate

[millionQuestions]

@VolvoGirl 

• For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit

These ~15 on 92 percent profit would be of strictly profit made under the business and not combining with my employment salary, correct? 

[VolvoGirl]

Right.  And it is per each person's business, not combined.    But you also pay regular income tax on it if you have a net profit.  It is added to all your other income like W2 and interest, dividends, etc.  You do get to deduct a loss against your other income.  

[TomD8]

Just to add to @VolvoGirl's information on estimated taxes: once your businesses are making a profit, don't forget to make estimated tax payments to your state (if your state has an income tax), as well as to the feds.

Also, be sure to get a federal EIN for each business if either of you plan to:

• hire employees
• have a Keogh or Solo 401(k) retirement plan,
• buy or inherit an existing business that you operate as a sole proprietorship
• incorporate or form a partnership or limited liability company, or
• file for bankruptcy.

Also, some banks require you to have an EIN before they'll set up a bank account for your business.

[millionQuestions]

@VolvoGirl 

If our businesses have a more expenses than income (since we are just starting) website, and equipment. When doing taxes, those business expenses being higher than income only apply to the business side? Or are we able to deduct them against my regular salary as well? 

Thanks

[VolvoGirl]

Yes a loss on the business Schedule C will be deducted from all your other income.  If you have large equipment expense yo may have to add it as an Asset and depreciate it over several years instead of expensing 100% now.

IRS overview of Depreciation

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/A-Brief-Overview-of-Depreciation

2018 new IRS info

https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-...

For a loss.......

Some expenses, such as home office or section 179 depreciation can only be used to reduce your schedule C taxable income to zero, and not to create a loss. Excess deductions for these carry over to the next year.  And you have to answer yes to both questions about exclusive and regular use, not just one.  The area of your home office must be used regularly and exclusively for business to deduct it.