New to contract employment and owning a business

[Washingtonianite]

Hello,

I have always been an W-2 employee until recently. I recently started a business, and contract work.

Here are some of my questions:

My wife and I have always filed a joint tax return. She is still a W-2 employee. What are the advantages and disadvantages of continuing to file jointly with her as a contract worker and business owner? Would we use the same form as before (1040?) if filing jointly? If I chose to file on my own, what form would I file with?

When hired for contract work, what are the advantages and disadvantages, tax-wise, of using my name and Social Security Number vs. using my business and EIN?

Here are a few other questions from the prewritten list that I'm still not sure about.

• I started a new business, how does that affect my taxes?
• How much do I need to pay in quarterly estimated taxes?
• Do I have to pay quarterly estimates on income taxes to my state too (I live in Washington State)?

Much appreciated!

[Terri Lynn]

Hi Goodenow, and thank you for your questions!

You asked:

1. How does starting a business effect my taxes?
2. How much do I need to pay in quarterly estimated taxes?
3. Do I have to pay quarterly estimates on income taxes to my state too (I live in Washington State)?

1.Starting a business can significantly impact your taxes in several ways, here are a few:

•  You may owe self-employment tax on your business income. This is the equivalent of payroll taxes for employees. The tax rate is 15.3% on your net business income.
• Your tax filing status changes from individual to sole proprietor (or whatever business type you form). You report business income/expenses on Schedule C and it flows through to your personal tax return.
•  You can deduct valid business expenses, which reduces your taxable income. Things like supplies, utilities, vehicle mileage, etc.
•  You may need to pay estimated quarterly taxes to the IRS if you expect to owe $1,000 or more. The amount is based on your expected tax liability for the year.

2. Yes, if you expect to owe $1,000 or more in federal income tax for the year, you generally have to make equal quarterly estimated tax payments to the IRS. 

Here are a few things to consider when determining how much to pay for quarterly estimated taxes:

•  Estimate your total tax liability for the year - this includes income tax, self-employment tax, and any other taxes you may owe. Consider income sources, deductions, credits, etc.
• Determine how much tax you've already had withheld from paychecks or other income sources. This counts toward your total tax paid.
•  Calculate 90% of your estimated tax liability for the year. To avoid penalties, your quarterly payments should equal at least 90% of what you expect to owe.
•  Divide this amount by 4 to determine your required quarterly payment amounts. You can pay a bit extra to be safe.
• Payments are due by April 15th, June 15th, September 15th, and January 15th of the following year.

3. Yes, you  will also need to make quarterly estimated tax payments to the state of Washington if you expect to owe more than $1,000 when you file your state taxes. The deadlines and percentage thresholds are similar to federal estimated taxes. The payments go to the Washington State Department of Revenue. Check their website for more information. Washington State Department of Revenue 

For more information on this topic, please check out the following links:

Estimated Taxes: How to Determine What to Pay and When 

A Comprehensive Guide to Paying Quarterly Estimated Taxes 

Common Questions About Paying Estimated Taxes 

Please feel free to reach backout with any additional questions or concerns you might have!

Have an amazing rest of your day!

Terri Lynn, EA

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[Washingtonianite]

Thank you for your help. Still looking for answers to the first portion of my questions.

My wife and I have always filed a joint tax return. She is still a W-2 employee. What are the advantages and disadvantages of continuing to file jointly with her as a contract worker and business owner? Would we use the same form as before (1040?) if filing jointly? If I chose to file on my own, what form would I file with?

When hired for contract work, what are the differences, or advantages and disadvantages, tax-wise, of using my name and Social Security Number vs. using my business and EIN?

[VolvoGirl]

Yes you still file a Joint return as normal.  Joint still should be the best way.  You will just add Schedule C for your business.  Or what kind of business entity is it?  Are you a Single Member LLC?  If you are not a SMLLC filing as a S Corp it is a disregarded entity on Schedule C.  

It doesn't matter on your tax return if you have an EIN.  You give your EIN to people who pay you so you don’t need to give out your ssn.  Thats if they need to give you a 1099NEC to report what they pay you.  

[Washingtonianite]

My business is a single member LLC. I think I now understand what to do regarding attaching the Schedule C to the 1040.

Does it make a difference on the amount of taxes owed if I use my EIN or SSN? My question refers to any tax, federal or state. For example, if I do work under my EIN, don't I then owe state sales tax for the money earned? Whereas if I did the work under my SSN, I wouldn't owe that sales tax?

[Terri Lynn]

Hello again, Goodenow, and thank you for your follow up questions!

You asked  "Does it make a difference on the amount of taxes owed if I use my EIN or SSN? My question refers to any tax, federal or state. For example, if I do work under my EIN, don't I then owe state sales tax for the money earned? Whereas if I did the work under my SSN, I wouldn't owe that sales tax?"

For federal taxes, both individuals and businesses can use their SSN as their taxpayer identification number(TIN),  when filing tax returns. However, if you have an EIN because you have a registered business entity (such as a sole proprietorship, partnership, LLC, or corporation), you should use that EIN for tax purposes instead of your SSN.

For state taxes, the rules vary depending on the state. Some states require businesses to register for a sales tax permit and collect sales tax on goods or services sold, while others do not. In general, if you are selling goods or services in a state where you have a physical presence (such as an office or store), you are required to collect sales tax on those sales. Using an EIN or SSN does not affect this requirement.

Overall, using your EIN or SSN may not directly impact the amount of taxes owed, but it is important to use the correct TIN for your business entity and comply with all tax laws and regulations in your state.

More information about Sales Tax:

o determine how to charge and remit taxes for a small business, consider the following:

• When should sales tax be charged? Sales tax is required in 45 states and various localities, with exemptions available depending on factors such as point of sale and product type. Verify whether your state or locality requires a license to sell or a sales tax permit, and charge the appropriate local rate along with any applicable state and specialty rates for your specific location.
• Do you have Nexus? Sales tax nexus refers to the connection between a seller and a state, with thresholds that trigger obligation when certain factors occur. Understand your business's nexus obligations before growth occurs by determining if nexus exists in states where you do business. Nexus requirements vary by state and consider physical presence, economic nexus, transaction thresholds, and other relevant business activities.
• Is the product or service taxable? Product taxability can vary based on the jurisdiction and the nature of the product being sold. Consider if your state collects sales tax based on origin or destination, if you're selling a product or service, and if the product or service is required to be taxed.
• Does an LLC have to pay sales tax? Yes, an LLC must collect sales tax for their products or tangible personal property sold in jurisdictions where they operate. Consider all factors mentioned above when determining if sales tax applies, regardless of business type.

Small business owners must understand how and when to charge sales tax, as well as how to remit it to state or local government.

1. To start, determine if your business has a compliance obligation in your state and register with the appropriate taxing agency before collecting sales tax.
2. Document the sales tax collected on invoices and file them with the relevant tax jurisdiction, based on the state's sales tax due date and filing frequency.
3. Research your state's filing frequency and due dates , as this varies from state to state.
4. To file your sales tax return, the first step is to gather the forms you need from the revenue department for the state in which you're filing (you can often find and complete these forms online). Fill out those forms with the numbers from your sales, and make sure you submit before your due date.

For additional information on related topics, please check out the links below:

Single Member Limited Liability Companies (SMLLC) 

Recordkeeping  

Small business tax workshops, meetings and seminars 

Limited Liability Company Taxes  

LLC Tax Filing Rules 

Hopefully this information helps! Please feel free to reach backout with any additional questions or concerns you might have!

Have an amazing rest of your day!

Terri Lynn, EA

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[Terri Lynn]

Hello and good evening,  Washingtonianite!  

You asked,"What are the advantages and disadvantages of continuing to file jointly with her as a contract worker and business owner? Would we use the same form as before (1040?) if filing jointly? If I chose to file on my own, what form would I file with?"

What are the advantages of Married Filing Jointly?

Filing a joint tax return with your spouse offers many benefits.

• One significant advantage is that joint filers receive one of the largest standard deductions each year, enabling couples to deduct a substantial amount from their taxable income. ()$27,700 in 2023. and $29,200 in 2024)
• Both or none: If one spouse decides to itemize, the other cannot claim the Standard Deduction. For 2023, each spouse filing separately would have a Standard Deduction of $13,850 if they don't itemize.
• Shared deduction restrictions: When each spouse has paid toward the same deductible expense, like property taxes or mortgage interest, they must agree on how to split the deduction amount between their separate returns. The combined total deduction claimed should not exceed what would be allowable on a joint return.
• Couples who file jointly are able to qualify for more tax credits and deductions, including the Earned Income Tax Credit, American Opportunity and Lifetime Learning Education Tax Credits, Exclusion or credit for adoption expenses, and Child and Dependent Care Credit.

What about Married Filing Separately?

In contrast, couples who file separately often have fewer tax benefits and may owe more in taxes. For instance, separate tax returns may result in more tax since Married Filing Separately taxpayers typically receive a lower standard deduction.

• When one spouse earns most of the family income, the difference between filing jointly and separately can be significant. When filing jointly, the couple can use both spouse's standard deductions and take advantage of more favorable tax brackets.
• Separate filers are typically disqualified from several tax deductions and credits available to joint filers, including the student loan interest deduction. Separate filers usually get a smaller IRA contribution deduction, and the capital loss deduction limit is lower;$1,500 each when filing separately, vs $3,000 on a joint return.

Even though there are many benefits to joint filing, there are some cases where filing separately may be more advantageous, such as in the following  scenarios:

1. Medical expenses: If you or your spouse incurred significant out-of-pocket medical expenses, filing separately might help you surpass the IRS's threshold to deduct these costs. Since the threshold is based on a percentage of your Adjusted Gross Income (AGI), filing separately with only one income could lower your AGI.

2. Student loan payments: If your student loan repayment plan is based on your tax return's income, filing separately might help you manage your payments better.

3. Separated finances: In circumstances where couples prefer or need to keep their finances separate, such as during a divorce, filing separately can provide financial division. Additionally, filing separately can limit your liability for your spouse's tax matters.

If you are filing your taxes as a married couple, you have two options: Married Filing Jointly (MFJ) or Married Filing Separately (MFS). The forms you use would depend on which option you select.

If you choose Married Filing Separately, you can still use the same  Form 1040 that you used as a married filing joint couple, but you would need to indicate that you’re filing separately from your spouse in the filing status section at the top of page 1 of the 1040. Additionally each of you will need tto prepare a 1040 for yourself and will be required  to provide the  name and social security number of your other spouse on tye married filing separate return. 

For additional informatiuon please checj out these links:

Married Filing Jointly vs Separately: Which Should I Choose? 

When Married Filing Separately Will Save You Taxes - TurboTax 

How Should You and Your Spouse File Taxes? Married Filing Jointly vs Separately 

Please feel free to reach backout with any additional questions or concerns you might have.

Have an amazing rest of your day!

Terri Lynn, EA

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