I am self employed with 1099 income. Can I run payroll for my self and also another employee? Do I need to take a EIN or use my SSN for this purpose?

[VolvoGirl · Accepted solution]

If you pay an employee you need to get a EIN, withhold taxes 

and file quarterly payroll reports.  Then give them a W2 at the end of the year.  

Or you might have paid them as n independent contractor.  Then you give them a 1099Misc or the new 1099NEC just like you are receiving a 1099Misc.

Either way you do not issue yourself a W2 or 1099Misc.  You do not pay yourself.  Sole proprietors cannot take a withdrawal or salary and include it as an expense on their tax return. As a sole proprietor, you are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income.  If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.  

[krishnadasika]

Thank you so much for your reply. I have been working on W2 all these years and Contributing to Social security. I would like to continue to contribute (I am under the impression if I don't continue to contribute, my Social security benefit will be effected - please correct me if my assumption is wrong). Additionally, I would like to know if there are any taxes I need to pay?

My situation is like this (Numbers may vary in reality)

1099 Misc income - 100k

I want to pay my son who is helping me - 40k

I have office and other expenses - 10k

What is the best way to file the above?

[VolvoGirl]

You need to use the Online Self Employed version.  Or you can use any Desktop program but you will get the most help in the Home & Business version.

You need to report all your income even if you don't get a 1099Misc. 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 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 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.

FOR 2019

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.

For 2019 Schedule C Net Profit or Loss now goes to 1040 Schedule 1 line 3.  Then the total on schedule 1 line 9 goes to 1040 line 7a.

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

[krishnadasika]

Can Turbotax pay my self-employment tax (SE tax)? Is this service available in Turbotax?

[VolvoGirl]

Turbo Tax dose not "pay" anything for you.  You fill out schedule C in your tax return for your self employment income and  expenses.  If you end up with a Net Profit of $400 or more Turbo Tax fills out Schedule SE and includes the self employment tax on your  tax return.  It is added to any regular income tax you owe.  Or it will reduce any refund you are getting.  

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.

Are you maybe asking about paying Estimates?  You need to send in quarterly estimated payments since they are not taking any withholding out of 1099 income.  

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.)

Are you maybe asking about making estimated payments?  

There is only 1 quarterly estimated payment left to make for 2020.  It is due by Jan 15.  If you haven't been sending in any estimates you should send in some NOW.

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.....2020 Estimate

[Opus 17]

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@krishnadasika wrote:

Thank you so much for your reply. I have been working on W2 all these years and Contributing to Social security. I would like to continue to contribute (I am under the impression if I don't continue to contribute, my Social security benefit will be effected - please correct me if my assumption is wrong). Additionally, I would like to know if there are any taxes I need to pay?

My situation is like this (Numbers may vary in reality)

1099 Misc income - 100k

I want to pay my son who is helping me - 40k

I have office and other expenses - 10k

What is the best way to file the above?

---

If you are an unincorporated business or single member LLC, there is no difference between "you" and "the business".  While it is often useful to keep separate bank accounts to help track income and expenses, all the money is yours.  You pay income tax at the end of the year on your net profit after expenses, and it doesn't matter how much of that profit you transfer from the "business" bank account to a personal account, assuming you even have separate accounts.

Your tax return will have a schedule C.  This reports all your business income and expenses and calculates the taxable profit.  You are expected to keep accurate records of your income and expenses even if you don't get tax paperwork from your customers or clients.  The net profit from schedule C flows to the main form 1040 where it is combined with your other income, deductions and credits, to determine your total income tax.

Your net profit also goes to schedule SE to calculate self-employment tax.  This is the same as social security and medicare tax as an employee, except that you pay both the employee share and the employer share, and it's about 15% of your net profit.  The SE tax is also transferred to form 1040 and added to your income tax, to arrive at the total amount you owe for the year.  SE tax gives you the same retirement credits in the social security system as paying social security tax as an employee.  

Because you don't have withholding from an employer, but the tax system is still pay-as-you-go, you are required to make estimated tax payments 4 times per year; April, June, September and January 15, to cover the taxes for the previous quarter.  If you don't make estimated payments, you will be assessed a penalty for late payment even if you pay in full when you file your return on April 15.  (If this is the first time you owe a penalty, you can ask for a waiver.). You can make the payments electronically at www.irs.gov/payments, and there will be similar payment site for your state income tax. 

Now, your expenses can include office supplies and equipment, possibly rent on an office, or the home office deduction if you meet all the qualification, and any other expense that is "ordinary and necessary" for the work you do.  An employee can certainly be an ordinary and necessary expense.

A person working for you can be a subcontractor or an employee.  If a subcontractor, you pay them a gross salary and issue a 1099-NEC, and they are responsible for their own taxes including a schedule C and self-employment tax.  If an employee, you issue a paycheck, and you must withhold social security and medicare tax,  state and federal income tax, and you may be required to pay unemployment insurance premiums, worker's comp premiums, or follow other laws of your state for hiring employees.

If you pay an employee you must have a federal EIN -- employer ID number.  Even if you don't pay employees, you might want to get an EIN to use for your business so you aren't using your personal social security number.  You can get an EIN online.

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

Whether your son is a subcontractor or employee depends on the working relationship and is far too complicated for this discussion.  However, there are significant penalties if you classify someone as a contractor who should be an employee, since you have more responsibilities toward employees and misclassifying employees as subcontractors is a way that unscrupulous businesses take advantage of their workers.

https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

Turbotax is only designed for year end taxes.  If you need to run a weekly or monthly payroll for an employee, you will need to do it manually or use something like Quickbooks Self-Employed version or Quickbooks Small Business version.  Quickbooks can also calculate the amount of quarterly estimated tax payments you need to make.

https://quickbooks.intuit.com/

When you have an employee you also must issue a W-2 and W-3 at the end of the year and file state and federal quarterly reports and remit the state and federal withholding at least quarterly.

There is no "best way" to file, there is the only way, as far as the IRS is concerned.

If you want to use Turbotax, you have three options.

• Turbotax Home & Business installed on your own computer.
• Turbotax Online Self-Employed.
• Turbotax LIVE Self-Employed.

The Live online version includes video chat with a CPA or enrolled agent.  Although it is the most expensive version, I strongly suggest you use the Live CPA version this year since you have so many basic questions.  Or, see an accountant this year to teach you more of what you need to know and maybe you can use Turbotax on your own next year.