Ok ... first the employer cannot stop paying him as an employee and switch him to a contractor at will. If he will still work as an employee where he uses the company truck and goes when and where the employer tells them then he is still an employee and should remain as such. When an employer tells you that you need to set up your own LLC then they are not following the law. Usually contractors own their own trucks, pay all their own operating costs, bargain for the fee they will be paid for each job and are free to work for any trucking company.
Now ... if you agree to work as a contractor and pay the employers part of the FICA taxes and have no workman's comp insurance, no unemployment comp possibilities, no company health insurance and no company benefits like vacation or sick days then you will need to decide what kind of business entity you will set up. I highly recommend you seek local professional assistance to get this done correctly and get educated on the requirement each option needs.
In the big picture you will still only file one federal tax return and both your income will be reported on it ... and if you incorporate or set up a partnership then a separate return will be filed for that company before the personal return. Please seek advice.
They left the ball at “do what is best for your taxes”. Well - the best would be to be paid with W2 but that is obviously not going to happen. The LLC has limited liability but you pay quite some money to register it.. I’ve even heard some register in another state to get tax benefits. Not sure how legal this is and how it reflects to the taxes later. Thank you very much!
LLCs are not an IRS thing, they are inventions of a state legislature. As far as the IRS is concerned, an LLC is taxed as a partnership (if more than one owner), as a corporation (if the taxpayer chooses), or as a sole proprietorship (if there is only one owner and he/she otherwise qualifies). Note that in community property states, there are special rules for LLCs owned by two spouses who work in the business; these can also be reported as two "sole proprietorships".
Many LLCs are formed nowadays by sole proprietors who are looking for the legal protection of a "corporation" (NOTE: this protection varies state by state so getting legal advice here would be wise). This is what I was referring to: an LLC taxed as a "disregarded entity" (i.e., the IRS ignores the state-based incorporation as an LLC but is considered a sole proprietorship (Schedule C)) normally does not need an EIN.
Here are the reasons that the IRS suggests for getting an EIN; can you answer "Yes" to any of the following questions?
Do you have employees?
Do you operate your business as a corporation or a partnership?
Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
Do you withhold taxes on income, other than wages, paid to a non-resident alien?
Do you have a Keogh plan?
Are you involved with any of the following types of organizations?
I couldn’t agree more for these days .. Also - since my husband doesn’t have employees, nor his own truck, maybe we can chose a different type of entity. It’s not mandatory to be LLC to get an EIN.. And as far as I understand, taxes will pass through the individual taxes, along with few extra steps for quarterly reporting and estimated taxes. Thank you.
Hello Critter. Thank you for all your helpful advice. As sole proprietor - can he still claim expenses? Is it still Schedule C, or there is another form that is specific for this type of entity? I am not sure where all this profit/loss determinations come in quarterly estimated taxes and tax reporting at year end.. Thank you.
Yes you still use schedule C.
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).
To prepare estimates for next year you start with your current return, but be careful not to change anything. For Online returns, if you can't get back into your return, Click on Add a State to let you back into your retun.
You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.
Or Go to….
Federal Taxes or Personal (Desktop H&B)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button
The 1040ES quarterly estimates are due April 15, 2019, June 17, Sept 16 and Jan 15, 2020. And don't forget your state. Go to the end of the state section, probably under Other Tax Situations. To just estimate the remaining quarters put in that you paid $1 for the missed quarters so it will only calculate the remaining quarters.
Here is some general info. You will need to keep good records. You may get a 1099Misc 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. You might want to use Quicken or QuickBooks to keep track of your income and expenses.
There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed return....
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 is some IRS reading material……
IRS information on Self Employment
Pulication 334, Tax Guide for Small Business
Publication 535 Business Expenses
This QuickBooks bundle appears to be a very useful tool, thank you so much! On a related issue - with forming entity as sole proprietor, a business bank account needs to be opened under the EIN, and this takes some time. There will be a time gap during which payments from the job will be deposited into a personal bank account. Is this relevant in tax point of view - since the personal bank account is under my husband's SSN?