Tax Options for IT Consultants

[Infinitarchitect]

Aside from incorporating your IT business what other options do I have as a IT consultant when doing business with small businesses and home users? I want to make sure I can benefit from the money I spend on computer equipment during the year when it comes tax time, I also want to be able to receive checks and operate as a legitimate business. Any suggestions?

 

[fredericofonseca]

What country!!!!!

Most countries (not all) will require that you register yourself as a self employed or that you incorporate as a company.

Once the above is done most countries will also allow you to put the money spent on the computer as expenses.

Regards

Frederico Fonseca
SysSoft Integrated Ltd

http://www.syssoft-int.com

 

[Infinitarchitect]

I'm in the USA The Greatest Country in the World!!! lol.

 

[lespaul]

You do not need to incorporate in order to take advantage of the expenses. You can include a Schedule C with your tax return that allows you to have a Sole Proprietor type business. This allows you to "run" a business under your Social Security Number. You can report income and expenses.

Technically, you are required to report all income from this business, however, if you are not issued a 1099 from a company there is no paper trail to be followed and a company is only required to issue a 1099 if they have paid you more than $600 in a single year and the home users are not required to issue any documentation to you.

However, remember that any "income" from this business is subject to "self-employment tax". This is both sides of Social Security and Medicare (the employee and employer portions) and is 15.2% (I think) of the reported income. Now you get a credit further in your tax return for 1/2 of that (the 1/2 your employer would have paid if you worked for someone else).

If this is your only source of income, the only downside to not reporting all the income from the business is a reduction in your Social Security credits for retirement calculations.

In case you're wondering, I worked as an accountant for 10 years before getting into IT, I worked for a tax accountant for the last 2 years of that time and my mom is a financial planner.

So, no you don't need to incorporate or do anything else special to get the tax break. Keep good records, anything that costs over $1000 should be depreciated, but anything else should be expensed. And all you do is add the Schedule C to your tax return.

HTH

Leslie

 

[Infinitarchitect]

That's the type of information I was looking for, actually I've been looking around for a CPA in my area but haven't had any luck, I may not need one now. Are there any websites that offer this type of information for independent self employed people? I do have a full time job, and work my consulting business part time but within 5 years or less I plan to do my consulting work full time business. Thanks so much for the information and guidance. Do you recommend any good software programs for record keeping. I already have Quicken and Quickbooks should that suffice?

 

[lespaul]

Those are both fine programs. I personally prefer Peachtree, but it really makes no difference, and you'll probably find Quickbooks easier to use. Plus, the Quicken products can be uploaded to the TurboTax website (I love using the TurboTax web filing for my taxes, haven't filed a paper return in 3 or 4 years!)

Another idea to consider is having someone come in once a month (or every other month) and reconcile the books for you so that you don't get to tax time and realize that there's months of work to do to straighten things out (trust me happens all the time!) When I did that kind of thing, I charged about $15/hour and most clients took less than 3 - 4 hours per month (they were larger than you will be right now). It's not a big expense, but you will save a LOT of time and energy if an experienced bookkeeper checks your work regularly.

Now I realized last night, I didn't mention that you still need to get whatever official documentation from your city/municipality. In Albuquerque, you would need a CRS ID (for reporting state gross receipts tax) and a business license from the city.

I don't know of any websites with this kind of information, I just know it because of my previous "life" and having had my own business as well. However, you should be able to find something in your state or county website with information on starting a business and what you need to do to be "legal".

And off the record, you don't want you business to make money (at least not on paper), a good tax accountant can help you maximize the tax benefits of having a side business. In fact, a lot of people have small side businesses JUST so they can have a loss in their business (at least on paper!!) and pay less in taxes. Your CPA licensure authority should be able to give you a list of names in your area and any expertise areas (like tax).

Good luck!!

Leslie

 

[lespaul]

You may also want to check out Forum1248 - Starting & Running a Technology Business!!

Leslie

 

[Infinitarchitect]

Your information has been indispensable. I feel like I own you lol. Thanks man!

 

[Infinitarchitect]

Your information has been indispensable. I feel like I owe you lol. Thanks man!

 

[lespaul]

next time you're in Albuquerque you can take me to lunch, but be sure you don't take that wrong turn!!! You'll end up with Bugs Bunny lost in the desert!!

leslie

 

[Infinitarchitect]

hahaha yeah I don't want to get lost. Thanks again.

 

[screwloose]

I would be very, very, very cautious using the Sole Proprietor type of business. There are a lot of reasons not to succumb to this business model.

 

[lespaul]

why do you say that?

Leslie

 

[screwloose]

A sole proprietorship is not the best model of business to conduct certain types of business from a financial or legal point.

 

[lespaul]

again, why do you say that?

A Sole Proprietorship works well for someone who already has a full time job, but does free lance work on the side.

According to the SBA:

"The vast majority of small business start out as sole proprietorships."

Advantages of a Sole Proprietorship

Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
Sole proprietors receive all income generated by the business to keep or reinvest.
Profits from the business flow-through directly to the owner's personal tax return.
The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship

Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).

'SBA'

Now, most small business that do decide to incorporate usually elect the S Corp tax classification:

Subchapter S Corporations
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Since the withdrawls to the owner can be handle in the same manner as in a Sole Proprietor instead of dividends.

Another website indicates:

The most obvious disadvantage of operating as a sole proprietorship is the unlimited liability for the claims of any creditors of the business. All of the owner's personal assets are exposed to debts of the business, regardless of the amount of capital invested or income earned by the owner
.......
As noted above, sole proprietorships are not treated as separate entities for federal income tax purposed and, accordingly, no separate income tax returns are required for them. Business income and loss are reported directly by the owner on "Schedule C" of his/her individual income tax return
........
The sole proprietorship thus has the advantage of having no entity-level tax, no tax liability incurred upon formation, and no costs attributable to preparation of separate tax returns for the business. A sole proprietorship has the disadvantage of unlimited liability of the owner for the debts of the business. Its use is also restricted to a single owner, because co-owners conducting an active trade or business would generally be treated as a partnership for federal income tax purposes. This form of business organization may also require special planning to facilitate the transfer of business assets upon the death of the sole proprietor.

'Tax Implications'

As far as I can see the disadvantages to the sole proprietor model for Imhotep2375 are minimal.

So, could you please provide some support for your clain?







Leslie

 

[screwloose]

Income from the business rolls to your personal taxes. Personal assets are not protected from liability. Your liability doesn’t end with the dissolution of the business because you are the business. Bankruptcy of the business is bankruptcy of you. You have more protection from a formal structure with higher revenues. The self-employment tax rate (15.3% on first $76,200 of net income.) Fully deductible health benefit plans should look at a C corporation. Other forms are best if taking on employees.

These are all very real concerns.

But a sole proprietorship might be a solution for a business earning a small profit and does not have significant liability concerns.

 

[rpearson]

http://www.nolo.com