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Kid got first job out of college... Contractor tax advice anyone??


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So he got his first real job, right out of school....  he is going to be a subcontractor at an established startup..  Good Shit Wooo Hooooo!!! Proud as hell!!!!  Anyway.  I have not been a sub since entering corp America 20+ yrs ago so I have no idea how to play the tax game as a contractor.  Any advice I might pass on. 

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Best advice.....don't ask tax advice on a forum trolled by IRS agents, sailors or drunkards...

Aside... congrats. You must feel at this point you might have done something right. I hope that feeling never goes away.

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18 minutes ago, warbird said:

Best advice.....don't ask tax advice on a forum trolled by IRS agents, sailors or drunkards...

Aside... congrats. You must feel at this point you might have done something right. I hope that feeling never goes away.

Was more asking how he needs to handle being responsible for his own taxes at the end of the year.  I have been W2 for the last 20 so I have no Idea how that works...  

 

THX BTW..  Sooooper proud o the kid.  Shoulda seen him in the suit.....  LOL

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17 minutes ago, Snaggletooth said:

Adgreede, teache hime howe to logon to SA and askes foire hisselfe................              :)

Come on Snags, This is My happy place....  LOL

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1 minute ago, shaggy said:
20 minutes ago, Snaggletooth said:

Adgreede, teache hime howe to logon to SA and askes foire hisselfe................              :)

Come on Snags, This is My happy place....  LOL

Macke it hisse to...........                  :)

Sincere congratz dad............. you done goode.............         :)

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4 minutes ago, shaggy said:

Was more asking how he needs to handle being responsible for his own taxes at the end of the year.  I have been W2 for the last 20 so I have no Idea how that works...  

 

THX BTW..  Sooooper proud o the kid.  Shoulda seen him in the suit.....  LOL

Tell him to elect 100% withholding, that way he will owe less at the end of the year...

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8 hours ago, warbird said:

Tell him to elect 100% withholding, that way he will owe less at the end of the year...

Ya mighta missed the whole point of the question...he's gonna be a subcontractor...there's not gonna be anybody "withholding" for him, he'll just be getting 1099s at end of year from any contractor he worked for...it's the new great way for the construction bidness to avoid all the hassles of actually having employees to take care of...kid needs to save every scrap of paper on what he spends related to work and then find a Mom&Pop tax service to tie it up in a bow for him at end of year...just don't mix anything in that pile of paper that might have come from a "cash" job :ph34r:...congrats! welcome to "Dirty Jobs" without the cameras...

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Hire an accountant.

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23 minutes ago, Grabbler said:

Ya mighta missed the whole point of the question...he's gonna be a subcontractor...there's not gonna be anybody "withholding" for him, he'll just be getting 1099s at end of year from any contractor he worked for...it's the new great way for the construction bidness to avoid all the hassles of actually having employees to take care of...kid needs to save every scrap of paper on what he spends related to work and then find a Mom&Pop tax service to tie it up in a bow for him at end of year...just don't mix anything in that pile of paper that might have come from a "cash" job :ph34r:...congrats! welcome to "Dirty Jobs" without the cameras...

Spot on advice.

What line of work is he in?

One of my kids just fell into building his first business. Same work he has been doing for many years but now the headaches are all his! Another proud pop here as well.

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Open up a savings account.

Figure out what his estimated taxes will be as a percentage of income - federal, state, and the self-employment assessment.  There should be planners you can download to do these calculations.

Transfer the percentage from every payment to the savings account and leave it there until April.

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1.) Get him Quicken so he can log all income and expenses and be sure to discipline to do this daily if not weekly.  This will make tax preparation so much easier. And should he ever get that invitation from the nice people at the IRS, the more organized he is the less they dig in.  As well, even though there are black holes such as vehicle, T&E, supplies, uniforms (no Prada bags and Armonie suits do not qualify),  go conservative - with everything online line, the IRS is pretty sophisticated these days.

2.) If he files as a single, non-married individual, he should expect to put aside 30-35% for income for taxes - There is also the self-employment tax SS & Medicare - which is deductible but he'll need to put away for that too.  He may get a penalty for not paying quarterly for the first year depending on the state.  Feds may hit him too depending on the amount - he won't be able to determine the Safe Harbor Rule, but I am sure there is a tax table somewhere he can get the information. .  He should set up an account with your state and the IRS and send in money each quarter as an estimated amount.  Worse case, he gets money back. 

3.) Have him set up a IRA and max it out - don't wait to the last minute to do it either, do it up front.

Good luck

 

 

 

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43 minutes ago, Grabbler said:

Ya mighta missed the whole point of the question...he's gonna be a subcontractor...there's not gonna be anybody "withholding" for him, he'll just be getting 1099s at end of year from any contractor he worked for...it's the new great way for the construction bidness to avoid all the hassles of actually having employees to take care of...kid needs to save every scrap of paper on what he spends related to work and then find a Mom&Pop tax service to tie it up in a bow for him at end of year...just don't mix anything in that pile of paper that might have come from a "cash" job :ph34r:...congrats! welcome to "Dirty Jobs" without the cameras...

Your son needs to discuss his situation with an accountant and perhaps a lawyer. He might need to establish an LLC for some protection in case of disputes with any of the contractors he is providing services to. Tax Man's suggestion of a seperate account for tax liabilities is a good one if he is not financially disciplined.

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As other have said, get in the habit of setting side that will be due.

Not sure there is anything such as "account" with tax authorities.  Can probably generate estimated ta remittance documents online as needed.  Just need the SSN to identify the tax payor.

With interest rates being what they are, sending in the estimates is probably better than holding in a saving account and hoping there is no penalty for under paying estimates throughout the year.  

For privacy, may want to consider buying something like Quicken as opposed to using the online version, especially the "free" ones.  They ain't free, you just don't pay in cash.

 

P.S. Congats to both the proud Papa and Son!

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2 hours ago, bmiller said:

Spot on advice.

What line of work is he in?

One of my kids just fell into building his first business. Same work he has been doing for many years but now the headaches are all his! Another proud pop here as well.

Startup builds websites for corp types... 

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Find the rules on the IRS site about deductible business related expenses and read it together.  

IIRC, deducting a portion of rent for the portion of his living space that is dedicated to work requires it be full dedicated to that purpose.  i.e. if he can afford a 2 bedroom apt and one is used exclusively as an office.  Not sure if similar rules apply to things such as his computer, monitor desk etc.  

Starting out toward the end of the year, it may pay to defer some expenses until next year.  Not sure if he can carry over these expenses if they are above his (?) AGI (?)  Conversely if there is a threshold of more than x% of AGI then grouping into a single year may make sense.

Caveat, I'm just a guy in the internet with an opinion.  Never been an independent / sub contractor with 1099s.  Like you, I am a W-2 wage slave.  

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1099 for 20 +years, fairly aggressive with tax interpretations and successfully passed a nasty three year audit in 2016. 
 

best solution for a one man biz with under 1M revs is Quickbooks Online combined with TurboTax. Not quite idiot proof but close, and provided he keeps his receipts and spends a few hours a month on it, almost no burden at all.  Makes finding and using deductions pretty easy.  

 

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5 hours ago, Tax Man said:

Open up a savings account.

Figure out what his estimated taxes will be as a percentage of income - federal, state, and the self-employment assessment.  There should be planners you can download to do these calculations.

Transfer the percentage from every payment to the savings account and leave it there until April.

Don't forget about the SS and Medicare tax he will have to pay in addition to state and Fed income tax. I think it's around 15%.

 

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7 hours ago, Mrleft8 said:

Hire an accountant.

This shit ain't rocket surgery...it's one step above a W2..."Mom&Pop" bookkeeper/tax preparer are a lot less expensive than "Mr Accountancy Pay for My Degree"...the kid's a one man band...they probably have 20-30 clients in exactly the same boat...

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4 hours ago, LakeBoy said:

 

IIRC, deducting a portion of rent for the portion of his living space that is dedicated to work requires it be full dedicated to that purpose.  i.e. if he can afford a 2 bedroom apt and one is used exclusively as an office.  Not sure if similar rules apply to things such as his computer, monitor desk etc.  

 

The rent thing, is it legal yes, but this can trigger an audit.  And if you own the property take the deduction and then sell... you're going to be subject to capitol gains on the portion that you deducted.

As for the other stuff, yes, he can and should take a one time hit, and leave it at that.  If he has already owned the stuff, he will need to come up with a value at the time he put the equipment into service. 

 

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3 hours ago, No Bargers said:

Don't forget about the SS and Medicare tax he will have to pay in addition to state and Fed income tax. I think it's around 15%.

 

It’s called Self-Employment Tax for non W-2 filers

 

 

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16 minutes ago, Ventucky Red said:

The rent thing, is it legal yes, but this can trigger an audit.  And if you own the property take the deduction and then sell... you're going to be subject to capitol gains on the portion that you deducted.

As for the other stuff, yes, he can and should take a one time hit, and leave it at that.  If he has already owned the stuff, he will need to come up with a value at the time he put the equipment into service. 

 

Never act on tax advice from people who do not have a fiduciary duty to you or their name on the return as Preparer. 
 

home office deduction does not trigger audits unless the deduction falls far outside deductions for similar trades or professions.  I didn’t take any home office rent/utility deduction when I was audited. My audit was triggered by excessive travel and meals for my lowly income as a traveling sailing media douche. Since then  I have deducted around 30% home office rent/utilities/insurance but that is for an actual office with two desks, and half the garage for business vehicle and equipment storage.  I approach every deduction the same way, by asking myself one simple question (in the voice of my very stern IRS investigation agent): “Mr. Block, please show me exactly how that expense occurred, why you deducted it, and what is the evidence?

if I can’t answer that question with authority, I don’t deduct the expense. 

I am going to mod my new house with a nice office, but that has to be amortized over I think 15 years.

who knows, the kid may be interested if he reads a few primers or watches a few videos on tax stuff and wants to learn more. There are tons of great resources out there, and the puzzle like nature of tax law (along with the chance of legally reducing ones taxes significantly) appeals to a lot more people than you might think.  For someone who really understands how to craft it, a smart tax plan for a solo or small business that incorporates IRA/Roth IRA, salary, health insurance, leasebacks, accelerated vehicle and equipment depreciation, loss allocation, and strategic purchasing can reduce income by a very meaningful amount.  Anyone with gross revs over 150k should have such a plan, even if they have to spend some money to implement it. 

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If nothing else, advise him to pay quarterly estimates, so he doesn't splurge on the new girlfriend and find himself in a cash crunch at year end.  Like said above, he'll need to do that starting next tax year anyway.

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15 hours ago, Grabbler said:

Ya mighta missed the whole point of the question...he's gonna be a subcontractor...there's not gonna be anybody "withholding" for him, he'll just be getting 1099s at end of year from any contractor he worked for...it's the new great way for the construction bidness to avoid all the hassles of actually having employees to take care of...kid needs to save every scrap of paper on what he spends related to work and then find a Mom&Pop tax service to tie it up in a bow for him at end of year...just don't mix anything in that pile of paper that might have come from a "cash" job :ph34r:...congrats! welcome to "Dirty Jobs" without the cameras...

Did that really need a purple font?

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On 8/12/2021 at 11:48 PM, shaggy said:

Was more asking how he needs to handle being responsible for his own taxes at the end of the year.

Find a good tax guy.  I did a lot of side jobs and found a good tax guy.  He paid for himself many times over.

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4 hours ago, Jules said:

Find a good tax guy.  I did a lot of side jobs and found a good tax guy.  He paid for himself many times over.

Cuts both ways though. My nightmare audit was a direct result of incompetent tax preparer work which algorithm’d me into the audits.  For very good tax advisor there are many shitty ones. 
 

I think if there is any time to do your own tax return, it’s when you are starting out. The burden is light and the basic knowledge will help throughout ones working career and beyond.  And you’re way less likely to be screwed over later by your CPA or tax lawyer. 
 

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1 hour ago, MR.CLEAN said:

Cuts both ways though. My nightmare audit was a direct result of incompetent tax preparer work which algorithm’d me into the audits.  For very good tax advisor there are many shitty ones.

That's why I said find a good tax guy.  Get references from people you know really well.

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On 8/13/2021 at 8:55 AM, Melibob said:

How many posts did that take? 

And how long has it taken for most people to ignore my advice?

 I did my own taxes for 26 years, most of them SE. Then I got married to a woman who had an accountant.  Cost$200 per year. He saved me several thousand $ each year. And I didn't have to spend a weekend with my eyes going blurry trying to figure out the tax forms every year.

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I'm not an accountant, but I did pay one for this advice -

Assuming he's essentially a single person company (a self-employed individual) he should look at setting up a SEP-IRA.  The SEP-IRA (https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep) has a significantly higher contribution limit than a regular or Roth IRA.  The catch is that the employer must contribute the same percent of income for each employee, but if he is his only employee, this is a non issue.

Really easy to setup - https://investor.vanguard.com/small-business-retirement-plans/sep-ira

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I found this book is very helpful when I ran my own show.  

https://store.nolo.com/products/working-for-yourself-wage.html

The accounting isn't hard, but requires discipline.  I was worried about it so I put some time into it at the beginning. That time investment paid off.

The IRS documents are well written, straight forward, and easy to read. They're all online and easy to get.  If you/he read them, you'll know what you can and can't do.  The Fishman book above ties together the tax info and other advice is worth buying.  Unless he's doing something elaborate, I don't think you need much more than the book above (or similar) and the IRS documents.  If you don't want to think and want to pay someone else to handle everything, you can go that route, but it's hard to find trustworthy folks for a small business.  Some characters push you into questionable deductions or similar to find ways to justify their compensation.

The thing you want to make sure you do is make the estimated tax payments every quarter.  If you wait until the end of the year, you'll find that the government wants interest.

Some other things to consider.  Look at the details of your contract and make sure you understand what you're getting paid for, how you get paid, and when you get paid.

Clauses like pay-when-paid can kill subs when they're working on a project for a large, slow paying client.  You get situations where the end customer doesn't pay for 90 days and you don't get paid for 30 days after that.  Which puts you 150 days away from your work - assuming you invoice at the end of the month

Make sure you know the procedure for invoicing as well as PO number and any other codes required.  Many times you'll be uploading to or entering information into a system. Know what the cutoff dates for each step.

Make sure you have sufficient documentation for your work.  If this isn't in the paperwork you were given, ask for samples.

Startups are typically not focused on HR, payroll, and subcontractor management systems.  Expect that you'll need to figure some of this out.  You may need to entire time sheets in one system and submit invoices elsewhere.

Find out if your contract is tied to a client or project?  If that contract goes away are you out on your ass?  You can't change that, but it's good to know as you'll see how things are going with the project and react accordingly.

Check whatever contract you have for non-compete and non-solicitation clauses.  You'll want to know if your end client can hire you or not.  Similarly, you'll want to know if you can / can't do the same work for a competitor and whether you can hire other coworkers.

It's unlikely at a startup, but some companies have rules about how long you can be a subcontractor.

Probably more stuff to consider, but that's a quick summary.

 

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On 8/14/2021 at 6:23 AM, MR.CLEAN said:

Cuts both ways though. My nightmare audit was a direct result of incompetent tax preparer work which algorithm’d me into the audits.  For very good tax advisor there are many shitty ones. 
 

I think if there is any time to do your own tax return, it’s when you are starting out. The burden is light and the basic knowledge will help throughout ones working career and beyond.  And you’re way less likely to be screwed over later by your CPA or tax lawyer. 
 

The only audit I ever had was also due to using a CPA...

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On 8/16/2021 at 4:25 PM, Raz'r said:

The only audit I ever had was also due to using a CPA...

 

With rental properties, I can't be tasked with learning the tax laws and doing 65 page returns myself.  I asked my CPA how may LLC's have ever been audited, in his many decades in the business? He said, only one; they asked a few questions that were answered, and problem solved. 

To me it's like lawyers, I should not be representing myself, with arcane mathematical stuff that I am not willing to learn, life is too short to put on that yoke and plow it...  Sometimes the best tool for the job is your checkbook...

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1 hour ago, M@AYC said:

Any reason not to form an LLC to run his contract work through?

 

I don't know where he is, but in CT there is an annual renewal filing fee of a couple hundred bucks, otherwise I can't think of a reason not to?   I have separate credit cards, some for the LLC, and some for personal.   Any payments, like for a "company" car, are paid with dollars that have not already given a third away in taxes...

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