This question is mainly for those who reside and work in the US and especially those who do freelance coding as a side job.
I've been thinking about licensing my name for the freelance work I do. The only thing I'm worried about is how this will affect my taxes and such. Is it better to license my name (LLC, Inc, etc.) and thus file a separate tax form for my business or should I just file it under my standard 1040 as extra cash I make on the side and not license my name? I don't have the money to hire a CPA to work this out, so for now, it'll be trial and error. Anyone have experience with this and know what benefits and problems there are with both methods? I believe licensing your name is only $50 or so.
If I do license my name, must I make sure my clients send in the form (1080a I think) that confirms the services and money I've charged? This would require them to be claiming the work they've subcontracted out, which of course many don't. So I don't really see this happening and if so, does that change anything for me?
Also, if you're dealing with clients from other countries, does this change the way in which you claim your taxes on the money you've made?
I'm aware that most do not claim the money they've made from freelancing but being that it's illegal if making more than a certain amount per year (I think it's $600) and this being a respectable forum, I will avoid those kind of talks
Sole Proprietor and Corporation (in its many forms).
Being a sole-prop makes taxes much easier and finances as well. You basically just need to file a schedule C at the end of the year for profit / loss (and most people can do Schedule C-EZ which is only 1 page).
The problems - finacially, ALL your money is taxed as salary. So you pay Medicare + FICA (7.65%) for both you and your business (so 15.3%) on ALL that money. PLUS Federal (15%) and state (if applicable) so you basically loose 30%+ out of every dollar. The other problem with Sole Prop is that your assets and your business assets are the same. Meaning if you royally screw up (not that you will, but you need to think about these things) and someone sues, they can go after your house, your car and your computer!
A corporation (S-Corp, C-Corp, LLC, and Partnership) on the other hand don't deal with Schedule C. They use 941 / 944 for annual filing. The benefit, you can categorize your earnings as "Salary" and "Distributions". All is still liable for Fed + State. BUT! You only have to pay FICA + Medicare on your Salary. Of course, the tendancy is for many people to claim everything as "Distributions" but this is a very risky idea. The IRS states that you must pay yourself a salary that is comparable to the industry and area you're working. Meaning, if you're a web designer, go to www.bls.gov and look up Average web designer rates for your area, and pay yourself that as a Salary. I know other people that do a 50-50 split, which the IRS is "usually" agreeable with as well. Me personally, I did the comparison and pay myself that salary every year.
The other benefit of a corporation is that your business assets and personal assets are separate. If someone sues your company for bad work, they can only go after your company assets not yours. So, for most people, doing an S-Corp is the way to go. However, the taxes are a little more challenging. They're not impossible for the average person, but you should probably use a solid accounting system like QuickBooks / Quicken and use TurboTax / TaxCut to help you.
Either way you go, don't forget you "may" need to make quarterly / monthly tax deposits to avoid penalties.
Thanks a lot! I have heard some of that before but not that complete of an explanation. That certainly clarifies a bunch.
I believe that if I were to go S-Corp, it'll cost a couple hundred dollars if I'm correct. If I went S-Corp, I do have Quickbooks 2008 and Turbo Tax, so I'm sure with a little guidance I could manage the taxes correctly. However, I'm not sure if I'm ready to jump into that just yet and may just start off as Sole-Prop.
I guess I have a little more research to do before I decide on the route I take. I just needed that jump start so I know where to begin.
Yeah, amazingly enough, the IRS is REALLY helpful for new business owners. If you call them up, my experience has always been very positive.
Some other things to consider for tax filing...
You may need to do separate business tax filings for State and local Government as well.
As an S-Corp, you'll also need to file 940 (Federal Unemployment Tax) and 1120S - Corporate Income tax return.
Either way, you're going to need to register tax ids for your company (sole prop and s-corp). Once you do that, you'll get a "welcome" packet from the feds. It actually does have lots of good info in it.
Finally, call your local Secty of State. Many states have a free guide on starting businesses (or relatively cheap i.e. under $15). I'd strongly recommend getting that.
Thanks for all your help Brandon. It's certainly getting more complicated then I originally thought, but no one said it'd be easy, hehe.
I'll definitely have to get that guide and see what else I can find too. I was hoping licensing my own business would at least afford me some more tax breaks but it's almost looking like I'll be dishing out more, esp. since I really don't pull in much income from freelancing right now.
1) Liability. How comfortable are you with your skills and what risks are you willing to take if someone sues. If you have a high risk tolerance, or aren't doing anything that deals with tens of thousands of dollars or are doing no e-commerce, then you should be ok as a Sole prop.
2) Estimated Revenue. If you're making (or plan to make) $10,000 or more this year, I'd strongly suggest looking seriously at an S-Corp. The tax advantages will probably offset the costs at that point.