July 30, 2025 • 29 mins
Transitioning from W-2 employment to receiving 1099 income fundamentally changes your tax situation and officially makes you a business owner, even if you're doing the same work as before.
• Self-employment tax means paying both the employer and employee portions of Social Security and Medicare (15.3%) on top of income tax
• Business expenses can be deducted against your 1099 income, reducing your taxable income significantly
• Opening a separate business bank account is crucial for tracking income and expenses correctly
• You can simply transfer money from your business account to your personal account as needed
• Estimated quarterly tax payments are required to avoid penalties from the IRS
• Consider setting aside 25-40% of income for taxes depending on your tax bracket
• Health insurance and retirement planning now fall entirely on your shoulders
• Once netting over $50,000 in profit, consider forming an LLC and electing S-Corporation status
• S-Corps require more complex paperwork but can save significant money in self-employment taxes
• Higher-earning contractors should work with a CPA rather than trying to handle everything themselves
Check out our guides for new businesses and S-Corp owners in the show notes if you need step-by-step assistance navigating your new tax situation.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
So most people know that when you start getting that
1099 income, nobody iswithholding taxes for you, and
that's normal.
But you might just be thinkingwell, I'm in the 12% tax bracket
, so nobody's withholding for me.
Whatever I make, I'm going tohave to pay 12% of that.
That is not where this ends,unfortunately.
Welcome to what your CPA Wantsyou To Know.
Speaker 2 (00:27):
Tax and accounting help can be expensive, so we've
created this podcast to helpguide you through it all and
make you feel like you have aCPA in your back pocket.
Speaker 1 (00:37):
I'm Carson Sands.
Speaker 2 (00:38):
And I'm Taryn Sands.
Speaker 1 (00:40):
I'm a CPA with over 10 years of experience helping
people start and grow theirbusinesses.
Speaker 2 (00:46):
And I'm an MBA with a specialization in marketing and
entrepreneurship.
Taxes suck and we want to makesure you don't pay more than
your fair share.
Speaker 1 (00:56):
We're here to share everything your CPA wants you to
know.
Speaker 2 (01:00):
In a fun and easy to understand way.
Speaker 1 (01:03):
Let's get started.
Speaker 2 (01:04):
Let's do it.
A few people reached out to uson Instagram and I was looking
back to see if I could send thema podcast episode, and I
realized we did not have apodcast episode about this, and
this is crazy, because this issomething that we get asked all
the time, so better late thannever.
(01:26):
Today's episode is all about1099s and the people that
receive them and how you need todeal with that from a tax
standpoint.
Speaker 1 (01:34):
Yeah, it is weird.
I mean I know we've talkedabout 1099s as part of a lot of
other episodes, but never withthat being the focus, and so
people that were searching forthat might not have found it or
might not have wanted to digthrough a whole episode of other
stuff just to get to that onepart.
Speaker 2 (01:50):
Right.
I couldn't even find it becausewe've answered all the
questions, but I couldn't goback and find the specific
episode.
I know that it was in one ofthem, but I have no idea which
one.
So quickly.
Speaker 1 (02:00):
if you are trying to figure out how to file 1099s
from your business and youalready know about some things
about business, but you'retrying to figure that part out.
Well, we do have an episode onthat, that's episode eight, but
this is completely different.
This is for people that haverecently started receiving a
1099 for the work that they do.
Speaker 2 (02:18):
And getting a 1099 is for contract labor and we are
seeing a big shift in thatinstead of W2 employees, we're
seeing a lot more 1099 employees.
So a lot of people are changingover and then they are
contacting us being like whatdoes this mean?
What does this mean for my taxreturn?
What do I need to do?
And those are all very goodquestions, because it changes a
(02:41):
lot, and today we're going totalk about all the changes and
what you should do if you haverecently been changed from W-2
to contractor or if you'verecently changed from W-2 to
1099, and what you need to domoving forward.
Speaker 1 (02:55):
The most important thing you need to do is get your
mind around the fact thatyou're a business owner now.
Speaker 2 (03:00):
Yes, that is.
The biggest thing to take awayfrom that is that if you're
getting a 1099, you need toconsider yourself a business
owner.
Yay, congratulations, you nowhave a business.
Speaker 1 (03:10):
Some people don't feel that way, especially when
they have only one customerwhich they don't even think of
as a customer, they still thinkof as their employer because
they only get the 1099 from them.
That's the only company they dowork for.
It doesn't matter if you weregetting a 1099, you have a small
business.
Speaker 2 (03:28):
Yes, and we will dive into what all that means.
But it also applies to thepeople that maybe are still
getting a W-2, but are receivinga large 1099 for, I don't know,
some other type of work.
I know in oil filled a lotpeople are getting 1099s even
though they're also getting aW-2.
I don't really know why orwhich part of that they're
(03:49):
getting the 1099 for, but we seethat a lot.
Speaker 1 (03:52):
Sometimes we see that certain elements of overtime
are considered a contract laborand it's because their
employment agreement does notallow them to work overtime.
So they do additional work andthey get paid 1099.
Those are usually big companies, so I'm sure they're following
the rules.
It seems like that would be astretch to me, because normally
(04:12):
that would still be an employeethat's just getting overtime,
but I'm sure they have someworkaround because, you know,
these major companies aren'tgoing to violate employment laws
typically.
Speaker 2 (04:21):
Well, I feel like we're seeing a lot of that.
So, whether they've found aloophole or something, I feel
like we're seeing a lot of that.
So, whether they've found aloophole or something, I feel
like we're seeing a lot ofpeople that maybe really should
be an employee that are beingpaid on a 1099, likely to just
decrease the cost for theemployer.
Speaker 1 (04:36):
Another example, though, would be we have people
that work for big truckdealerships or for heavy
equipment dealerships, and thedealership pays them a W-2 for
their commissions or whatevertheir salary is, but then a lot
of these, let's say, they'reselling John Deere equipment.
Well, john Deere has specialincentives for the salesmen that
are paid directly to them andnot to the dealership, and those
(04:58):
are paid out on a 1099, becausethey don't work for John Deere,
they work for the dealership.
Speaker 2 (05:02):
Okay.
So there's a lot ofcircumstances like that.
So if you're receiving a 1099,especially if it's for a
significant amount, this episodeis just for you.
Speaker 1 (05:12):
So if you are a business owner, then if you
haven't filed any otherpaperwork to be a special kind
of entity which you probablyhaven't, if you just started
getting a 1099, then you're asole proprietorship.
We do have an episode on soleprops and that's episode 28 of
this podcast, and so there's alot of good information.
That's a good place to, youknow, go and listen to that and
(05:32):
find out some information, butthat doesn't mean we're not
going to give you a lot of greatinformation in this episode as
well.
Speaker 2 (05:37):
Right, that's just where you start.
So if you receive a 1099 andyou are filing your taxes,
you're putting that on your taxreturn as your sole proprietor.
You don't have to file anythingto do that.
This is just automatic.
And the reason is because theself-employment taxes and we'll
go into that a little bit more,but just know that automatically
(05:58):
that's going to be filed onschedule C of your tax return
without you doing anything orfiling anything.
Speaker 1 (06:04):
So most people know that when you start getting that
1099 income, nobody iswithholding taxes for you, and
that's normal.
But you might just be thinkingwell, I'm in the 12% tax bracket
, so nobody's withholding for me.
Whatever I make, I'm going tohave to pay 12% of that.
That is not where this ends,unfortunately.
Speaker 2 (06:22):
No, Unfortunately there are more taxes because
you're not going to get out ofthings like Social Security and
Medicare.
Speaker 1 (06:28):
That's right.
Your employer has beenwithholding 7.65% to cover
Social Security and Medicare andwithholding for your income tax
, and on top of that they'vebeen matching the 7.65% for
Social Security and Medicarewith their own funds, and so
that adds up to 15.3% that hasbeen going into just Social
Security and Medicare with theirown funds, and so that adds up
to 15.3% that has been goinginto just Social Security and
Medicare on top of your incometax withholding.
(06:51):
Well, now you're responsiblefor 100% of that 15.3%.
So all of your income will betaxed at the 15.3% for
self-employment, which is yourSocial Security and Medicare and
your income tax rate, whateverthat may be.
Speaker 2 (07:06):
So that's a lot of taxes and you're going to feel
it a lot more than you dowhenever you're being paid on a
W-2, because your employer ispaying a portion of that.
Speaker 1 (07:15):
Right, and all of that's going to hit you at once.
Plus, you know, 12 percent, 10percent, whatever bracket you're
in, plus the 15.3 percent,you're already looking at a
quarter of your income thatneeds to be set aside for these
taxes, and that's assuming thatyour spouse isn't making a large
income already.
If they are, you could be inthe 22% or 24% tax bracket.
Speaker 2 (07:36):
Now, all of a people don't plan in advance and then
they just deal with it when theyfile their tax return and maybe
they know they're going to owea lot.
Carson said that they generallydo know that, but actually they
don't.
A lot of times people aresurprised, so they just wait to
(07:58):
file and then they maybe have a1099 for $60,000 and they have
to pay those taxes all at once,but they're definitely unaware
of the self-employment taxes.
So that's what we want to avoidby teaching you all of these
things today.
Speaker 1 (08:12):
Yeah, and as a side note, that just highlights the
evil that withholding actuallyis, because the IRS forces your
employers to withhold all thatmoney so that you never see it
and you don't feel it.
And so when you owe all thisbig amount, you're shocked.
You've been paying it yourwhole life.
You didn't pay more.
Just because you'reself-employed, you're paying the
same taxes you've always paid.
You're just getting hit with itall at once when you file your
(08:34):
tax return, instead of sneakingout every two weeks a little bit
of it.
Speaker 2 (08:38):
And it's really hard for people to plan for this,
because if you've never done itand it's just been taken out of
your paycheck little by little,it is hard to plan for such a
large amount and actually seethat you do it.
Speaker 1 (08:49):
I can guarantee you, if they made everybody write a
check on April 15th, includingemployees, that people would
start voting differently veryquickly.
Speaker 2 (08:57):
I mean, I can definitely relate to that
because when we started thisbusiness I was really mad about
the taxes we had to pay.
At the time we weren't doingestimated tax payments and we
did have to pay it all at onceand I was not happy.
Speaker 1 (09:11):
Yeah, no, she was not .
She told me to recalculatethose numbers.
Speaker 2 (09:15):
Yeah, Redo, that is not okay with me.
I do not want to pay that muchin taxes.
But you know it just.
You just get used to your checkbeing a certain amount and most
people just don't look at allthose numbers.
But they're really important,especially if you make a big
change to 1099 and then you'rehaving to plan for that and pay
those out of pocket all at once.
Speaker 1 (09:33):
That's right.
But hey, don't blame the IRS.
They're just following therules that they're told, paying
39.6% of the amount that is onthe 1099, you're doing it wrong.
(09:55):
So that's where we start to getback a little bit of that money
, because it's sounding crazyLike I can't be self-employed if
I have to pay 40% tax.
That sounds absurd.
Well, you don't, because inaddition to having all those
taxes, you also get to have awhole bunch of expenses that you
put against that 1099 income.
Speaker 2 (10:13):
So there's nothing that you have to do to file this
1099 income on your Schedule C,which opens up the ability for
you to put in deductions.
So a lot of people still thinkthat if they have a W-2 that
they can have deductions rightoff certain things.
You can't.
There's no way for us to dothat for you on your tax return.
However, if you have a 1099, itcan be put on schedule C and
(10:33):
there's a whole list of thingsthat you can deduct to help
bring down that taxable income.
Speaker 1 (10:38):
Yeah, do you drive somewhere?
If you're in sales, I'm sureyou do.
That mileage adds up so fast.
You wouldn't believe it, andthat's fair, because your gas is
not cheap.
Speaker 2 (10:53):
And your cell phone, your home office things you buy,
like your laptop, all of thosethings that people want to
always deduct.
You can deduct when you have a1099.
Speaker 1 (10:57):
And that's a great point Even and we do see this a
lot even if you're self-employedbut you work from home and you
get that 1099, well, at the veryleast you have a home office,
you have office supplies, you'reusing your computer for
business, so a portion of thatcan be deducted.
Using your internet, portion ofthat can be deducted.
Or your cell phone is yourprimary form of communication
with your I don't want to sayemployer, because you're not an
(11:19):
employee but with the peoplethat are paying you, or with the
customers you're working with.
You know your cell phone isbeing used for that, so you get
to deduct part of that.
All of those things add up andcan make a really big difference
, especially when your tax rateon this income is 25 or 40%.
Speaker 2 (11:35):
Absolutely, and there's so many I mean software
fees and certifications that youwould have.
There is something sodefinitely do not just file that
1099 straight income withouttaking some deductions, because
we promise you you have some.
Speaker 1 (11:49):
Yeah, and now if you have some kind of job, some
magic job, where you don't haveany certifications, you don't
have to do anything.
People just send you money andyou do nothing for it.
Well, okay, then maybe youdon't have any expenses.
Let us know what job that is.
And I might do that on the side, but I don't think that it's
going to be almost anybody.
Speaker 2 (12:08):
No.
So the first thing that youwant to do is keep track of
those expenses through the year,because if you have a CPA doing
your tax return, you're goingto need to give that to them.
If you're doing it yourself,you're going to need that.
So you need a total of whatyou've spent in every category.
So what did you spend on?
Speaker 1 (12:26):
meals.
Speaker 2 (12:26):
What did you spend on meals?
What did you spend on supplies?
How many miles did you have?
All of those things need to becalculated for the year and
you'll use that to file your taxreturn.
Now, the easiest way to keep upwith this is to have a business
bank account, and I know we'vesaid this a lot, a lot, a lot on
the podcast.
Speaker 1 (12:43):
Yeah, you can probably hear us talk about that
on episode 12, starting a newbusiness, or episode 21, roadmap
for new business owners.
You know, in general and wehave some, by the way, that are
specifically about accountingfor your business, and there's
some that are about doing it ifyou use a spreadsheet or some if
you do it through QuickBooks.
But no matter which way you doit, you need to have a separate
bank account or your accountingis going to be a nightmare.
Speaker 2 (13:10):
So step one with all of this is, if you are now
receiving a 1099, is to open anew bank account, and what
you'll do with that is you willhave all the payments that
you're receiving from, even ifit's just one person or many
businesses, all need to go tothat bank account, and then
anything that you are purchasingfor your business or any type
of business expense needs to beused with that business debit
card.
Moving forward, that makeseverything so easy and so simple
(13:33):
when it comes to filing yourtax return.
Speaker 1 (13:36):
So what's your first question whenever we tell you
this?
Everyone's first question ishow do I get paid?
How do I use the money that Imake to live to eat, to pay for
silly luxuries like a roof overmy?
Speaker 2 (13:47):
house.
If all the money that I'mmaking is going into this
business bank account, it mustbe very complicated to pay
myself from it, but good news isit's not.
Speaker 1 (13:55):
Not at all.
There's so many ways you can doit.
You can write yourself a check.
That's just a distribution,doesn't affect your taxes at all
, and if you're from the 1900s,like we are Don't start using
big words when you saydistribution.
It really confuses people Okay,that's just money that comes
out of your business and goesinto your personal account.
There's nothing fancy about it.
Speaker 2 (14:13):
And it's not.
You don't have to run payroll.
Speaker 1 (14:16):
No.
Speaker 2 (14:16):
Nothing formal about this payment to yourself.
Speaker 1 (14:19):
None of that is necessary yet.
That's all things we do downthe road when things get more
complicated, but right now it'sjust moving the money from your
business account to yourpersonal account.
You can do it through a checkif you're from the 1900s, like
we are, but if you're from thismillennium, then you could just
transfer it over.
If you bank your business andyou're personal at the same bank
, then it's really easy.
(14:39):
You just transfer from oneaccount to the other and that's
it, and then you can use themoney.
However, you need to Just makesure you take that extra step
and transfer the money.
However, you need to just makesure you take that extra step
and transfer the money, becauseif you start buying personal
items through the business, itjust complicates your life
unnecessarily.
Speaker 2 (14:55):
Yes.
So don't make it complicated topay yourself.
You're a sole proprietor.
You don't have to run payrollor anything like that.
You can have a business bankaccount and a regular checking
account and you can justtransfer online, like we do from
Wells Fargo, from one bankaccount to the other when you
see fit.
It doesn't have to be on thefirst and the 15th, it doesn't
have to be biweekly, it can bewhenever you want, it can be
(15:18):
every day.
Whenever you have enough moneyin that account that you feel
like you want to transfer abunch out and it can cover the
expenses, go ahead and payyourself.
Speaker 1 (15:26):
But here's why you want that extra step.
If you have all of yourexpenses running through your
personal account, you're goingto miss some because you're not
going to know was that Walmarttrip for office supplies or was
it personal and you might err onthe side of caution and that's
just an expense you miss.
What you won't miss is theincome, because the full amount
of your income is reported rightthere on that 1099 and the IRS
(15:48):
already knows about it.
So you already have to reportall that.
We certainly don't want to missany expenses and having a
separate account can make thatso much easier.
And God forbid if you do getaudited.
Having that separate businessaccount will give you a leg to
stand on when you're approvingyour expenses.
Speaker 2 (16:02):
Absolutely.
This is just going to save youso much time, so it doesn't take
very much time to open a bankaccount, especially if you do it
online.
You can do that on WealthFargo,for sure.
It's so fast, but you're notgoing to have to go through all
12 bank statements through theyear and try to sift through
what was business, what waspersonal, and gather that
information up for your taxreturn.
It's going to be right there,super easy.
Speaker 1 (16:24):
And the last reason is if you get to the end of the
year and, oops, you didn't doyour bookkeeping, that happens
and you're like I don't want to.
That sounds miserable.
I would rather do anything elsein my whole life than do
accounting.
I totally understand thatfeeling.
So you're like I'll hire abookkeeper or I'll pay the CPA
to do it.
That's great.
If you have that separateaccount, they will take that and
they'll charge you a reasonableamount and they'll get it done
(16:47):
for you.
If they look at it and it's allmixed into your personal, then
one of two things will happen.
If it was us, we'll just sayI'm sorry, we can't help you.
You're gonna need to findsomeone else.
If it is another bookkeeper,maybe they're hungry for money,
but they're still gonna see howmuch extra time it's gonna take
them.
In that situation They'llthey're just going to charge you
about five times as much asthey would have in a normal
(17:07):
situation?
Speaker 2 (17:08):
Well, no one can go through your personal bank
account and know what was foryour business and what wasn't.
That's just.
It doesn't matter how good thebookkeeper is, they can't do
that.
Speaker 1 (17:16):
If you do have that business bank account, you can
tell them, like everything inhere is business related, okay,
well then they'll know what todo with it.
But if even if they're willingto take on a mixed account like
that, they're going to require alot of effort from you.
So now you're paying extra andyou're still having to do a
whole lot of work to tell themoh, this was business, oh, this
was personal.
By the time you do all that,you might as well just do it
yourself.
Speaker 2 (17:36):
And if you're kind of scared because we're mentioning
bookkeeping and you didn'trealize that having a 1099 meant
you're going to have to startbookkeeping, it's not as scary
as it sounds.
You don't have to getQuickBooks, especially if you're
just having minimaltransactions and you're just
getting started.
If it's very simple, all youneed this for is to plan for
(17:59):
taxes and to file your taxreturn.
So you're going to need a incategories and total for the
year and then how much money youmade total for the year.
So those two things are whatyou need for your tax return.
But also you're going to needthat information to help you
plan for taxes in the year,which brings us to estimated tax
(18:22):
payments.
Speaker 1 (18:22):
Ah, yes.
So this is something that youshould start doing when you
become a 1099 person, becausenobody is withholding those
taxes for you and the IRS.
They're not willing to waituntil April 15th to get that
money.
They want you to pay it inquarterly throughout the year so
that they can.
I don't know, usually if theyneed more money they just print
more, but I guess the originalidea of the estimated payments
(18:46):
was so that they have operatingmoney throughout the year and
they don't get all of it just atone time from all the business
owners.
Speaker 2 (18:53):
Yes, they will fine you, they will penalize you if
you don't make these paymentsand you just pay them all at
once when you file your taxreturn.
So unfortunately that sucks.
Speaker 1 (19:03):
If you're already into your first year and you
haven't done this yet.
A lot of times they don'tpenalize you the first year.
It just depends, because theway they penalize you is.
It's a complicated calculation,but just suffice it to say that
it's never too late to startand it's not the end of the
world if you've already missed afew of those.
But moving forward, just beprepared to pay that in.
You're already setting themoney aside.
(19:24):
You're not making that muchinterest on it in the savings
account anyway.
Just go ahead and pay it intothe IRS, because their penalties
are higher than whatever you'reearning in the savings account.
Speaker 2 (19:38):
Estimated tax payments just confuse the hell
out of people.
So we do have an episode comingup where we will walk you
through how to make theestimated tax payments, where
you can do that, all of youroptions, the due dates and all
of that.
I also realized we didn't haveone of those, even though we've
talked about it a lot.
Speaker 1 (19:49):
Yeah, I know Isn't that weird.
I know we mentioned it inepisode 23, along with some
other things, but we talk aboutretirement and a bunch of other
stuff in that episode.
Speaker 2 (20:02):
It's either the next episode or the one after that.
It's going to be all aboutestimated tax payments.
So if you're listening to thisand this applies to you just
stay tuned for that episode.
We'll go further into that.
But basically you're going tomake four payments during the
year of those taxes that you'regoing to owe at the end.
If you don't, there arepenalties.
Speaker 1 (20:18):
So we'll just say that for now, and the name says
it all.
They're estimated tax payments,because you're estimating how
much tax you'll owe in totalwhen you file your tax return
and you're paying about aquarter of that four times
through the year.
Speaker 2 (20:31):
Right, you're just looking at what you made in that
quarter and sending in apayment.
It's just a guess.
It's always a guess wheneveryou own a business, because you
don't know what the year isgoing to look like.
But maybe for some of youlistening, you know how much
contract work you're going tohave and that will make things a
little bit easier.
It is important to note thatyour tax return will change.
Like I said, you'll be filing aseparate form now.
(20:53):
So if you're doing it yourself,it will change and if you have
a CPA, it will very likelyincrease the price that you're
paying if you just were filingwith W-2.
Speaker 1 (21:04):
That's true, because it is a business, and so it does
complicate things.
Speaker 2 (21:08):
I know you did want to mention, just in case you
hadn't thought about this if youare new to getting a 1099 and
you were previously a W-2employee, you will no longer
have retirement savings orhealth care from your job, so
you need to plan for thosethings too.
Speaker 1 (21:23):
Right.
And if you're just starting onthe 1099 path, unless if you are
already making a significantamount of money which happens
sometimes you might not be readyfor retirement yet.
It might just be something youwant to put in the back of your
mind for later.
But there are ways to save forretirement through your business
or even outside of yourbusiness just to make sure
you're still contributing.
But the health insurance,that's a big one.
(21:43):
You don't want to wait on thatand there are options out there
that don't cost an arm and a leg.
Now, the marketplace is great.
If you don't make any money,you can get a lot of discounts
on the health insurance, andthat's great.
If either you're already makinga lot of money, or even if
you're not but your spouse is,then you're not going to qualify
for any of those discounts, andpaying full price through the
(22:06):
marketplace it's prettyexpensive.
But there's some alternativesthat maybe are not considered
technically health insurance,but they still work.
They still cover you whenyou're sick and stuff, and
MediShare is one of those.
It's pretty well known.
But just cost sharing plans ingeneral of any kind would be a
much cheaper option, and we didthat when we started out, and I
(22:26):
mean it was an eighth of theprice, maybe a 10th of the price
of what the marketplaceinsurance was.
So keep that in mind.
Speaker 2 (22:34):
And we do have an episode all about where we talk
about what we did when we firststarted our business, and it's
episode number 74 healthinsurance options for business
owners.
So keep that on your radar ifyou're just now moving to 1099.
Speaker 1 (22:47):
So the last thing we'll talk about and you might
not be there yet, but this couldbe way, way, way down the road,
or it could be today.
Yeah, you could be knocking onthe door of needing to do this
right now, but people always askabout do I need an LLC?
You don't need one necessarily.
It could be beneficial.
We have so many episodestalking about the benefits of an
LLC, when you need one, why youneed one and, beyond that, an
(23:11):
S-Corp when you make anS-election for tax purposes to
be taxed as an S-corporation, itcan save you a great deal of
taxes.
But it's not for everybody.
We have, I mean, not justepisodes about that, we've
written a book about it, and sowe have a lot of information
about that.
The whole.
Speaker 2 (23:25):
S-Corp series.
But the LLC I do want to statein this podcast episode that has
nothing to do with your taxes.
So an LLC is just going toprovide legal protection for
your business.
You may or may not need that,depending on what type of work
you're doing.
So check out episode numbernine.
Do you need an LLC for yourbusiness?
So, like we said, you are abusiness owner, so think of it
(23:47):
as a business.
Maybe you do need that LLC.
Now, the S-corp part of all ofthis is based on how much income
you're making.
So if you are netting over$50,000, if it's significantly
more than that, you need to goahead and move forward with the
LLC and the S-corp now.
Speaker 1 (24:04):
And when Taryn says netting, she means not what's on
the 1099, but what is leftafter you deduct all of the
expenses from that income.
Speaker 2 (24:12):
On your tax return.
So people will be like, oh yeah, I'm making $60,000 for the
year.
That's not what we mean.
Speaker 1 (24:20):
If we're getting your mileage and your office
expenses and your other thingsand after all of that it's
bringing you down to 30,000 innet profit that's great, but
it's not time to do an S-Corpyet.
Speaker 2 (24:35):
It's not going to be worth it.
You just want this on yourradar as you continue to grow
your business or get morecontract work or whatever that
$50,000 mark, because that'swhen it will be worth it for you
to switch to an S-Corp, whichis all about saving taxes.
However, a lot of people switchto 1099 work, like I'm thinking
of some anesthesiologists thatwe have, like nurses, things
like that that right off the bat, are making well over that
(24:57):
$50,000 in profit mark.
So from the very beginning,they're going to want to file
all of this.
Speaker 1 (25:03):
Right, Because these are people that are still
working in the same field andthey just switch from being a
W-2 employee to a 1099contractor and being well
established in their field.
Yeah, they're immediatelymaking well over the threshold
where an S-corp makes sense.
So for those people, movequickly.
Hopefully they are aware ofthis and they're already
reaching out to their taxprofessional, but it doesn't
(25:24):
always happen that way.
Speaker 2 (25:25):
So if this applies to you and you know you're going
to be netting well over $50,000,then you need to look at
episodes 38, 39, and 40.
That's all about the S-Corp hasjust had a W-2 job and then all
(25:51):
of a sudden are thrown into allof this.
Because when you convert to anS-corp you do have to be an LLC,
you do have to run payroll, youhave to do all of those more
complicated business things.
But it's well worth it becauseyou're going to save a lot in
taxes.
But it's still a pain in thebutt and it's still a lot to
learn in a short amount of time.
Speaker 1 (26:07):
Right, and if you're at that point, if your income's
that high and you need to do theS-corp and all that, I mean
you're past the point where youshould be doing it yourself.
You're too busy, your time istoo valuable to waste on this
stuff.
Let somebody do it.
They can do it quickly andcorrectly.
You need a tax professional forthat.
Speaker 2 (26:24):
If you're at that point, you absolutely need a CPA
.
So if you're listening to this,you know probably step one is
to find a good CPA because to doall the conversion and
everything they can help youfile your LLC, they can help you
convert to an S-corp and theycan help you with your tax
questions and then, mostimportantly, they're going to be
filing your S-corp tax return,which you cannot do yourself.
Speaker 1 (26:44):
No, it's going to be too complicated and you'll miss
so many deductions.
I mean, they're at that pointthen.
Speaker 2 (26:53):
yes, it is an expense that you just need to build
into your business becausethey're going to save you way
more money than you're payingthem Exactly.
So this is a lot of information, but hopefully it's helpful and
you can refer to the episodesthat apply to you.
So if you're just starting out,it's completely fine to start
out as a sole proprietorship.
There's nothing that you needto do as far as paperwork goes
to file any of that.
You don't have to get an EIN,you don't have to do any of that
(27:14):
.
What you need to do is just betracking your income and
expenses with your separate bankaccount for your business and
be prepared for your taxes tochange significantly.
Then, if you are making wellover $50,000 in profit, you need
to dive into the S-corp stuffthat we talked about.
Speaker 1 (27:33):
Right, and if this doesn't feel overwhelming and
you want to learn even more, Ihave, you know, heard a lot of
people say they go back andlisten to like all the episodes
of the podcast, which I meanthank you, that's.
I'm very honored that you'vespent your time doing that.
Or, if you want it in a moredigestible format, we do have
our guides for new businessesand our guides for S-Corp owners
.
Speaker 2 (27:53):
Yes, you can check the link in the show notes for
those.
We have one that walks youthrough all the steps, and then
we have another one just forpeople that are considering
switching to the S-Corp.
Speaker 1 (28:02):
And you know that new business guide.
All of that information iscontained in these podcast
episodes, but it's a lot oflistening to get.
All of the information iscontained in these podcast
episodes, but it's a lot oflistening to get all of the
information.
The guide has it all insomething you could probably
knock out in a night or two andget through.
Speaker 2 (28:16):
So yeah, it's very organized, step by step.
Speaker 1 (28:20):
But the podcast is free and the guide does cost
money, so well, we appreciateyou listening.
Speaker 2 (28:24):
If you found this episode helpful, or you were
listening and you thought ofsomeone that this would apply to
, please send that episode tothem.
That is how we grow the podcastand we get more people
listening.
So we really appreciate whenpeople take the time to share
the episode.
Speaker 1 (28:40):
And if you don't share it with people, then
that's just more money thatother people are paying to the
IRS Right.
Speaker 2 (28:46):
So we definitely don't want that we want to save
everyone as much money aspossible Until next time.
Thank you so much for listeningto.
Speaker 1 (28:54):
What your CPA Wants you to Know Podcast.
This podcast is intended toprovide accounting and tax
information for educationalpurposes only.
All tax situations are uniqueand should be handled with the
assistance of a tax professional.
So most people know that when you start getting that
1099 income, nobody iswithholding taxes for you, and
that's normal.
But you might just be thinkingwell, I'm in the 12% tax bracket
, so nobody's withholding for me.
Whatever I make, I'm going tohave to pay 12% of that.
That is not where this ends,unfortunately.
Welcome to what your CPA Wantsyou To Know.
Speaker 2 (00:27):
Tax and accounting help can be expensive, so we've
created this podcast to helpguide you through it all and
make you feel like you have aCPA in your back pocket.
Speaker 1 (00:37):
I'm Carson Sands.
Speaker 2 (00:38):
And I'm Taryn Sands.
Speaker 1 (00:40):
I'm a CPA with over 10 years of experience helping
people start and grow theirbusinesses.
Speaker 2 (00:46):
And I'm an MBA with a specialization in marketing and
entrepreneurship.
Taxes suck and we want to makesure you don't pay more than
your fair share.
Speaker 1 (00:56):
We're here to share everything your CPA wants you to
know.
Speaker 2 (01:00):
In a fun and easy to understand way.
Speaker 1 (01:03):
Let's get started.
Speaker 2 (01:04):
Let's do it.
A few people reached out to uson Instagram and I was looking
back to see if I could send thema podcast episode, and I
realized we did not have apodcast episode about this, and
this is crazy, because this issomething that we get asked all
the time, so better late thannever.
(01:26):
Today's episode is all about1099s and the people that
receive them and how you need todeal with that from a tax
standpoint.
Speaker 1 (01:34):
Yeah, it is weird.
I mean I know we've talkedabout 1099s as part of a lot of
other episodes, but never withthat being the focus, and so
people that were searching forthat might not have found it or
might not have wanted to digthrough a whole episode of other
stuff just to get to that onepart.
Speaker 2 (01:50):
Right.
I couldn't even find it becausewe've answered all the
questions, but I couldn't goback and find the specific
episode.
I know that it was in one ofthem, but I have no idea which
one.
So quickly.
Speaker 1 (02:00):
if you are trying to figure out how to file 1099s
from your business and youalready know about some things
about business, but you'retrying to figure that part out.
Well, we do have an episode onthat, that's episode eight, but
this is completely different.
This is for people that haverecently started receiving a
1099 for the work that they do.
Speaker 2 (02:18):
And getting a 1099 is for contract labor and we are
seeing a big shift in thatinstead of W2 employees, we're
seeing a lot more 1099 employees.
So a lot of people are changingover and then they are
contacting us being like whatdoes this mean?
What does this mean for my taxreturn?
What do I need to do?
And those are all very goodquestions, because it changes a
(02:41):
lot, and today we're going totalk about all the changes and
what you should do if you haverecently been changed from W-2
to contractor or if you'verecently changed from W-2 to
1099, and what you need to domoving forward.
Speaker 1 (02:55):
The most important thing you need to do is get your
mind around the fact thatyou're a business owner now.
Speaker 2 (03:00):
Yes, that is.
The biggest thing to take awayfrom that is that if you're
getting a 1099, you need toconsider yourself a business
owner.
Yay, congratulations, you nowhave a business.
Speaker 1 (03:10):
Some people don't feel that way, especially when
they have only one customerwhich they don't even think of
as a customer, they still thinkof as their employer because
they only get the 1099 from them.
That's the only company they dowork for.
It doesn't matter if you weregetting a 1099, you have a small
business.
Speaker 2 (03:28):
Yes, and we will dive into what all that means.
But it also applies to thepeople that maybe are still
getting a W-2, but are receivinga large 1099 for, I don't know,
some other type of work.
I know in oil filled a lotpeople are getting 1099s even
though they're also getting aW-2.
I don't really know why orwhich part of that they're
(03:49):
getting the 1099 for, but we seethat a lot.
Speaker 1 (03:52):
Sometimes we see that certain elements of overtime
are considered a contract laborand it's because their
employment agreement does notallow them to work overtime.
So they do additional work andthey get paid 1099.
Those are usually big companies, so I'm sure they're following
the rules.
It seems like that would be astretch to me, because normally
(04:12):
that would still be an employeethat's just getting overtime,
but I'm sure they have someworkaround because, you know,
these major companies aren'tgoing to violate employment laws
typically.
Speaker 2 (04:21):
Well, I feel like we're seeing a lot of that.
So, whether they've found aloophole or something, I feel
like we're seeing a lot of that.
So, whether they've found aloophole or something, I feel
like we're seeing a lot ofpeople that maybe really should
be an employee that are beingpaid on a 1099, likely to just
decrease the cost for theemployer.
Speaker 1 (04:36):
Another example, though, would be we have people
that work for big truckdealerships or for heavy
equipment dealerships, and thedealership pays them a W-2 for
their commissions or whatevertheir salary is, but then a lot
of these, let's say, they'reselling John Deere equipment.
Well, john Deere has specialincentives for the salesmen that
are paid directly to them andnot to the dealership, and those
(04:58):
are paid out on a 1099, becausethey don't work for John Deere,
they work for the dealership.
Speaker 2 (05:02):
Okay.
So there's a lot ofcircumstances like that.
So if you're receiving a 1099,especially if it's for a
significant amount, this episodeis just for you.
Speaker 1 (05:12):
So if you are a business owner, then if you
haven't filed any otherpaperwork to be a special kind
of entity which you probablyhaven't, if you just started
getting a 1099, then you're asole proprietorship.
We do have an episode on soleprops and that's episode 28 of
this podcast, and so there's alot of good information.
That's a good place to, youknow, go and listen to that and
(05:32):
find out some information, butthat doesn't mean we're not
going to give you a lot of greatinformation in this episode as
well.
Speaker 2 (05:37):
Right, that's just where you start.
So if you receive a 1099 andyou are filing your taxes,
you're putting that on your taxreturn as your sole proprietor.
You don't have to file anythingto do that.
This is just automatic.
And the reason is because theself-employment taxes and we'll
go into that a little bit more,but just know that automatically
(05:58):
that's going to be filed onschedule C of your tax return
without you doing anything orfiling anything.
Speaker 1 (06:04):
So most people know that when you start getting that
1099 income, nobody iswithholding taxes for you, and
that's normal.
But you might just be thinkingwell, I'm in the 12% tax bracket
, so nobody's withholding for me.
Whatever I make, I'm going tohave to pay 12% of that.
That is not where this ends,unfortunately.
Speaker 2 (06:22):
No, Unfortunately there are more taxes because
you're not going to get out ofthings like Social Security and
Medicare.
Speaker 1 (06:28):
That's right.
Your employer has beenwithholding 7.65% to cover
Social Security and Medicare andwithholding for your income tax
, and on top of that they'vebeen matching the 7.65% for
Social Security and Medicarewith their own funds, and so
that adds up to 15.3% that hasbeen going into just Social
Security and Medicare with theirown funds, and so that adds up
to 15.3% that has been goinginto just Social Security and
Medicare on top of your incometax withholding.
(06:51):
Well, now you're responsiblefor 100% of that 15.3%.
So all of your income will betaxed at the 15.3% for
self-employment, which is yourSocial Security and Medicare and
your income tax rate, whateverthat may be.
Speaker 2 (07:06):
So that's a lot of taxes and you're going to feel
it a lot more than you dowhenever you're being paid on a
W-2, because your employer ispaying a portion of that.
Speaker 1 (07:15):
Right, and all of that's going to hit you at once.
Plus, you know, 12 percent, 10percent, whatever bracket you're
in, plus the 15.3 percent,you're already looking at a
quarter of your income thatneeds to be set aside for these
taxes, and that's assuming thatyour spouse isn't making a large
income already.
If they are, you could be inthe 22% or 24% tax bracket.
Speaker 2 (07:36):
Now, all of a people don't plan in advance and then
they just deal with it when theyfile their tax return and maybe
they know they're going to owea lot.
Carson said that they generallydo know that, but actually they
don't.
A lot of times people aresurprised, so they just wait to
(07:58):
file and then they maybe have a1099 for $60,000 and they have
to pay those taxes all at once,but they're definitely unaware
of the self-employment taxes.
So that's what we want to avoidby teaching you all of these
things today.
Speaker 1 (08:12):
Yeah, and as a side note, that just highlights the
evil that withholding actuallyis, because the IRS forces your
employers to withhold all thatmoney so that you never see it
and you don't feel it.
And so when you owe all thisbig amount, you're shocked.
You've been paying it yourwhole life.
You didn't pay more.
Just because you'reself-employed, you're paying the
same taxes you've always paid.
You're just getting hit with itall at once when you file your
(08:34):
tax return, instead of sneakingout every two weeks a little bit
of it.
Speaker 2 (08:38):
And it's really hard for people to plan for this,
because if you've never done itand it's just been taken out of
your paycheck little by little,it is hard to plan for such a
large amount and actually seethat you do it.
Speaker 1 (08:49):
I can guarantee you, if they made everybody write a
check on April 15th, includingemployees, that people would
start voting differently veryquickly.
Speaker 2 (08:57):
I mean, I can definitely relate to that
because when we started thisbusiness I was really mad about
the taxes we had to pay.
At the time we weren't doingestimated tax payments and we
did have to pay it all at onceand I was not happy.
Speaker 1 (09:11):
Yeah, no, she was not .
She told me to recalculatethose numbers.
Speaker 2 (09:15):
Yeah, Redo, that is not okay with me.
I do not want to pay that muchin taxes.
But you know it just.
You just get used to your checkbeing a certain amount and most
people just don't look at allthose numbers.
But they're really important,especially if you make a big
change to 1099 and then you'rehaving to plan for that and pay
those out of pocket all at once.
Speaker 1 (09:33):
That's right.
But hey, don't blame the IRS.
They're just following therules that they're told, paying
39.6% of the amount that is onthe 1099, you're doing it wrong.
(09:55):
So that's where we start to getback a little bit of that money
, because it's sounding crazyLike I can't be self-employed if
I have to pay 40% tax.
That sounds absurd.
Well, you don't, because inaddition to having all those
taxes, you also get to have awhole bunch of expenses that you
put against that 1099 income.
Speaker 2 (10:13):
So there's nothing that you have to do to file this
1099 income on your Schedule C,which opens up the ability for
you to put in deductions.
So a lot of people still thinkthat if they have a W-2 that
they can have deductions rightoff certain things.
You can't.
There's no way for us to dothat for you on your tax return.
However, if you have a 1099, itcan be put on schedule C and
(10:33):
there's a whole list of thingsthat you can deduct to help
bring down that taxable income.
Speaker 1 (10:38):
Yeah, do you drive somewhere?
If you're in sales, I'm sureyou do.
That mileage adds up so fast.
You wouldn't believe it, andthat's fair, because your gas is
not cheap.
Speaker 2 (10:53):
And your cell phone, your home office things you buy,
like your laptop, all of thosethings that people want to
always deduct.
You can deduct when you have a1099.
Speaker 1 (10:57):
And that's a great point Even and we do see this a
lot even if you're self-employedbut you work from home and you
get that 1099, well, at the veryleast you have a home office,
you have office supplies, you'reusing your computer for
business, so a portion of thatcan be deducted.
Using your internet, portion ofthat can be deducted.
Or your cell phone is yourprimary form of communication
with your I don't want to sayemployer, because you're not an
(11:19):
employee but with the peoplethat are paying you, or with the
customers you're working with.
You know your cell phone isbeing used for that, so you get
to deduct part of that.
All of those things add up andcan make a really big difference
, especially when your tax rateon this income is 25 or 40%.
Speaker 2 (11:35):
Absolutely, and there's so many I mean software
fees and certifications that youwould have.
There is something sodefinitely do not just file that
1099 straight income withouttaking some deductions, because
we promise you you have some.
Speaker 1 (11:49):
Yeah, and now if you have some kind of job, some
magic job, where you don't haveany certifications, you don't
have to do anything.
People just send you money andyou do nothing for it.
Well, okay, then maybe youdon't have any expenses.
Let us know what job that is.
And I might do that on the side, but I don't think that it's
going to be almost anybody.
Speaker 2 (12:08):
No.
So the first thing that youwant to do is keep track of
those expenses through the year,because if you have a CPA doing
your tax return, you're goingto need to give that to them.
If you're doing it yourself,you're going to need that.
So you need a total of whatyou've spent in every category.
So what did you spend on?
Speaker 1 (12:26):
meals.
Speaker 2 (12:26):
What did you spend on meals?
What did you spend on supplies?
How many miles did you have?
All of those things need to becalculated for the year and
you'll use that to file your taxreturn.
Now, the easiest way to keep upwith this is to have a business
bank account, and I know we'vesaid this a lot, a lot, a lot on
the podcast.
Speaker 1 (12:43):
Yeah, you can probably hear us talk about that
on episode 12, starting a newbusiness, or episode 21, roadmap
for new business owners.
You know, in general and wehave some, by the way, that are
specifically about accountingfor your business, and there's
some that are about doing it ifyou use a spreadsheet or some if
you do it through QuickBooks.
But no matter which way you doit, you need to have a separate
bank account or your accountingis going to be a nightmare.
Speaker 2 (13:10):
So step one with all of this is, if you are now
receiving a 1099, is to open anew bank account, and what
you'll do with that is you willhave all the payments that
you're receiving from, even ifit's just one person or many
businesses, all need to go tothat bank account, and then
anything that you are purchasingfor your business or any type
of business expense needs to beused with that business debit
card.
Moving forward, that makeseverything so easy and so simple
(13:33):
when it comes to filing yourtax return.
Speaker 1 (13:36):
So what's your first question whenever we tell you
this?
Everyone's first question ishow do I get paid?
How do I use the money that Imake to live to eat, to pay for
silly luxuries like a roof overmy?
Speaker 2 (13:47):
house.
If all the money that I'mmaking is going into this
business bank account, it mustbe very complicated to pay
myself from it, but good news isit's not.
Speaker 1 (13:55):
Not at all.
There's so many ways you can doit.
You can write yourself a check.
That's just a distribution,doesn't affect your taxes at all
, and if you're from the 1900s,like we are Don't start using
big words when you saydistribution.
It really confuses people Okay,that's just money that comes
out of your business and goesinto your personal account.
There's nothing fancy about it.
Speaker 2 (14:13):
And it's not.
You don't have to run payroll.
Speaker 1 (14:16):
No.
Speaker 2 (14:16):
Nothing formal about this payment to yourself.
Speaker 1 (14:19):
None of that is necessary yet.
That's all things we do downthe road when things get more
complicated, but right now it'sjust moving the money from your
business account to yourpersonal account.
You can do it through a checkif you're from the 1900s, like
we are, but if you're from thismillennium, then you could just
transfer it over.
If you bank your business andyou're personal at the same bank
, then it's really easy.
(14:39):
You just transfer from oneaccount to the other and that's
it, and then you can use themoney.
However, you need to Just makesure you take that extra step
and transfer the money.
However, you need to just makesure you take that extra step
and transfer the money, becauseif you start buying personal
items through the business, itjust complicates your life
unnecessarily.
Speaker 2 (14:55):
Yes.
So don't make it complicated topay yourself.
You're a sole proprietor.
You don't have to run payrollor anything like that.
You can have a business bankaccount and a regular checking
account and you can justtransfer online, like we do from
Wells Fargo, from one bankaccount to the other when you
see fit.
It doesn't have to be on thefirst and the 15th, it doesn't
have to be biweekly, it can bewhenever you want, it can be
(15:18):
every day.
Whenever you have enough moneyin that account that you feel
like you want to transfer abunch out and it can cover the
expenses, go ahead and payyourself.
Speaker 1 (15:26):
But here's why you want that extra step.
If you have all of yourexpenses running through your
personal account, you're goingto miss some because you're not
going to know was that Walmarttrip for office supplies or was
it personal and you might err onthe side of caution and that's
just an expense you miss.
What you won't miss is theincome, because the full amount
of your income is reported rightthere on that 1099 and the IRS
(15:48):
already knows about it.
So you already have to reportall that.
We certainly don't want to missany expenses and having a
separate account can make thatso much easier.
And God forbid if you do getaudited.
Having that separate businessaccount will give you a leg to
stand on when you're approvingyour expenses.
Speaker 2 (16:02):
Absolutely.
This is just going to save youso much time, so it doesn't take
very much time to open a bankaccount, especially if you do it
online.
You can do that on WealthFargo,for sure.
It's so fast, but you're notgoing to have to go through all
12 bank statements through theyear and try to sift through
what was business, what waspersonal, and gather that
information up for your taxreturn.
It's going to be right there,super easy.
Speaker 1 (16:24):
And the last reason is if you get to the end of the
year and, oops, you didn't doyour bookkeeping, that happens
and you're like I don't want to.
That sounds miserable.
I would rather do anything elsein my whole life than do
accounting.
I totally understand thatfeeling.
So you're like I'll hire abookkeeper or I'll pay the CPA
to do it.
That's great.
If you have that separateaccount, they will take that and
they'll charge you a reasonableamount and they'll get it done
(16:47):
for you.
If they look at it and it's allmixed into your personal, then
one of two things will happen.
If it was us, we'll just sayI'm sorry, we can't help you.
You're gonna need to findsomeone else.
If it is another bookkeeper,maybe they're hungry for money,
but they're still gonna see howmuch extra time it's gonna take
them.
In that situation They'llthey're just going to charge you
about five times as much asthey would have in a normal
(17:07):
situation?
Speaker 2 (17:08):
Well, no one can go through your personal bank
account and know what was foryour business and what wasn't.
That's just.
It doesn't matter how good thebookkeeper is, they can't do
that.
Speaker 1 (17:16):
If you do have that business bank account, you can
tell them, like everything inhere is business related, okay,
well then they'll know what todo with it.
But if even if they're willingto take on a mixed account like
that, they're going to require alot of effort from you.
So now you're paying extra andyou're still having to do a
whole lot of work to tell themoh, this was business, oh, this
was personal.
By the time you do all that,you might as well just do it
yourself.
Speaker 2 (17:36):
And if you're kind of scared because we're mentioning
bookkeeping and you didn'trealize that having a 1099 meant
you're going to have to startbookkeeping, it's not as scary
as it sounds.
You don't have to getQuickBooks, especially if you're
just having minimaltransactions and you're just
getting started.
If it's very simple, all youneed this for is to plan for
(17:59):
taxes and to file your taxreturn.
So you're going to need a incategories and total for the
year and then how much money youmade total for the year.
So those two things are whatyou need for your tax return.
But also you're going to needthat information to help you
plan for taxes in the year,which brings us to estimated tax
(18:22):
payments.
Speaker 1 (18:22):
Ah, yes.
So this is something that youshould start doing when you
become a 1099 person, becausenobody is withholding those
taxes for you and the IRS.
They're not willing to waituntil April 15th to get that
money.
They want you to pay it inquarterly throughout the year so
that they can.
I don't know, usually if theyneed more money they just print
more, but I guess the originalidea of the estimated payments
(18:46):
was so that they have operatingmoney throughout the year and
they don't get all of it just atone time from all the business
owners.
Speaker 2 (18:53):
Yes, they will fine you, they will penalize you if
you don't make these paymentsand you just pay them all at
once when you file your taxreturn.
So unfortunately that sucks.
Speaker 1 (19:03):
If you're already into your first year and you
haven't done this yet.
A lot of times they don'tpenalize you the first year.
It just depends, because theway they penalize you is.
It's a complicated calculation,but just suffice it to say that
it's never too late to startand it's not the end of the
world if you've already missed afew of those.
But moving forward, just beprepared to pay that in.
You're already setting themoney aside.
(19:24):
You're not making that muchinterest on it in the savings
account anyway.
Just go ahead and pay it intothe IRS, because their penalties
are higher than whatever you'reearning in the savings account.
Speaker 2 (19:38):
Estimated tax payments just confuse the hell
out of people.
So we do have an episode comingup where we will walk you
through how to make theestimated tax payments, where
you can do that, all of youroptions, the due dates and all
of that.
I also realized we didn't haveone of those, even though we've
talked about it a lot.
Speaker 1 (19:49):
Yeah, I know Isn't that weird.
I know we mentioned it inepisode 23, along with some
other things, but we talk aboutretirement and a bunch of other
stuff in that episode.
Speaker 2 (20:02):
It's either the next episode or the one after that.
It's going to be all aboutestimated tax payments.
So if you're listening to thisand this applies to you just
stay tuned for that episode.
We'll go further into that.
But basically you're going tomake four payments during the
year of those taxes that you'regoing to owe at the end.
If you don't, there arepenalties.
Speaker 1 (20:18):
So we'll just say that for now, and the name says
it all.
They're estimated tax payments,because you're estimating how
much tax you'll owe in totalwhen you file your tax return
and you're paying about aquarter of that four times
through the year.
Speaker 2 (20:31):
Right, you're just looking at what you made in that
quarter and sending in apayment.
It's just a guess.
It's always a guess wheneveryou own a business, because you
don't know what the year isgoing to look like.
But maybe for some of youlistening, you know how much
contract work you're going tohave and that will make things a
little bit easier.
It is important to note thatyour tax return will change.
Like I said, you'll be filing aseparate form now.
(20:53):
So if you're doing it yourself,it will change and if you have
a CPA, it will very likelyincrease the price that you're
paying if you just were filingwith W-2.
Speaker 1 (21:04):
That's true, because it is a business, and so it does
complicate things.
Speaker 2 (21:08):
I know you did want to mention, just in case you
hadn't thought about this if youare new to getting a 1099 and
you were previously a W-2employee, you will no longer
have retirement savings orhealth care from your job, so
you need to plan for thosethings too.
Speaker 1 (21:23):
Right.
And if you're just starting onthe 1099 path, unless if you are
already making a significantamount of money which happens
sometimes you might not be readyfor retirement yet.
It might just be something youwant to put in the back of your
mind for later.
But there are ways to save forretirement through your business
or even outside of yourbusiness just to make sure
you're still contributing.
But the health insurance,that's a big one.
(21:43):
You don't want to wait on thatand there are options out there
that don't cost an arm and a leg.
Now, the marketplace is great.
If you don't make any money,you can get a lot of discounts
on the health insurance, andthat's great.
If either you're already makinga lot of money, or even if
you're not but your spouse is,then you're not going to qualify
for any of those discounts, andpaying full price through the
(22:06):
marketplace it's prettyexpensive.
But there's some alternativesthat maybe are not considered
technically health insurance,but they still work.
They still cover you whenyou're sick and stuff, and
MediShare is one of those.
It's pretty well known.
But just cost sharing plans ingeneral of any kind would be a
much cheaper option, and we didthat when we started out, and I
(22:26):
mean it was an eighth of theprice, maybe a 10th of the price
of what the marketplaceinsurance was.
So keep that in mind.
Speaker 2 (22:34):
And we do have an episode all about where we talk
about what we did when we firststarted our business, and it's
episode number 74 healthinsurance options for business
owners.
So keep that on your radar ifyou're just now moving to 1099.
Speaker 1 (22:47):
So the last thing we'll talk about and you might
not be there yet, but this couldbe way, way, way down the road,
or it could be today.
Yeah, you could be knocking onthe door of needing to do this
right now, but people always askabout do I need an LLC?
You don't need one necessarily.
It could be beneficial.
We have so many episodestalking about the benefits of an
LLC, when you need one, why youneed one and, beyond that, an
(23:11):
S-Corp when you make anS-election for tax purposes to
be taxed as an S-corporation, itcan save you a great deal of
taxes.
But it's not for everybody.
We have, I mean, not justepisodes about that, we've
written a book about it, and sowe have a lot of information
about that.
The whole.
Speaker 2 (23:25):
S-Corp series.
But the LLC I do want to statein this podcast episode that has
nothing to do with your taxes.
So an LLC is just going toprovide legal protection for
your business.
You may or may not need that,depending on what type of work
you're doing.
So check out episode numbernine.
Do you need an LLC for yourbusiness?
So, like we said, you are abusiness owner, so think of it
(23:47):
as a business.
Maybe you do need that LLC.
Now, the S-corp part of all ofthis is based on how much income
you're making.
So if you are netting over$50,000, if it's significantly
more than that, you need to goahead and move forward with the
LLC and the S-corp now.
Speaker 1 (24:04):
And when Taryn says netting, she means not what's on
the 1099, but what is leftafter you deduct all of the
expenses from that income.
Speaker 2 (24:12):
On your tax return.
So people will be like, oh yeah, I'm making $60,000 for the
year.
That's not what we mean.
Speaker 1 (24:20):
If we're getting your mileage and your office
expenses and your other thingsand after all of that it's
bringing you down to 30,000 innet profit that's great, but
it's not time to do an S-Corpyet.
Speaker 2 (24:35):
It's not going to be worth it.
You just want this on yourradar as you continue to grow
your business or get morecontract work or whatever that
$50,000 mark, because that'swhen it will be worth it for you
to switch to an S-Corp, whichis all about saving taxes.
However, a lot of people switchto 1099 work, like I'm thinking
of some anesthesiologists thatwe have, like nurses, things
like that that right off the bat, are making well over that
(24:57):
$50,000 in profit mark.
So from the very beginning,they're going to want to file
all of this.
Speaker 1 (25:03):
Right, Because these are people that are still
working in the same field andthey just switch from being a
W-2 employee to a 1099contractor and being well
established in their field.
Yeah, they're immediatelymaking well over the threshold
where an S-corp makes sense.
So for those people, movequickly.
Hopefully they are aware ofthis and they're already
reaching out to their taxprofessional, but it doesn't
(25:24):
always happen that way.
Speaker 2 (25:25):
So if this applies to you and you know you're going
to be netting well over $50,000,then you need to look at
episodes 38, 39, and 40.
That's all about the S-Corp hasjust had a W-2 job and then all
(25:51):
of a sudden are thrown into allof this.
Because when you convert to anS-corp you do have to be an LLC,
you do have to run payroll, youhave to do all of those more
complicated business things.
But it's well worth it becauseyou're going to save a lot in
taxes.
But it's still a pain in thebutt and it's still a lot to
learn in a short amount of time.
Speaker 1 (26:07):
Right, and if you're at that point, if your income's
that high and you need to do theS-corp and all that, I mean
you're past the point where youshould be doing it yourself.
You're too busy, your time istoo valuable to waste on this
stuff.
Let somebody do it.
They can do it quickly andcorrectly.
You need a tax professional forthat.
Speaker 2 (26:24):
If you're at that point, you absolutely need a CPA
.
So if you're listening to this,you know probably step one is
to find a good CPA because to doall the conversion and
everything they can help youfile your LLC, they can help you
convert to an S-corp and theycan help you with your tax
questions and then, mostimportantly, they're going to be
filing your S-corp tax return,which you cannot do yourself.
Speaker 1 (26:44):
No, it's going to be too complicated and you'll miss
so many deductions.
I mean, they're at that pointthen.
Speaker 2 (26:53):
yes, it is an expense that you just need to build
into your business becausethey're going to save you way
more money than you're payingthem Exactly.
So this is a lot of information, but hopefully it's helpful and
you can refer to the episodesthat apply to you.
So if you're just starting out,it's completely fine to start
out as a sole proprietorship.
There's nothing that you needto do as far as paperwork goes
to file any of that.
You don't have to get an EIN,you don't have to do any of that
(27:14):
.
What you need to do is just betracking your income and
expenses with your separate bankaccount for your business and
be prepared for your taxes tochange significantly.
Then, if you are making wellover $50,000 in profit, you need
to dive into the S-corp stuffthat we talked about.
Speaker 1 (27:33):
Right, and if this doesn't feel overwhelming and
you want to learn even more, Ihave, you know, heard a lot of
people say they go back andlisten to like all the episodes
of the podcast, which I meanthank you, that's.
I'm very honored that you'vespent your time doing that.
Or, if you want it in a moredigestible format, we do have
our guides for new businessesand our guides for S-Corp owners
.
Speaker 2 (27:53):
Yes, you can check the link in the show notes for
those.
We have one that walks youthrough all the steps, and then
we have another one just forpeople that are considering
switching to the S-Corp.
Speaker 1 (28:02):
And you know that new business guide.
All of that information iscontained in these podcast
episodes, but it's a lot oflistening to get.
All of the information iscontained in these podcast
episodes, but it's a lot oflistening to get all of the
information.
The guide has it all insomething you could probably
knock out in a night or two andget through.
Speaker 2 (28:16):
So yeah, it's very organized, step by step.
Speaker 1 (28:20):
But the podcast is free and the guide does cost
money, so well, we appreciateyou listening.
Speaker 2 (28:24):
If you found this episode helpful, or you were
listening and you thought ofsomeone that this would apply to
, please send that episode tothem.
That is how we grow the podcastand we get more people
listening.
So we really appreciate whenpeople take the time to share
the episode.
Speaker 1 (28:40):
And if you don't share it with people, then
that's just more money thatother people are paying to the
IRS Right.
Speaker 2 (28:46):
So we definitely don't want that we want to save
everyone as much money aspossible Until next time.
Thank you so much for listeningto.
Speaker 1 (28:54):
What your CPA Wants you to Know Podcast.
This podcast is intended toprovide accounting and tax
information for educationalpurposes only.
All tax situations are uniqueand should be handled with the
assistance of a tax professional.
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