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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hi, I am offered a contract job. This will last at least

Resolved Question:

Hi,

I am offered a contract job. This will last at least 6 months. I will be providing textile designs that I will make in my home office. I will use a design system that they will provide to me. I have never had a private business, so I can't decide which business form is best for me. I want to get the maximum profit with least tax amount. Let me know if you need more info before you give an answer.
Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.

Hello designer,

 

Do you have an approximate idea at this point how much you will make total from this contract job?

 

 

Customer: replied 4 years ago.
Hi Merlo,

Yes, it looks like I will be making between $30,000 and $35,000 for this 6 month period.

Expert:  Merlo replied 4 years ago.

Hello again designer,

 

Thank you for the additional information.

 

Since for at least right now this is going to be a temporary position, and you do not expect earnings of more than $35,000 for that period, I would strongly suggest that you simply operate this business as a sole proprietor, rather than setting up any type of formal business entity.

 

Many people are under the impression that having a formal business set up will allow you more deductions, but that is really not the case. And setting up a formal business involves much more paper work and registration fees than it may be worth in your case, at least at this point.

 

Operating as a sole proprietor you will simply report your income and related expenses from this job on Schedule C of your personal tax return. You will then pay taxes only on your net income after deducting your expenses. If you will be working from your home and will be using a dedicated area in your home for this business work, then you can claim a deduction for some of your home expenses for the area being used for your work.

 

The only reason at this point that you would really want to consider creating a formal business would be if you feel that you need a layer of legal protection. In other words, if you feel there are any possibilities your company might be sued for a faulty product or something of that nature, then it would be beneficial to have a separate legal entity set up so that your personal assets were protected. But from a tax standpoint, you will be just as well to operate as a sole proprietor.

 

If at some point this becomes a full time venture for you and your income increases significantly from this business, then it might be worth looking in to establishing an S Corporation, as that would offer you a few tax advantages. But the tax advantages of an S Corp would not really even kick in until you were running this as a full time business and had income of at least $50,000 or more each year.

 

 

Thank you designer

 

 

Customer: replied 4 years ago.
Hello again,

That's a good answer and I will accept it. Before I hit the accept button I have a couple of short additional questions, if you don't mind. I need really short answers:
1. Since I don't buy almost anything related to my business, I don't have many expenses, is there any special category that covers my situation, e.g. "consultants" etc. that will provide less taxation.
2. Do I need a business license to operate as a sole proprietorship?
Expert:  Merlo replied 4 years ago.

Hello again designer,

 

1. There is no category of business which offers different tax rates. Regardless of the type business you run, all of your net income will be treated as ordinary income, the same as you would have from a regular job as an employee, and will be subject to the same tax rates.

 

2. You do not need any type of license at all to operate as a sole proprietor, and no special registrations of any kind are required. All of your income and expenses will simply be reported on Schedule C of your personal tax return, using your social security number for reporting purposes.

 

 

Thank you designer and let me know if you have more questions.

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 2 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thanks again, I am satisfied with this answer, have a great Sunday!
Expert:  Merlo replied 4 years ago.

Thank you designer, and let me know if you have more questions. I am happy to help you with whatever I can.

 

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Merlo
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25+ years tax consulting. Specializing in returns for US citizens living abroad