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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4021
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Hello. I started a sole proprietorship in May of 2009, meaning

Resolved Question:

Hello. I started a sole proprietorship in May of 2009, meaning that I legally created the entity with the feds and received my EIN. However, I have really been evolving the vision and working on startup activities - website, vision, marketing - in preparation for when I could finally begin operations that would produce income. So I have not paid myself at all in 2009 or 2010. My question is twofold: Can I pay myself for the work I have done in 2010 now? Can I receive payment via 1099 as a contractor, since it was web development work that I could have subcontracted out easily? As an owner, I was not sure I could pay myself as a contractor. Thanks for any assistance.
Submitted: 3 years ago.
Category: Tax
Expert:  Stephen G. replied 3 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Customer :

I sure will, thanks for your help.

Stephen E. Grizey :

As a sole-proprietor there's no need to "pay yourself" as a contractor as whatever your net profit from the activity is will be taxed the same as an independent contractor. There's no need to actually transfer any cash as that would simply be "draw" and not be the amount you are taxed on.

Customer :

Let me clarify the purpose of these questions. It will help you. I have been doing real work to get my company started, but no income has been reflected on my W-2. I am hoping that I can pay myself retroactively for my work, in spite of the fact that income will not come into my company until 2011. is this not possible with a sole proprietorship?

Customer :

I was assuming I can move my investment funds over to my company account and pay myself, as the only income for my company has been from startup investment funds of my own.

Customer :

(i need to reflect income in order to downsize my home and get qualified for a smaller loan, etc...all legitimately of course.)

Stephen E. Grizey :

Sure, but as an owner you can't be an employee of your own sole proprietorship, so there's no W-2 or 1099 involved. You should be filing a Schedule C with your income tax return, despite the fact that you have no income; you would claim the expenses which would result in a loss that could be used against other income; this treatment isn't optional; it is required.

Stephen E. Grizey :

No you can't move your investment income anywhere as a sole proprietorship is you; one in the same; all on your personal income tax return on Form 1040

Stephen E. Grizey :

Start-up funds aren't income; they are investments and not deductible until expended for business expenses

Customer :

it sounds like a made the wrong decision in how to structure my business then. that sucks.

Stephen E. Grizey :

Not really, why do you say that?

Customer :

i am assuming that a corporation entity would allow me to operate as a contractor when doing work that satisfies those requirements, and thus could be paid for that work. perhaps i missed your point.

Stephen E. Grizey :

Just a minute, I've got a call...........

Customer :

no problem

Customer :

i'll clarify a bit more while i wait. I have been doing website development work that I could have paid someone else to do as a contractor, funded out of my startup funds...but i opted to do it myself and now cannot reflect my own income from the work, even though a contractor I would have paid could show income from the same work to the IRS.

Customer :

I assume that a corporate could have paid me for this work. Losses do me no good when I have no income...unless I can defer the losses to a time when I do have income to report them against. Is that possible? I'll stop here, as I realize I am asking multiple questions.

Customer :

I believe this last question really hits the heart of what I need to know, given what you have shared about the sole proprietorship requirements.

Stephen E. Grizey :

ok, just a minute

Customer :

I'll be here. no problem. thanks

Stephen E. Grizey :

ok , hang on, let me read what you've written........

Stephen E. Grizey :

ok, let me read what you've just written

Stephen E. Grizey :

I don't think you're understanding the concept............why would you want income that is self-generated, subject to sel-employment taxes, income taxes, etc. ?

Customer :

I would not want it, given that I just have my savings I'm using for my living...but in order to get a mortgage re-fi or new loan to reduce my home size, etc....they only care about debt-to-income ratio....they do not care about my savings and my ability to pay them for quite a long period without any risks of defaulting. so the real pressure around demonstrating income is to satisfy those banking requirements.

Customer :

there are 2 other reasons, but I won't go into those.

Customer :

was hoping i could defer my business losses and investment losses to a time when I do have income, so that there's an advantage for me from a tax perspective.

Stephen E. Grizey :

ok, I understand, but even if you incorporated, we would be recommending that you elect S-Corp status which would mean that the loss the S-Corp would incur would be reflected on your personal return and offset any W-2 earnings generated by the

Customer :

(that's the secondary reason i mentioned I would not go into:-) )

Stephen E. Grizey :

s-Corp paying you

Customer :

ok...so there's no way to offset or leverage the losses at a time when I do have income that I could deduct them from? two different questions I realize...so let me summarize my two questions now that you've helped me net them out: question 1 - is there any way for me to reflect any income on my W-2 for 2009/2010 if I have been doing substantial work at a loss to my company? question #2 - if there is not a way to report income, then is there a way to hang onto the tax deduction benefit of my business and investment losses if I defer them to a time that I do have income in 2011?

Customer :

(by the way, i signed up for the unlimited questions for 30 days...so the money should cover these 2 questions as long as you are fine with answering them both)

Stephen E. Grizey :

OK, first...........there's no W2 involved.............you can't pay yourself.........

Customer :

ok, so the idea of making any 'salary' is completely gone as long as I'm under a sole proprietorship.

Stephen E. Grizey :

As far as deferring investment losses, unused capital losses (realized) may be "carried forward" to offset future capital gains or may offset up to $3,000 of ordinary income each year..........

Customer :

ok, and i'm sorry to have to ask this....so an unused capital loss (realized) would be? just an example to help me know what the boundaries of that would be. sorry for being so accounting stupid:-)

Stephen E. Grizey :

Operating losses may actually be "carried back" 2 or 3 years depending upon the years involved and then forward 15 years, subject to certain limitations, to offset ordinary income

Customer :

ok....so this is getting more complicated as i look at my investment losses...need to hire someone to take me thorugh this. thanks for your confirmation on the payment issue.

Stephen E. Grizey :

Yes the "idea of" salary is non-existent for an owner in a sole proprietorship (or a partnership for that matter)

Customer :

ok...a big shift for me after being in corporate america for so long...alright, well i'm not sure i've made the right decision. but i'll cross that bridge later! thanks for your assistance. the value was very good here. i appreciate the patience.

Stephen E. Grizey :

ok, that's probably a good idea..........please remember to hit the accept button & thanks again for using our service......

Customer :

sure will. thanks.

Stephen E. Grizey :

U R Welcome.......I'll be glad to help you further if I can....just ask for me..........

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4021
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and other Tax Specialists are ready to help you

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