Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer! I'm happy to help with your tax questions. Feel free to interject at any time if you need clarification.
Whether you are submitting invoices in your own name or are doing buisness as sole proprietorship will have no bearing on your tax situation. The tax situation is the same. In either scenario, your income and expenses will be reported on Schedule C of your 1040 and taxed as self-employment income.
OK, so is there any reason to form a sole proprietorship for a small consultancy like this? I recall that taxes on secondary income were very high from when I was younger and held 2 jobs.
Yes, taxes on self-employment are very high because not only will you be paying regular income tax on them based on your tax bracket, but you are also responsible for paying self-employment tax on your net income (revenue less expenses). Self-employment income represents both the employer and employee portion of Social Security and Medicare taxes. For 2011, there is a 2% break on the employee side so this totals to 13.3%. In 2012, it will revert back to 15.3%.
Because you would technically considered self-employed for your second job, you would report your income on a Schedule C of your tax return and would be able to deduct any expenses that would be considered ordinary and necessary. This can include office supplies, travel for the second job, postage, etc. For IRS guidelines on what is considered ordinary and necessary, click here.
So are you indicating that 'Yes' secondary income incurrs a high tax rate, but 'No' a sole proprietorship (or other formalized business structure) would not reduce those taxes. I guess my question is, if there are no tax benefits to sole proprietorship or similar business structures, then why do people form them to begin with? Thanks, XXXXX XXXXX my rather elementary knowledge of this...
People generally form sole proprietorships for a number of reasons depending on the type of business they are running. It could be they don't want to invoice in their own name, they are going to have employees, it will be more than just a "side business."
The tax on the secondary income really isn't higher, it is just when you are paying it and who is paying it. Normally, as an employee, you have Social Security and Medicare taxes withheld from your paychecks, so you aren't paying these taxes at tax-time. With the secondary income, you are paying them at tax-time instead. Also, the employer matches the SS/Medicare taxes withheld from your check. Since you are technically self-employed with your secondary income, you are the employer, so you are matching your own taxes.
Other formal business structures, such as corporations and LLCs, offer greater liability protection in the event of a lawsuit than operating on your own as a sole proprietorship. However, there are costs incurred with forming and maintaining these business entities. Unless you are going to be earning this secondary income long-term, I do not think it would make sense to form one of these business structures. Down the line you could always form one if necessary.
OK, thank you. Final question, which I can probably answer with the IRS link you provided...but, can the cost of creation and maintenance of a webpage about my skills and services be claimed on my taxes?
Yes. That would be able to be claimed on your Schedule C.
If you have any more follow-up questions, please feel free to ask. If not, please hit the green accept button. Thanks!