log entries of timotheus

I will try to link to the sites that I received information on. A lot of this info came from my Mom, who is an accountant and who I grilled for thirty minutes last night.

First off, if you earn more than $433 from your self-employment, then you should be paying the Self-Employment Tax and Estimated Taxes. (See the IRS site on Self-Employed Individuals Tax Center page for more info) Failure to pay Estimated Taxes quarterly can result in fees.

Next is something that needs to be explained, but the easiest way to do this is with an example:

Tom designs a website for Underhill Associates. Tom isn’t very good with graphics, so he has his two friends, Bert and Bill help with that part. Tom gets paid $1000 from Underhill. He turns around and gives $250 to both Bert and Bill.

(Queue Sesame Street-ish music) What are the tax implications?

Tom has to declare all $1000 as income. Now the good news is he can say the $500 in labor he paid to Bert and Bill was an expense. (And you pay taxes on your net income; income minus expenses). But lets add to the scenario a bit..

Tom does two more jobs at the same rate, with Bert and Bills help. They each get paid $250 per job, so now they have recieved $750 from Tom this year.

What are the tax implications?

Since Tom is paying over $600 to the subcontractors, Tom will need to give each of them a 1099-MISC form at the end of the year. (See this great article)

Now Tom is thinking, what if I turned to stone or something, and couldn’t carry on the business. All the billing is coming from my account, and in my name. Could I just set up a seperate checking account or something that all the billing is attached to, so if I was stone, Bert and Bill could carry on the work?

Sadly not without forming a corporation. A bank account needs to be tied to an entity. This is either a person, two people (joint account), or a corporate entity like a business.

I hope this has been informative!