Self-Employment Advice

[dr.girlfriend]

So, my husband is taking the leap and going fully freelance (since COVID hit he's been part-time at his salaried job and part-time freelance).  He's been on my health insurance since June.  My income alone can cover our expenses, and we have a good chunk of liquid savings and can cut things like charity contributions, etc. pretty easily if needed.

He's created an LLC, and opened a company-specific bank account and credit card.  He's planning on setting aside approximately 60% of his income for taxes, social security withholding, etc.  He charges about $2500 - $5000 for speaking engagements (currently all virtual) and has income quarterly from his book, but that's not a lot of transactions so we don't think we really need a bookkeeping service right now but will consider that if he gets busier. 

Any other advice?  We don't really know what we don't know.  How should I handle tax withholdings from my job if his income is a big question mark?  I'm guessing we need to do an individual IRA for his retirement now that he won't have a company plan?  I do get free financial advisement from my company retirement plan which we will probably take advantage of when we have a minute to breathe.  :-)

[Accountingcat]

Regarding payroll taxes, he could look at still using a payroll or PEO service. I know Paychex will work with 1 person company. Insperity is a PEO that will do taxes, workers comp, offer access to very affordable medical insurance, 401k, FSA, HSA, etc. I am an Insperity client and have used them since we only had 3 employees back in 2009. I can answer more specific questions about those if you have any.

For bookkeeping, most people just use QuickBooks desktop or online and use a CPA at tax time.

Other things to consider would be:
- business insurance... It sounds like he might not have a lot of liability but it's best to ask a pro.
- business license, this varies by city and industry
- Sales & use tax, again varies by state and industry
- He could look into a SEP for retirement

[awkwardpenguin]

Local and state requirements: sometimes you have to register a business name or DBA with the city or state. Should only apply if he uses a name other than his name.

Retirement: I’d look into both a SEP IRA and solo 401k and see which one makes sense. Both have big tax benefits for self-employed folks.

Quarterly taxes and withholding: I’d probably use a CPA for the tax stuff. But if you choose not to, set your withholding to married-0 and you’ll make up any difference when you pay quarterly taxes. 60% holdback sounds high - I’d use SS/Medicare’s 15.3% plus your marginal tax rate.

Vehicle use: you should keep a monthly mileage log if he uses a car for business. It makes claiming standard mileage easier and better documented.

General documentation of business expenses: just keep on top of this. Set up a system that works for him and use it.

Business liability insurance: worth looking into if he could have personal liability for his work.

[smock]

He sounds way more organized than I was when I went full-time freelance.

On withholdings, 60% is way high, especially if you're paying federal taxes on your salary and you guys file jointly. You can use IRS tools to estimate his quarterly taxes, and if you're way off the first year you might need to pay a penalty. That's what I did, at least. 😆

Look into an SEP IRA. The cap for self-employed people with no employees is really high, so it's a great retirement vehicle and helps reduce tax liability.

And ditto the advice on figuring out a good system to track income/expenses/etc. so he's not scrambling when it comes to tax time.

[gretchenindisguise]

I just made the leap two months ago, so following for all of the advice you get.

I have been using quickbooks self-employed. It has been good for tracking expenses and keeping me organized. I can upload receipts directly into it, which I do after each transaction so I don't forget. You can also pay quarterly taxes directly through it.

[puppylove64]

You don’t need to use a payroll company unless you are paying employees. Self doesn’t count. 60% is high. Do 15.3% for SS and Medicare, then federal and state marginal rates. Make quarterly payments. Look at your total tax for previous year and divide it by 4. Make sure your withholdings, plus the payments equal the previous years total tax.

My recommendation is to run all business expenses in the business account or credit card and nothing personal there. That way at the end of the year, all your income and expenses are in one place and isn’t intermingled with personal. This will make it easier for tax time. Whenever you need to pay yourself a “paycheck,” just transfer a lump sum to your personal account.

[Accountingcat]

puppylove64, I threw out the payroll company suggestion because it's an easier way to deal with taxes and many freelancers would prefer access to benefits still.

[scout8]

Jan 31, 2021 21:25:49 GMT -5 Accountingcat said:

puppylove64, I threw out the payroll company suggestion because it's an easier way to deal with taxes and many freelancers would prefer access to benefits still.

Can you explain what you mean about benefits?

[Accountingcat]

scout8, My experience has been with Insperity, so I'm going to talk about them. A PEO firm allows 1 person or small employers to join their company for a monthly service fee as a joint employment agreement. So I'm an employee of Insperity when it comes to benefits but I still own my company legally in every sense. Insperity is pooling a million companies together to get the best rates, this allows me access to their medical insurance, 401k, and other benefits at a very affordable price. It might not be worth it for people that have access to a spouse's benefits or only insure themselves. When we started using them in 2009, there was no ACA and 2 employees were trying to insure families. They also do my payrolls which means they deduct and file all taxes like a normal employer. This is a huge weight off if you don't want to do the quarterly planning.

Insperity's insurance varies by what plan you are on and where you live, but I have a choice of 10 different UnitedHealthcare PPO plans. Insperity also gives me access to FSA/HSA accounts, disability insurance, Skillport (useful to earn continuing edu credits if you need those), perksatwork.com, adoption credits, cell phone discounts, etc.

If/when you add employees, then they manage all your payroll, taxes, unemployment, benefits, HR, and laws compliance. Sounds silly, but if I hire a 1099 that lives in another state, I know I'm still legally following every law for hiring, pay, etc. This has also allowed us to grow by being a small company that had benefits.

[scout8]

Feb 1, 2021 9:39:31 GMT -5 Accountingcat said:

scout8 , My experience has been with Insperity, so I'm going to talk about them. A PEO firm allows 1 person or small employers to join their company for a monthly service fee as a joint employment agreement. So I'm an employee of Insperity when it comes to benefits but I still own my company legally in every sense. Insperity is pooling a million companies together to get the best rates, this allows me access to their medical insurance, 401k, and other benefits at a very affordable price. It might not be worth it for people that have access to a spouse's benefits or only insure themselves. When we started using them in 2009, there was no ACA and 2 employees were trying to insure families. They also do my payrolls which means they deduct and file all taxes like a normal employer. This is a huge weight off if you don't want to do the quarterly planning.

Insperity's insurance varies by what plan you are on and where you live, but I have a choice of 10 different UnitedHealthcare PPO plans. Insperity also gives me access to FSA/HSA accounts, disability insurance, Skillport (useful to earn continuing edu credits if you need those), perksatwork.com, adoption credits, cell phone discounts, etc.

If/when you add employees, then they manage all your payroll, taxes, unemployment, benefits, HR, and laws compliance. Sounds silly, but if I hire a 1099 that lives in another state, I know I'm still legally following every law for hiring, pay, etc. This has also allowed us to grow by being a small company that had benefits.

Thank you. This is great information. Currently, we have insurance through my H's employer, but there have been times in the past when this would have been a lifesaver. 

[orval]

When I was a sole proprietor, I held back 45% for taxes. That worked out about right. You will need to pay estimated taxes on the income each quarter otherwise there is a penalty.
Does he have business liability insurance? Not sure he needs it, but something to look into.
Agree with keeping all expenses/accounts seperate from personal expenses.
I use Quickbooks but I wonder if he won't have that many transactions and expenses he could just keep it by in an accounting journal (debits/credits). Quickbooks can be expensive and I don't even use a quarter of the features it has. Maybe chat with an accountant.

[mae0111]

Regarding retirement, DH was a sole proprietor for a couple of years before hiring an employee. He was able to set up an individual 401k (I forget what it was called exactly). He paid himself a salary (used Paychex, had all payroll taxes and benefits deducted, and was able to establish a 401k with a company match.

Re: taxes, I don’t know what the threshold is, but we pay quarterly estimates. It’s a lot easier to track and it makes annual taxes somehow less painful.

Also Re: taxes. Now that he’s on his own, there’s a lot that can be written off. Dedicated work space, cell phone, mileage (when that ever happens), zoom or other software subscriptions, LLC fees/annual reports, laptop/Mac/desktop, etc. Track it all in an organized way. It’s a huge pain to try to pull together at the end of the year.

This might be obvious to some, but there was a lot I didn’t know when I established my LLC.