Originally posted by Nit777:
Lots of good advice.
I am in Florida but most of what you are talking about are IRS or Social Security type issues which would be the same. State income tax may have some bearing on what you do.
#1 - Do not put the checks from the new company into your regular bank account. Start a new account. It would be best if you knew the name (entity) of your new company and got it registered with the state so the new account would be in the name of the new company.
But, if you can not see an accountant before you get it set up, either hold the checks or open an account which you can change but do not commingle W2 income and 1099 income because you will have a hard time figuring it out at tax time.
#2 - Send in money to the IRS on a regular basis. Be it quarterly, monthly or whatever, do not screw this up and spend the money or you will get behind when it comes to file your return.
#3 The accountant can tell you what type of business entity (LLC) or C Corp etc, depending on what you want from it. Say you want a LLC and you make $100,000 in this second business. You would probably have to pay yourself about $40,000 in W2 earnings (which will be about $50K after you add in taxes and social security which is 15%. You can then make a SEP IRA contribution of 25% of your W2 income, or $8,000 which comes off the remaining $50,000. This leaves about $40,000 to pass through at capital gain rates. As someone stated above, you can further lower this by paying all legitimate expenses from the $40,000 and probably get it down to say $20K.
Another entity option may allow you to contribute more to some type of tax deferred program, but may have a higher tax rate on the remainder.
Not that it matters what I do, but here goes:
I am retired military and I receive a pension which is large enough to live on and I do not need income from a second career to get by. I have a second career as a real estate appraiser. The appraisal business is an LLC.
Payments for appraisal services are paid to the LLC.
The money goes into a separate checking account. I also have a debit card for this account. I pay a lot of small expenses via direct withdrawal from this account and use the debit card for other expenses.
About three times a year after money builds up, I send the IRS $25,000 for a total of $75,000.
In the middle of December, I see what is left and my accountant and I compute what I can take, how much I need to contribute for taxes and social security and a SEP IRA contribution.
I write myself one W2 paycheck for the year.
This makes record keeping for the business very easy as it is all on one account and very self contained.
You will also probably have some type of unemployment reporting requirements to your state.
______________________________________________________________________________________________________
I recognize that some will tell you that I am not very smart as I should take the money and invest it or use it rather than let the IRS have it interest free. That is a fine academic argument, but my many years of life tells me that I would spend a lot of it. When you get one big chunk, you can do something with it.
None of this will matter to you if you need the additional money each month. You will write yourself a check from the business account to your personal account based on what total W2 income you have decided to pay yourself after talking to the accountant.
______________________________________________________________________________________________________
I would think one thing you need to talk to the accountant about is how much W2 income do you make in your first job. There would be no point in having more W2 income that the social security maximum or even to the maximum (my opinion) as social security will almost certainly change as there are more recipients and fewer payors. This would influence me to cut the W2 income from the second job down to as low as I could get it.
______________________________________________________________________________________________________
Finally, what you are talking about needing to do here is VERY EASY.
The big things are not commingling the 1099 income with the W2 income and starting to send some into the IRS on a periodic basis so you do not have a big tax liability at tax return time.
Good luck
