Contract employee - tax issues?

Question

I am going to change jobs from working for a company to being essentially self employed. I will work as a contract employee, so I will be responsible for withholding taxes, paying them, etc...Would it be in my best interest to hire a cpa or try to figure it out on my own? Also, if I "hired" my wife to handle my money, would I be able to deduct from my taxes? I am going to make close to double the income I presently make - the tax consequence will be much higher? Any help would be welcome!

Answer 1

An excellent resource for small business owners is http://www.irs.gov.
Look for Small Business publications - especially, check out the resource guide at http://www.irs.gov/businesses/small/index.html

If you get a basic understanding of deductible vs. non-deductible expenses, you probably can prepare your own returns using any good tax prep software

Answer 2

This is probably something you can do for your self. Think of it like changing the oil in your car or a haircut. These are things you can learn to do for yourself but night not be worth the hassle.

You could also hire it out the first couple of years, ask your preparer lots of questions so you can learn then do it yourself. You might try using tax software like tax cut or TurboTax, but this won’t be any help if you don’t have a basic understanding of what is deductible or taxable.

Hiring you wife won’t lower your taxes any unless you pay her less than a $400 profit because, then she will have to pay self employment taxes on profit, naturally you will have to include your and her income if you file joint.

To see what you can deduct I would suggest the following publications; 587 Business Use of Your Home, pub 17 Your Federal Income Tax, pub 334 Tax Guide for Small Business, pub 463 Travel, Entertainment, Gift and Car Expenses, pub 535 Business Expenses, and pub 583 Starting a Business, and pub 946 How to Depreciate Property.

One last thing to remember, you will probably be subject to estimated taxes. If you are you must make you payments at least quarterly. However you can make them more often, like monthly. The tax system is a pay as you go system; if you don’t stay current you will always pay more than you legally have to with penalties and interest.

Answer 3

The taxes would be about the same as if you made the same amount as an employee, except that you'll pay both the emploiyee and employer halves of social security and medicare, so that's an extra 7.65%, nowhere near eating up the doubling of your salary. You will need to file form 1040ES quarterly, and make quarterly estimated payments. Warning - the numbers might look a little startling when you see them for the whole quarter rather than just one paycheck.

There might be expenses you can deduct from your gross income. Deducting hose don't require itemizing your personal expenses, and you'll pay tax on your income AFTER the expen ses are deducted.

Anything you'd pay your wife would end up taxable income to her, so on a joint return it would be right back, and you DON'T want to file separately, it could cost you a small fortune.

I'd talk to a CPA before you switch to find out what kind of records you need to keep, and what kind of expenses you can deduct. It might even be worth your while to have him or her prepare your tax return the first year - but if you're familiar with tax returns or with something like Turbo Tax, you can very possibly do it yourself.

Answer 4

If you hire your wife, she has to pay taxes on what you pay her, so you will not be saving the family money.