In my tax situation, is it better to start a business or pay as personal?

Question

I have a regular job, but I also do freelance work on the side. I have made approximately $30,000 this year in freelance work. I haven't spent the money, and I have probably $5000 in expenses related to the freelance work. Will it make a difference in my tax standing if I start a business as opposed to just counting it all as personal income?

Answer 1

You already have started a business -- a Sole Proprietorship. You file your income and expenses on Schedule C or C-EZ. The net profit flows to Form 1040 and Schedule SE. Schedule SE is used to calculate the Self-Employment tax and that flows to Form 1040 as well.

Creating any other legal entity such as a corporation or LLC won't save you any taxes and will cost you more in certain fees, especially at the state level.

Answer 2

Unless you formed a business and incorporated it, it ends up the same whether you call it a business or just a sideline - to the IRS, it's a business, and you fill out schedules C and SE for the freelance income and expenses, and submit it as part of your tax return.

Incorporating could end up costing you MORE overall than just keeping on the way you are.

Answer 3

Your situation is a lot like mine. Technically, the IRS says you are going to have to treat this as a business. And by doing so you will be adding $25,000 to your taxable income (your taxable profit from the business). Usually paying the tax on $25,000 is better than paying it on the full $30,000.

In addition to your $25,000 of taxable income (and hence the higher taxes you will have to pay), you will also have to pay a self employment tax, which is another 7.5% of the $25,000 of business income. Bottom line is that unless you make a ton of money in your regular job, your income taxes (both federal and state) are going to go up significantly.

Before giving my final opinion, I need to ask you a question, and it is this:

Right after year end (usually in January of the next year), do your clients/customers send you a 1099-MISC form reporting what they paid to you as nonemployee compensation?

This is important! By sending you a 1099 they are reporting the amount they paid to you as one of their deductible business expenses. In addition to documenting their legitimate deductible business expenses, it also creates the IRS's link to you and your business income.

But if your clients/customers are not businesses, but just consumers of your freelance work, they probably don't send you a 1099, and thus do not create the link to the IRS. Also in some cases a business customer of yours might not consider the amount that they pay to you as significant enough to bother with the 1099 reporting process. Again, no link to IRS. This is critical to answering your question.

-srs2000

Answer 4

You have already started a business. Report your profit on Form 1040 Schedule C and self employment tax on Form 1040 SE