Taxation for free-lancers

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manedark
Posts: 242
Joined: Sun Apr 22, 2018 2:05 pm

Taxation for free-lancers

Post by manedark » Tue Jun 12, 2018 9:23 am

Hi BHers,
DW would be starting a freelancing job that will potentially pay her $1000 or more a month.

We are married filing jointly. I had a couple of questions that it would be great if you could a answer:
1. Can my wife continue to file a joint return with me? Or does it make sense to file separately? (mg income being 180K and hers being 12K roughly).
2. Is it necessary or desirable that she create a business entity? (we would rather avoid the hassle if its not really worth much).
3. Can she claim deduction for equipment she purchases in prepapration for the job and to be used in the job - laptop, phone, software, commuting expenses etc.
4. What to keep in mind for above, save original receipts, anything else?
5. Our marginal rate was 24‰ federal, and I think she has to pay 15‰ self employment tax on top of it? I think it's a bit too much, is there a way to avoid it? (btw I am already paying FICA and Medicare from my paycheck).


Thanks a lot in advance!
Maned

SRenaeP
Posts: 774
Joined: Tue Jan 19, 2010 9:05 pm

Re: Taxation for free-lancers

Post by SRenaeP » Tue Jun 12, 2018 9:53 am

1. Yes, you can continue to file MFJ. I would still run the numbers both ways to see which way (MFJ or MFS) is optimal.
2. I would say it depends on the type of work she'll be doing. If she's doing provide services where liability may be an issue, it's probably better to create a business entity and get E&O insurance.
3. Yes, these will go on Schedule C. She should read the Schedule C instructions and any associated pub for details.
4. Keep everything for at least seven years.
5. The primary difference between 1099 income and W-2 income is that 1099ers are responsible for both employer and employee portions of SS tax, so 12.4% instead of 6.2%. Like with W-2 income, 1099 income can put into a tax-deferred account (e.g. solo 401k or SEP IRA).

manedark
Posts: 242
Joined: Sun Apr 22, 2018 2:05 pm

Re: Taxation for free-lancers

Post by manedark » Tue Jun 12, 2018 1:42 pm

SRenaeP wrote:
Tue Jun 12, 2018 9:53 am
1. Yes, you can continue to file MFJ. I would still run the numbers both ways to see which way (MFJ or MFS) is optimal.
2. I would say it depends on the type of work she'll be doing. If she's doing provide services where liability may be an issue, it's probably better to create a business entity and get E&O insurance.
3. Yes, these will go on Schedule C. She should read the Schedule C instructions and any associated pub for details.
4. Keep everything for at least seven years.
5. The primary difference between 1099 income and W-2 income is that 1099ers are responsible for both employer and employee portions of SS tax, so 12.4% instead of 6.2%. Like with W-2 income, 1099 income can put into a tax-deferred account (e.g. solo 401k or SEP IRA).
Thanks.
About the liability, I think she is working for a large tech powered company, as a representative of that company. So I would assume the liability, if any, is born by them. But it is a very good point that you raised, I will ask her to check with them. In any case, I dont think the nature of her work, makes her liable for anything more than "shoddy" work and not getting paid for it.
Any other reason for opening the business? What about her example her ability to claim expenses - that is not contingent on her having a incorporated business, right?

Good point about opening the IRA to save on taxes - will read up on pros and cons of SEP vs Individual 401K.

pshonore
Posts: 6429
Joined: Sun Jun 28, 2009 2:21 pm

Re: Taxation for free-lancers

Post by pshonore » Tue Jun 12, 2018 3:00 pm

manedark wrote:
Tue Jun 12, 2018 1:42 pm
SRenaeP wrote:
Tue Jun 12, 2018 9:53 am
1. Yes, you can continue to file MFJ. I would still run the numbers both ways to see which way (MFJ or MFS) is optimal.
2. I would say it depends on the type of work she'll be doing. If she's doing provide services where liability may be an issue, it's probably better to create a business entity and get E&O insurance.
3. Yes, these will go on Schedule C. She should read the Schedule C instructions and any associated pub for details.
4. Keep everything for at least seven years.
5. The primary difference between 1099 income and W-2 income is that 1099ers are responsible for both employer and employee portions of SS tax, so 12.4% instead of 6.2%. Like with W-2 income, 1099 income can put into a tax-deferred account (e.g. solo 401k or SEP IRA).
Thanks.
About the liability, I think she is working for a large tech powered company, as a representative of that company. So I would assume the liability, if any, is born by them. But it is a very good point that you raised, I will ask her to check with them. In any case, I dont think the nature of her work, makes her liable for anything more than "shoddy" work and not getting paid for it.
Any other reason for opening the business? What about her example her ability to claim expenses - that is not contingent on her having a incorporated business, right?

Good point about opening the IRA to save on taxes - will read up on pros and cons of SEP vs Individual 401K.
She can certainly claim valid business expenses based on the business portion of use but sometimes equipment (computers, etc) has to be depreciated over its life. You can use accelerated depreciation but thats a tricky area. If she has a home office you can deduct those expenses (provided she has a profit) if its used REGULARY and EXCLUSIVELY for business.

manedark
Posts: 242
Joined: Sun Apr 22, 2018 2:05 pm

Re: Taxation for free-lancers

Post by manedark » Tue Jun 12, 2018 7:15 pm

pshonore wrote:
Tue Jun 12, 2018 3:00 pm
She can certainly claim valid business expenses based on the business portion of use but sometimes equipment (computers, etc) has to be depreciated over its life. You can use accelerated depreciation but thats a tricky area. If she has a home office you can deduct those expenses (provided she has a profit) if its used REGULARY and EXCLUSIVELY for business.
Thanks. Do you think we can do all this through a tax software like H&R block or Turbo-tax i.e. my W2 income and her 1099-MISC income in the same tax return? Or should we hire a tax consultant , especially since it's the first time we are going to do this - can tax consultant provide needed advise about the current tax year, "before" the tax season starts in March-April next year?

RickBoglehead
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Joined: Wed Feb 14, 2018 9:10 am

Re: Taxation for free-lancers

Post by RickBoglehead » Tue Jun 12, 2018 9:35 pm

TurboTax does it fine.

Jablean
Posts: 250
Joined: Sat Jun 02, 2018 2:38 pm

Re: Taxation for free-lancers

Post by Jablean » Tue Jun 12, 2018 11:43 pm

Two contractor family here, always done MFJ with TurboTax. At 10K a year just go with IRA or Roth, you can only save 20% on SEP, maybe more on solo, so likely not a help in saving more. As a contractor your wife has the liability but she's not working with kids or building things that may collapse. Even LLCs are a PITA to do accounting and tax for. Just keep it as sole proprietor. If she likes she can file a DBA with the state to operate as something other than her name but we've found it easiest just to keep our names in the business name and then you don't need a DBA. Set up a spreadsheet and list the categories found on Sched C in columns and dates in rows. Write down daily a recap of what she did and where she went, fill in milage, parking, meals if out of town or with client, cell phone, internet, office supplies etc. Company will pay her bi-weekly or monthly (she'll need to submit invoice) company will send her a 1099 at end of the year just like a W2.

SRenaeP
Posts: 774
Joined: Tue Jan 19, 2010 9:05 pm

Re: Taxation for free-lancers

Post by SRenaeP » Wed Jun 13, 2018 6:43 am

manedark wrote:
Tue Jun 12, 2018 1:42 pm
SRenaeP wrote:
Tue Jun 12, 2018 9:53 am
1. Yes, you can continue to file MFJ. I would still run the numbers both ways to see which way (MFJ or MFS) is optimal.
2. I would say it depends on the type of work she'll be doing. If she's doing provide services where liability may be an issue, it's probably better to create a business entity and get E&O insurance.
3. Yes, these will go on Schedule C. She should read the Schedule C instructions and any associated pub for details.
4. Keep everything for at least seven years.
5. The primary difference between 1099 income and W-2 income is that 1099ers are responsible for both employer and employee portions of SS tax, so 12.4% instead of 6.2%. Like with W-2 income, 1099 income can put into a tax-deferred account (e.g. solo 401k or SEP IRA).
Thanks.
About the liability, I think she is working for a large tech powered company, as a representative of that company. So I would assume the liability, if any, is born by them. But it is a very good point that you raised, I will ask her to check with them. In any case, I dont think the nature of her work, makes her liable for anything more than "shoddy" work and not getting paid for it.
Any other reason for opening the business? What about her example her ability to claim expenses - that is not contingent on her having a incorporated business, right?

Good point about opening the IRA to save on taxes - will read up on pros and cons of SEP vs Individual 401K.
Note that if you currently use or plan to use the backdoor Roth method, a SEP IRA will cause pro-rata to go into effect. While $10k isn't much, in that scenario, I'd consider the solo 401k.

SRenaeP
Posts: 774
Joined: Tue Jan 19, 2010 9:05 pm

Re: Taxation for free-lancers

Post by SRenaeP » Wed Jun 13, 2018 6:45 am

Jablean wrote:
Tue Jun 12, 2018 11:43 pm
Two contractor family here, always done MFJ with TurboTax. At 10K a year just go with IRA or Roth, you can only save 20% on SEP, maybe more on solo, so likely not a help in saving more. As a contractor your wife has the liability but she's not working with kids or building things that may collapse. Even LLCs are a PITA to do accounting and tax for. Just keep it as sole proprietor. If she likes she can file a DBA with the state to operate as something other than her name but we've found it easiest just to keep our names in the business name and then you don't need a DBA. Set up a spreadsheet and list the categories found on Sched C in columns and dates in rows. Write down daily a recap of what she did and where she went, fill in milage, parking, meals if out of town or with client, cell phone, internet, office supplies etc. Company will pay her bi-weekly or monthly (she'll need to submit invoice) company will send her a 1099 at end of the year just like a W2.
An LLC doesn't necessarily require any additional accounting. An LLC can be a sole proprietor, in which case, it's treated as a disregarded entity by the IRS. In plain terms, you just file a Schedule C like you would without an LLC.

Also note, the OP's wife may need a business license in their local jurisdiction.

J295
Posts: 1760
Joined: Sun Jan 01, 2012 11:40 pm

Re: Taxation for free-lancers

Post by J295 » Wed Jun 13, 2018 7:39 am

Agree that TurboTax works fine. Presently, both my wife and I have some self-employment income from separate professions. We also both have separate liability coverage.

Having said that, when I was working full time we used an accountant not because we couldn’t handle it ourselves, but I just didn’t want to spend the extra time and effort staying up to speed on some of the questions you asked. When our life transitioned into “retirement “using TurboTax and digging for the answers was no problem and even a little bit fun, so we no longer use an accountant. Perhaps you want to use an accountant initially or at least have one available for consultation on some of the issues that may pop up.

michaeljc70
Posts: 3914
Joined: Thu Oct 15, 2015 3:53 pm

Re: Taxation for free-lancers

Post by michaeljc70 » Wed Jun 13, 2018 9:00 am

pshonore wrote:
Tue Jun 12, 2018 3:00 pm
manedark wrote:
Tue Jun 12, 2018 1:42 pm
SRenaeP wrote:
Tue Jun 12, 2018 9:53 am
1. Yes, you can continue to file MFJ. I would still run the numbers both ways to see which way (MFJ or MFS) is optimal.
2. I would say it depends on the type of work she'll be doing. If she's doing provide services where liability may be an issue, it's probably better to create a business entity and get E&O insurance.
3. Yes, these will go on Schedule C. She should read the Schedule C instructions and any associated pub for details.
4. Keep everything for at least seven years.
5. The primary difference between 1099 income and W-2 income is that 1099ers are responsible for both employer and employee portions of SS tax, so 12.4% instead of 6.2%. Like with W-2 income, 1099 income can put into a tax-deferred account (e.g. solo 401k or SEP IRA).
Thanks.
About the liability, I think she is working for a large tech powered company, as a representative of that company. So I would assume the liability, if any, is born by them. But it is a very good point that you raised, I will ask her to check with them. In any case, I dont think the nature of her work, makes her liable for anything more than "shoddy" work and not getting paid for it.
Any other reason for opening the business? What about her example her ability to claim expenses - that is not contingent on her having a incorporated business, right?

Good point about opening the IRA to save on taxes - will read up on pros and cons of SEP vs Individual 401K.
She can certainly claim valid business expenses based on the business portion of use but sometimes equipment (computers, etc) has to be depreciated over its life. You can use accelerated depreciation but thats a tricky area. If she has a home office you can deduct those expenses (provided she has a profit) if its used REGULARY and EXCLUSIVELY for business.
If you use accelerated depreciation and then she no longer has the "business", that gets tricky as there can be recapture of the depreciation. So, I would watch that if you don't think this is going to be a long term thing.

Jablean
Posts: 250
Joined: Sat Jun 02, 2018 2:38 pm

Re: Taxation for free-lancers

Post by Jablean » Thu Jun 14, 2018 10:24 pm

SRenaeP wrote:
Wed Jun 13, 2018 6:45 am
Jablean wrote:
Tue Jun 12, 2018 11:43 pm
Two contractor family here, always done MFJ with TurboTax. At 10K a year just go with IRA or Roth, you can only save 20% on SEP, maybe more on solo, so likely not a help in saving more. As a contractor your wife has the liability but she's not working with kids or building things that may collapse. Even LLCs are a PITA to do accounting and tax for. Just keep it as sole proprietor. If she likes she can file a DBA with the state to operate as something other than her name but we've found it easiest just to keep our names in the business name and then you don't need a DBA. Set up a spreadsheet and list the categories found on Sched C in columns and dates in rows. Write down daily a recap of what she did and where she went, fill in milage, parking, meals if out of town or with client, cell phone, internet, office supplies etc. Company will pay her bi-weekly or monthly (she'll need to submit invoice) company will send her a 1099 at end of the year just like a W2.
An LLC doesn't necessarily require any additional accounting. An LLC can be a sole proprietor, in which case, it's treated as a disregarded entity by the IRS. In plain terms, you just file a Schedule C like you would without an LLC.

Also note, the OP's wife may need a business license in their local jurisdiction.
Thanks, I filed about 10 years ago one time as an LLC and for some reason tax time just seemed a lot more complicated but I don't remember why. But then my accounting system was/is sortof shoeboxey. If she's only looking at $10,000 it just seems easiest to do the least necessary.

AlwaysWannaLearn
Posts: 230
Joined: Mon May 28, 2018 8:37 pm

Re: Taxation for free-lancers

Post by AlwaysWannaLearn » Thu Jun 14, 2018 11:39 pm

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Last edited by AlwaysWannaLearn on Wed Jul 18, 2018 11:48 pm, edited 1 time in total.

trueblueky
Posts: 1378
Joined: Tue May 27, 2014 3:50 pm

Re: Taxation for free-lancers

Post by trueblueky » Fri Jun 15, 2018 8:19 am

manedark wrote:
Tue Jun 12, 2018 9:23 am
Hi BHers,
DW would be starting a freelancing job that will potentially pay her $1000 or more a month.

We are married filing jointly. I had a couple of questions that it would be great if you could a answer:
1. Can my wife continue to file a joint return with me? Or does it make sense to file separately? (mg income being 180K and hers being 12K roughly).
MFJ, you get $24,000 standard deduction. MFS you each get $12,000. If one of you itemizes, you must both itemize.

She gets to deduct half her payroll on the front page, which brings her income to something like $9300 before the standard deduction. Even before IRA, SEP or equivalent, she has no taxable income. She would be better with Roth, should you choose MFS.

MFS, you personally would likely be in a higher bracket. With the lower deduction, you would certainly pay more tax. It might be worthwhile for you to run the numbers once just to see how much Congress hates MFS. I assume that's because of past abuses.

pshonore
Posts: 6429
Joined: Sun Jun 28, 2009 2:21 pm

Re: Taxation for free-lancers

Post by pshonore » Fri Jun 15, 2018 10:00 am

trueblueky wrote:
Fri Jun 15, 2018 8:19 am
manedark wrote:
Tue Jun 12, 2018 9:23 am
Hi BHers,
DW would be starting a freelancing job that will potentially pay her $1000 or more a month.

We are married filing jointly. I had a couple of questions that it would be great if you could a answer:
1. Can my wife continue to file a joint return with me? Or does it make sense to file separately? (mg income being 180K and hers being 12K roughly).
MFJ, you get $24,000 standard deduction. MFS you each get $12,000. If one of you itemizes, you must both itemize.

She gets to deduct half her payroll on the front page, which brings her income to something like $9300 before the standard deduction. Even before IRA, SEP or equivalent, she has no taxable income. She would be better with Roth, should you choose MFS.

MFS, you personally would likely be in a higher bracket. With the lower deduction, you would certainly pay more tax. It might be worthwhile for you to run the numbers once just to see how much Congress hates MFS. I assume that's because of past abuses.
Careful, the are different contribution limits for MFS filing status

aristotelian
Posts: 4917
Joined: Wed Jan 11, 2017 8:05 pm

Re: Taxation for free-lancers

Post by aristotelian » Fri Jun 15, 2018 11:10 am

manedark wrote:
Tue Jun 12, 2018 1:42 pm
Good point about opening the IRA to save on taxes - will read up on pros and cons of SEP vs Individual 401K.
Definitely Solo 401k. She will be able to defer all her net income after SE tax instead of just 20%.

michaeljc70
Posts: 3914
Joined: Thu Oct 15, 2015 3:53 pm

Re: Taxation for free-lancers

Post by michaeljc70 » Fri Jun 15, 2018 5:57 pm

AlwaysWannaLearn wrote:
Thu Jun 14, 2018 11:39 pm
manedark wrote:
Tue Jun 12, 2018 1:42 pm
About the liability, I think she is working for a large tech powered company, as a representative of that company. So I would assume the liability, if any, is born by them. But it is a very good point that you raised, I will ask her to check with them.
She shouldn't rely on what the company says. What does the contract say?
michaeljc70 wrote:
Wed Jun 13, 2018 9:00 am
In any case, I dont think the nature of her work, makes her liable for anything more than "shoddy" work and not getting paid for it.
Don't bet on it. Most independent contractor agreements have confidentiality obligations, sometimes non-competes, indemnification and other obligations.
That wasn't my comment.....

Though getting professional liability insurance may not be as easy as you think if you are not a lawyer, cpa or other certified/registered professional. What will insurance do if you break confidentiality or non-competes? Insurance doesn't cover that! That's like saying your auto insurance will cover you breaking someone's windshield with a baseball bat.

AlwaysWannaLearn
Posts: 230
Joined: Mon May 28, 2018 8:37 pm

Re: Taxation for free-lancers

Post by AlwaysWannaLearn » Fri Jun 15, 2018 11:19 pm

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Last edited by AlwaysWannaLearn on Wed Jul 18, 2018 11:48 pm, edited 1 time in total.

CFM300
Posts: 1384
Joined: Sat Oct 27, 2007 5:13 am

Re: Taxation for free-lancers

Post by CFM300 » Sat Jun 16, 2018 2:25 am

AlwaysWannaLearn wrote:
Fri Jun 15, 2018 11:19 pm
Assume the contract is between C corp. and OP's Wife LLC. If wife inadvertently discloses Corp's confidential information (e.g. she casually mentions it to her husband since as we know these are the things couples chat about, and husband casually tells a friend since that's what friends talk about, and friend posts it on the internet because that's the online world we live in and friend of husband was excited to tell the world what he's just learned), wife might inadvertently be in breach.

If wife is an LLC, the most Corp. can get (if the contract's drafted right) is either the LLC's assets (a computer maybe?) and whatever cap on liability was put into the contract (if any) - Most Corp templates don't have one, but any lawyer representing OP's wife would insist on it being no more than what she's received from Corp.

If the contract is between Corp. and OP's wife in her individual capacity, the most Corp. can get is EVERYTHING that wife-of-OP has in her name + anything that the two of them jointly hold. Kapiche?
Are you sure about all that? I agree that an LLC would potentially shield her personal assets from liability arising from the actions of an employee of hers, but would she not be personally liable for her own actions?

AlwaysWannaLearn
Posts: 230
Joined: Mon May 28, 2018 8:37 pm

Re: Taxation for free-lancers

Post by AlwaysWannaLearn » Sat Jun 16, 2018 8:14 am

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Last edited by AlwaysWannaLearn on Wed Jul 18, 2018 11:47 pm, edited 1 time in total.

CFM300
Posts: 1384
Joined: Sat Oct 27, 2007 5:13 am

Re: Taxation for free-lancers

Post by CFM300 » Sat Jun 16, 2018 7:18 pm

AlwaysWannaLearn wrote:
Sat Jun 16, 2018 8:14 am
CFM300 wrote:
Sat Jun 16, 2018 2:25 am
would she not be personally liable for her own actions?
Generally speaking, no, so long as the actions are within the scope of the business.
I remain skeptical. Nolo.com, for instance, directly contradicts your assertion:

"There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business." [emphasis added]

https://www.nolo.com/legal-encyclopedia ... guide.html

AlwaysWannaLearn
Posts: 230
Joined: Mon May 28, 2018 8:37 pm

Re: Taxation for free-lancers

Post by AlwaysWannaLearn » Sat Jun 16, 2018 8:20 pm

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Last edited by AlwaysWannaLearn on Wed Jul 18, 2018 11:44 pm, edited 5 times in total.

trueblueky
Posts: 1378
Joined: Tue May 27, 2014 3:50 pm

Re: Taxation for free-lancers

Post by trueblueky » Sat Jun 16, 2018 8:25 pm

pshonore wrote:
Fri Jun 15, 2018 10:00 am
trueblueky wrote:
Fri Jun 15, 2018 8:19 am
manedark wrote:
Tue Jun 12, 2018 9:23 am
Hi BHers,
DW would be starting a freelancing job that will potentially pay her $1000 or more a month.

We are married filing jointly. I had a couple of questions that it would be great if you could a answer:
1. Can my wife continue to file a joint return with me? Or does it make sense to file separately? (mg income being 180K and hers being 12K roughly).
MFJ, you get $24,000 standard deduction. MFS you each get $12,000. If one of you itemizes, you must both itemize.

She gets to deduct half her payroll on the front page, which brings her income to something like $9300 before the standard deduction. Even before IRA, SEP or equivalent, she has no taxable income. She would be better with Roth, should you choose MFS.

MFS, you personally would likely be in a higher bracket. With the lower deduction, you would certainly pay more tax. It might be worthwhile for you to run the numbers once just to see how much Congress hates MFS. I assume that's because of past abuses.
Careful, the are different contribution limits for MFS filing status
Agree.

But there is no tax advantage for her in a traditional IRA or other tax-deferred account, if they file MFS. My main points are on the question of whether to file separately. It is highly unlikely that MFS makes sense.

I have prepared taxes professionally and as a volunteer. The only instance that comes to mind where MFS was better involved a married couple from Ohio. MFS meant higher federal taxes, which were more than offset by lower state taxes. Those situations are rare (would not have applied in most states).

I have never seen a couple where one had much higher taxable income than the other and MFS saved money. There are couples who have other compelling non-tax reasons to file separately; i did not get that this was one of those cases.

JBTX
Posts: 4271
Joined: Wed Jul 26, 2017 12:46 pm

Re: Taxation for free-lancers

Post by JBTX » Sat Jun 16, 2018 8:39 pm

manedark wrote:
Tue Jun 12, 2018 9:23 am
Hi BHers,
DW would be starting a freelancing job that will potentially pay her $1000 or more a month.

We are married filing jointly. I had a couple of questions that it would be great if you could a answer:
1. Can my wife continue to file a joint return with me? Or does it make sense to file separately? (mg income being 180K and hers being 12K roughly).
Yes, continue MFJ



2. Is it necessary or desirable that she create a business entity? (we would rather avoid the hassle if its not really worth much).
Depends but probably not. If there is any risk you can get insurance. You could set up a different type of legal entity but the risk may not be worth the additional hassle and expenses of setting it up and maintaining it annually.

If you choose to open a self employed 401k you may need to get a separate business tax ID from IRS
3. Can she claim deduction for equipment she purchases in prepapration for the job and to be used in the job - laptop, phone, software, commuting expenses etc.
In short, yes she can. There are rules and limitations to do so depending on the circumstance. You may be able to take a small deduction for home office expense.
4. What to keep in mind for above, save original receipts, anything else?
Certainly save receipts. Keep detailed records. It may be clearner to have revenue and expenses going through a separate bank account. To the extent you separate business records it is cleaner.

5. Our marginal rate was 24‰ federal, and I think she has to pay 15‰ self employment tax on top of it? I think it's a bit too much, is there a way to avoid it? (btw I am already paying FICA and Medicare from my paycheck).


Thanks a lot in advance!
Maned

Yes marginal tax rates are high for self employed. Best way to fight it is to take as much legitimate deductions as you can and also open a self employed 401k or other self employed retirement plan. You may Even be able to save and tax defer almost all of that self employment income.

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