

Ask HN: Tax considerations for self employed - dvdand

Hi there,
I am self employed and as I begin a new corp-to-corp contract (my first one), I have been thinking about taxes at the end of the year. I don&#x27;t want to have a large tax liability at the end of the year (10K+). So, I have been looking into payroll tax services as an option. Has anyone here tried them for their self-employment income? Which one and was it worth it? Any gotchas or negative experiences?
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philiphodgen
If I understand your comment correctly (based on your "corp-to-corp"
statement) you have a corporation that provides your services as a consultant
to other corporations.

If that is "yes" you should absolutely put yourself on payroll with any of the
big generic payroll companies. I have used Payroll 1, Paychex, Quickbooks
Payroll, and ADP. They are commodity services. If you do your bookkeeping in
Quickbooks, consider Quickbooks Payroll. They're fine until they f---
something up, and then they are shit awful. I think for the last 2 years they
have taken down their servers at year-end for routine maintenance, EXACTLY
WHEN YOU NEED TO DO A LAST-MINUTE YEAR END PAYROLL RUN. Our experience in
year-end 2012 was particularly egregious, and we are committed former
customers of Intuit. But I am not bitter, and I do not judge. :-)

In terms of choosing a payroll service, remember that you are giving them
access to your bank account and hoping they pay the taxes on time and in the
right amount, and that they file the right paperwork at the right time.
Ultimately you are responsible for all of that if they screw it up, so I
recommend a big, established player. Sorry, startups. I'm not going to place
mission-critical stuff at a new place that might or might not be there, and
might or might not have 20 years of payroll tax expertise.

Get the full service from your payroll service -- they run payroll every 2
weeks (or whatever), make the tax deposits, and prepare and file the payroll
tax returns. The first year I did this, I stopped having big year-end tax
surprises.

If I read your comment wrong (i.e., you signed a contract as a human being
with a corporation as your client), then you have self-employment tax and
income tax problems to deal with. I'm in California, and you can set up online
accounts with the IRS and the Franchise Tax Board to make electronic
remittances to them of the estimated tax. Do that. Don't wait for every
quarter. Log on weekly or biweekly and keep current with payments that way.
The government won't refuse your estimated tax payments just because you are
making them more frequently than quarterly.

ADP, at least, has no capability (or interest, perhaps) in making estimated
payments of tax if there is not a salary item connected to it. So if you are
self-employed, shop elsewhere. Maybe there is another company that will do
this for you.

FWIW, my business is an S corporation. I have a regular biweekly salary (every
other Friday) of $120,000. I have it set up so that ALL of that goes to taxes
and personal savings (yay Dave Ramsey). Then I have an S corporation
distribution every other Friday for the income I pull from the business in
excess of $120,000 per year. That's what I live on. Every other Friday, I make
tax payments of 40% of that S corporation distribution online to the IRS and
the State of California.

The reason I do it like that is that the distribution from the S corporation
(above the salary) is fully taxable for income tax purposes (just like a
salary) but it escapes the Medicare tax (3.9% load). In other words, I get a
4% tax break for pulling money out as a distribution rather than a salary.

The reason the salary is set at $120,000 is that I calibrate the salary to the
point at which you don't have to make Social Security tax contributions
anymore on salary. (Medicare contributions go up to infinity. And beyond.) If
you set an unrealistically low salary level, the IRS will get cranky with you.
But if you're making the full boat Social Security tax contribution, you're
making yourself a little more audit-proof.

But yeah. However you do it, make small, regular deposits to cover your
estimated tax liability for the year. I did not have the discipline to save up
a big lump and pay quarterly. But I do have the discipline to make biweekly
payments online and through payroll tax deductions.

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dvdand
Thanks, this is very insightful. You did read my comments correctly in that
like you I too have an S corp through which I provide my services.

