Sole Proprietorship and becoming 'official'

[WanderALot]

I currently have a full-time job and I plan on taking on a part-time software coding gig payable through a 1099. It's easy work and could hopefully lead me to the start of my semi-ER phase of my life.

Since it's not a ton of money, about 35K/year, and since I'll already be maxing out my payroll taxes, I'm thinking a sole proprietorship is the way to go. I've decided to open up a solo 401k to funnel some of the extra income. Vanguard requires an Taxpayer ID Number and an official document indicating that I "formed the proprietorship". To satisfy both these requirements, I believe all I have to do is:

1. Get an TIN from the IRS (free)
2. Get a business license from the city, must be renewed annually ($50)

I don't think I need to do anything for my state (CA). Not too bad, but I find it hard to believe that everyone who starts a small consulting gig goes through this stuff ? Anyone see anything that I've missed or have any suggestions? Thanks.

 

[RonBoyd]

Since it's not a ton of money, about 35K/year, and since I'll already be maxing out my payroll taxes, I'm thinking a sole proprietorship is the way to go. I've decided to open up a solo 401k to funnel some of the extra income. Vanguard requires an Taxpayer ID Number and an official document indicating that I "formed the proprietorship". To satisfy both these requirements, I believe all I have to do is:

1. Get an TIN from the IRS (free)
2. Get a business license from the city, must be renewed annually ($50)

I don't think I need to do anything for my state (CA). Not too bad, but I find it hard to believe that everyone who starts a small consulting gig goes through this stuff ? Anyone see anything that I've missed or have any suggestions? Thanks.

Are you asking for Legal advice or Tax advice? Other than whether everyone "goes through this stuff" or if you've missed anything, I am unsure of the question.

My "go to" source for online Tax advice to the self-employed is June Walker: Tax advice for self-employed & indie... and her blog at June Walker: Tax & Financial Advisor to the Self-employed.

(Yeah, I am beginning to sound like a "One-Note Samba" so be aware that there are, no doubt, other equally qualified sources of that type of information.)

As far as Legal advice is concerned, there are several Lawyers that frequent this Forum who can offer direction if you ask the right questions.

 

[brewer12345]

DW is a sole proprietor with a solo 401k at Fido. She had to go through some extra steps because she needed a variance to see clients in her home office (I kid you not) and NJ regulates what she does (complete with antiquated professional competency test that has not been updated since 1990). If you are not living in the People's Republic of New Jersey and doing something not regulated by your state, I think that is all you need to do. But a tax advisor could tell you for sure.

 

[sailor]

Check with CA laws, but if you don't have employees you might not need TIN (SSN is used instead).

 

[walkinwood]

Also look into a SEP-IRA. I don't know how it compares to a solo 401K, but it is another option for the self-employed. All the best!

 

[Rich_by_the_Bay]

Sounds unlikely based on your description, but if you intend to hire outside vendors, suppliers, part-time coders, etc. who bring along any additional liabililty, consider whether an LLC is advisable to shield your personal assets.

If you will always be the only one working for the business, I don't think there is much advantage of an LLC in that regard. We'll see if any of our more knowledgeable members agree...

 

[SunsetSail]

I've previously owned and run a business I started in CA but I had employees so there were more hoops. You must be in a relatively small city because most larger cities in CA have business licenses taxes (although many have small business exemptions for a year or two of operations) - but don't worry if you miss one the IRS & FTB will share your Sch c income with your city and you will get a friendly notice.

I can't think of any requirements you missed, but so long as you are just a sole proprietor the requirements are typically simple. One reason for the simplicity is that it is easy to find a sole proprietor. Depending on your line of work this may be a big disadvantage - it won't be hard for a vendor or customer to find your home address. If this is an issue for you, it isn't hard or expensive to form a single member LLC and setup a street address with a UPS store or Kinko's (or whatever the FedEx store is called these days). The LLC may provide you with some phantom liability protection based on the aggrieved party's perception, but in reality probably won't provide you much protection because you are personally performing the services.

Also, you want a TIN regardless of the fact that Vanguard requires it so you don't have to put your SSN on a ton of documents that aren't well protected (w-9s, 1099s, etc.).

I also recommend you keep separate business books and records even though everything flows through to you (you can do it with Quicken). The records will help you substantiate business deductions in case of an audit.

Lastly you might want to consider E&O insurance if you are in a line of work that may generate liability.

This isn't legal or tax advice - perform your own due diligence.
Good luck in your venture.

 

[DblDoc]

You could just function as an Independent Contractor if it will only be you and set up a SEP IRA. No need to form an LLC. The insurance piece might be an issue for you though. I carry malpractice coverage through the contract group I work for.

DD

 

[samclem]

As a sole proprietor, a SEP IRA, a Solo 401K, or a solo Roth 401K are available to you. The 401Ks offer considerably higher contribution limits.

 

[WanderALot]

Thanks for the replies everyone.

Are you asking for Legal advice or Tax advice? Other than whether everyone "goes through this stuff" or if you've missed anything, I am unsure of the question.

Yeah, I guess I wasn't really too specific. <insert Rumsfeld's unknown unknowns quote here> I just had no idea about any of this and thought that all I had to do was to give the company my SSN number and they'll send me a 1099. It's amazing how each state and locality has its own rules about business licenses!

All I'm doing is being a code monkey for an out-of-state company. They will send me the work instructions and I will work on it on and upload the code back to their server. So, no one will be visiting here, no other employees and no vendors.

The only reason that I'm going with a solo 401k over a SEP-IRA is that my 401k wasn't maxed this year so I hope to funnel over a few K into it (part of the 16.5k employee contribution). Next year, my 401k will be maxed at my primary job so the SEP-IRA and solo 401k will have the same contribution limits. But I figure the solo 401k is only marginally more work than the SEP-IRA at least until I hit the 250K account balance which won't be anytime soon if ever.

I also recommend you keep separate business books and records even though everything flows through to you (you can do it with Quicken). The records will help you substantiate business deductions in case of an audit.

Make sense. However, I don't expect to have a lot of deductions. I'm not going to claim the home office deduction and the company is going to supply me with laptops, hardware etc.

 

[SVHoper]

Hi,

I recently transitioned from full-time employee to part-time consultant and am enjoying the huge time flexibility. I use Vanguard solo 401k without LLC - very simple administration. If you have 35k profit then the contribution limit will be more like $23k under 55, and $28k if over 55 due to profit sharing - I believe the max contribution limit is 49k (much better than $16,500) but unfortunately have not had to worry about that. Mid-year, Vanguard also said I could make a partial transfer into an IRA and then Roth IRA... but I haven't done this yet and they may have changed rules.

It might be worth checking with your accountant about claiming home office - I believe it is possible to claim some costs so that they do not impact capital gain upon sale.

Have fun.