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Independent Contractor / Surpise Business Owner

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T

TaoWanderer

Member
What is the name of your state (only U.S. law)? CA

I started working from home for a company doing over the phone consulting in 2009. I didn't realize that I was considered an independent contractor vs an employee until it was tax time. At the beginning of 2011 I started working for a second company doing the same thing, also as an independent contractor. During this last tax season I became more aware that as an independent contractor, I am basically a self-employed sole proprietor (let me know if I'm wrong please) and was going to look into finding out if there was something special I'm supposed to be doing as a business owner. I used Turbo Tax Home and Business to do my taxes last year and I believe I did everything correctly. Now I was looking into opening an individual 401k and they want an EIN and as a sole proprietor, the document filed to form the proprietorship. I don't have an EIN or any document filed to form a sole proprietorship, so I started wondering if there is anything else I'm supposed to have / do that I'm missing.

Was I supposed to file a document to form the sole proprietorship with someone prior to starting working?

Are they talking about a business permit?

Do I need a business permit?

What else might I be missing / should be thinking about, as I don't want to get myself into trouble down the road?
 


H

HomeGuru

Senior Member
TaoWanderer said:
What is the name of your state (only U.S. law)? CA

I started working from home for a company doing over the phone consulting in 2009. I didn't realize that I was considered an independent contractor vs an employee until it was tax time. At the beginning of 2011 I started working for a second company doing the same thing, also as an independent contractor. During this last tax season I became more aware that as an independent contractor, I am basically a self-employed sole proprietor (let me know if I'm wrong please) and was going to look into finding out if there was something special I'm supposed to be doing as a business owner. I used Turbo Tax Home and Business to do my taxes last year and I believe I did everything correctly. Now I was looking into opening an individual 401k and they want an EIN and as a sole proprietor, the document filed to form the proprietorship. I don't have an EIN or any document filed to form a sole proprietorship, so I started wondering if there is anything else I'm supposed to have / do that I'm missing.

Was I supposed to file a document to form the sole proprietorship with someone prior to starting working?

Are they talking about a business permit?

Do I need a business permit?

What else might I be missing / should be thinking about, as I don't want to get myself into trouble down the road?
Click to expand...
**A: did you file Form 1040 Schedule C?
 
LdiJ

LdiJ

Senior Member
TaoWanderer said:
Yes, SCHEDULE C-EZ.
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Then you did everything correctly.

You are certainly free, as a sole proprietor to obtain an EIN number so that you can form your 401k. However that is not your only option for opening a retirement account. You could also open a SEP IRA and contribute up to 20% of your net profits to that.
 
T

TaoWanderer

Member
LdiJ said:
I doubt that a business permit would be needed for doing that type of consulting.
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Great, so I'm all good than as far as doing everything legal, there's nothing else I need to do?

In the Vanguard form to open an Individual 401(k) it says:

Type of business Select one.
Check the organization’s entity type. If the state you’re doing business in provided documentation for the type of business you specify below, please include a copy of the documentation with this form.
■ Sole proprietorship Document filed to form the proprietorship.

Am I suppose to file a form for my proprietorship in California?
 
T

tranquility

Senior Member
In the cities in CA I know, any business needs a business permit unless the gross is below a certain amount. I'd say you need a business permit, but it would depend on your local laws. The state will give the fact you file a schedule c to the local jurisdiction listed on your return in many cases. (Some cities don't participate in the info sharing.)

A 401(k) is not appropriate. But, as LdiJ said, there are other options.
 
T

TaoWanderer

Member
tranquility said:
In the cities in CA I know, any business needs a business permit unless the gross is below a certain amount. I'd say you need a business permit, but it would depend on your local laws. The state will give the fact you file a schedule c to the local jurisdiction listed on your return in many cases. (Some cities don't participate in the info sharing.)

A 401(k) is not appropriate. But, as LdiJ said, there are other options.
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I technically live in an unincorporated area of San Diego County, so no permit needed then? How do I find out for sure?

Why is a Individual 401(k) not appropriate? I thought they were made for self employed people whose only employee is the owner or the owner and their spouse.
 
LdiJ

LdiJ

Senior Member
TaoWanderer said:
I technically live in an unincorporated area of San Diego County, so no permit needed then? How do I find out for sure?

Why is a Individual 401(k) not appropriate? I thought they were made for self employed people whose only employee is the owner or the owner and their spouse.
Click to expand...
Because you can accomplish the same thing with a SEP IRA. Its just as good as a 401k and is specifically designed to be a retirement vehicle for someone that is self employed. That is what you are, self employed.
 
T

TaoWanderer

Member
LdiJ said:
Because you can accomplish the same thing with a SEP IRA. Its just as good as a 401k and is specifically designed to be a retirement vehicle for someone that is self employed. That is what you are, self employed.
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Yes, I could use a SEP IRA, it's just that with an Individual 401(k) I would be able to contribute a lot more i.e. $26,000 vs. $9,000 for my income level.
 
LdiJ

LdiJ

Senior Member
TaoWanderer said:
Yes, I could use a SEP IRA, it's just that with an Individual 401(k) I would be able to contribute a lot more i.e. $26,000 vs. $9,000 for my income level.
Click to expand...
Why do you want to contribute more than 50% of your income to a retirement account?
 
LdiJ

LdiJ

Senior Member
tranquility said:
How can you know how much you can contribute?
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Well, he likely knows how much he is making, and he stated that he filed a Schedule C-EZ so we know he has little in expenses. So he probably knows what his income is going to be...or close to it.

What I don't get is how he can afford to live and do that.
 
T

tranquility

Senior Member
So he probably knows what his income is going to be...or close to it.
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He's still going to have to have a adjusted profit of $130,000 to shelter $26,000. I don't understand where the 50% is coming from.
 
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