Independent Contractor / Surpise Business Owner

[TaoWanderer]

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?

 

[HomeGuru]

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?

**A: did you file Form 1040 Schedule C?

 

[TaoWanderer]

**A: did you file Form 1040 Schedule C?

Yes, SCHEDULE C-EZ.

 

[LdiJ]

Yes, SCHEDULE C-EZ.

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.

 

[TaoWanderer]

Do I need a business permit?

 

[LdiJ]

Do I need a business permit?

I doubt that a business permit would be needed for doing that type of consulting.

 

[TaoWanderer]

I doubt that a business permit would be needed for doing that type of consulting.

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?

 

[tranquility]

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.

 

[TaoWanderer]

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.

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]

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.

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.

 

[TaoWanderer]

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.

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]

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.

Why do you want to contribute more than 50% of your income to a retirement account?

 

[tranquility]

How can you know how much you can contribute?

Here I was thinking there was a limit of 20% of the net adjusted profit.

Info edit:
From a company trying to encourage Solo 401(k).

http://www.solo401kcontributionlimits.com/sole-proprietorship.html

 

[LdiJ]

How can you know how much you can contribute?

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.

 

[tranquility]

So he probably knows what his income is going to be...or close to it.

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.