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I know a 17 year old self-employed young person who will turn 18 in the next few months. She says she is getting "killed on taxes" as a 1099 employee and being 17 years old because she has to deposit all the money in a checking account, not a business account. Her arrangement with the employer is a 50/50 split of the money she brings in, but she made it sound like she is paying taxes on the entire amount, not the 50% (not sure about how that works specifically.)
At any rate, I want to be able to give her some guidance on what kind of account to set up for her business earnings that minimize her tax burden.
I am not very knowledgeable about banking or 1099 self-employment and taxes, so any and all advice is welcome. Again, main goal is to help get this young lady's money into the right place once she becomes an adult to keep more in her pocket.
I know a 17 year old self-employed young person who will turn 18 in the next few months. She says she is getting "killed on taxes" as a 1099 employee and being 17 years old because she has to deposit all the money in a checking account, not a business account. Her arrangement with the employer is a 50/50 split of the money she brings in, but she made it sound like she is paying taxes on the entire amount, not the 50% (not sure about how that works specifically.)
At any rate, I want to be able to give her some guidance on what kind of account to set up for her business earnings that minimize her tax burden.
I am not very knowledgeable about banking or 1099 self-employment and taxes, so any and all advice is welcome. Again, main goal is to help get this young lady's money into the right place once she becomes an adult to keep more in her pocket.
Thanks in advance.
The type of account (personal checking vs business) is irrelevant when it comes to taxes owed.
I have no idea what you mean by 50/50 split.
1099 employee is an oxymoron. One is either a 1099 contractor, or an employee. You cannot be a combination of the two.
You must pass specific tests to qualify as a 1099 contractor. If you do not, the employer may be liable for paying back taxes, but you will need a professional to make a judgment on this.
If 1099 status is correct, it is reasonably simple to calculate taxes. She would be responsible for taxes on the entire amount, plus social security, plus the employer portion of social security (renamed as self-employment tax). The amount of all of this will depend on the gross earned, her deductions, whether she can be claimed as a dependent by others, and any legitimate business expenses she can deduct.
The type of account (personal checking vs business) is irrelevant when it comes to taxes owed.
I have no idea what you mean by 50/50 split.
1099 employee is an oxymoron. One is either a 1099 contractor, or an employee. You cannot be a combination of the two.
You must pass specific tests to qualify as a 1099 contractor. If you do not, the employer may be liable for paying back taxes, but you will need a professional to make a judgment on this.
If 1099 status is correct, it is reasonably simple to calculate taxes. She would be responsible for taxes on the entire amount, plus social security, plus the employer portion of social security (renamed as self-employment tax). The amount of all of this will depend on the gross earned, her deductions, whether she can be claimed as a dependent by others, and any legitimate business expenses she can deduct.
The business is some kind of software firm. She creates software for them and gets 1/2 the money from every purchase of the product.
Yes, you are correct about 1099, she is not an employee of the company.
I guess it is more a tax question than a banking one, then. Would a CPA be the best route? Between the two of us, neither knew enough to really ask the right questions, let alone come to answers. My takeaway was "getting killed on taxes because I am still 17." but that needs more investigation I guess.
The business is some kind of software firm. She creates software for them and gets 1/2 the money from every purchase of the product.
Yes, you are correct about 1099, she is not an employee of the company.
I guess it is more a tax question than a banking one, then. Would a CPA be the best route? Between the two of us, neither knew enough to really ask the right questions, let alone come to answers. My takeaway was "getting killed on taxes because I am still 17." but that needs more investigation I guess.
Thanks for the answer.
You are correct, banking is irrelevant to her tax rates.
Ok, so it sounds like she is paid royalties/commission based on unit sales.
There a few things she needs to consider. Whether to operate as a sole proprietor, to create an LLC or sub S corp, or to pursue other more complex options.
Regardless of method, she is going to be paying taxes on income. There are ways to shield some of it, which are pretty standard. Claim business deductions and contribute to a 401k being the big ones.
This is definitely CPA stuff. The good news, payment to a CPA for business advice is a deductible business expense.
She needs to sit with the CPA and learn how to do her own taxes so she understands what expenses she can deduct from her income. Bank account doesn't matter at all. She would file a Schedule C listing her income then deducting things like her computer expenses, internet, etc.
Her taxes are not going to be complicated, she just needs to learn what records to keep and what forms to fill out.
And I guess she learned right away that the government takes a big portion of your what you get paid.
I know a 17 year old self-employed young person who will turn 18 in the next few months. She says she is getting "killed on taxes" as a 1099 employee and being 17 years old because she has to deposit all the money in a checking account, not a business account. Her arrangement with the employer is a 50/50 split of the money she brings in, but she made it sound like she is paying taxes on the entire amount, not the 50% (not sure about how that works specifically.)
At any rate, I want to be able to give her some guidance on what kind of account to set up for her business earnings that minimize her tax burden.
I am not very knowledgeable about banking or 1099 self-employment and taxes, so any and all advice is welcome. Again, main goal is to help get this young lady's money into the right place once she becomes an adult to keep more in her pocket.
Thanks in advance.
In addition to the great advice that's already been given, the 50% share that goes to the "employer" needs to be 1099'd to the employer (unless the employer is a corporation) if it's showing up on the 1099 this young lady is receiving from her clients. That will support the deduction she would take for money she paid over to the employer.
If the employer is a corporation, she can still take the deduction, just make sure she keeps records of the funds going to the employer.
In addition to the great advice that's already been given, the 50% share that goes to the "employer" needs to be 1099'd to the employer (unless the employer is a corporation) if it's showing up on the 1099 this young lady is receiving from her clients. That will support the deduction she would take for money she paid over to the employer.
If the employer is a corporation, she can still take the deduction, just make sure she keeps records of the funds going to the employer.
Thanks everybody for the information. I'll share what I have learned then recommend she contact a CPA.
The bolded sounds like what she was trying to describe to me, that she is paying taxes on the whole amount, but she thought it was because of banking limitations due to age.
How long has she been doing this? Did she file taxes last year too? Seems like she would just be getting ready to file her first tax return, wondering if she just put the totals in a turbotax type program without doing the deductions.
I know a 17 year old self-employed young person who will turn 18 in the next few months. She says she is getting "killed on taxes" as a 1099 employee and being 17 years old because she has to deposit all the money in a checking account, not a business account. Her arrangement with the employer is a 50/50 split of the money she brings in, but she made it sound like she is paying taxes on the entire amount, not the 50% (not sure about how that works specifically.)
At any rate, I want to be able to give her some guidance on what kind of account to set up for her business earnings that minimize her tax burden.
I am not very knowledgeable about banking or 1099 self-employment and taxes, so any and all advice is welcome. Again, main goal is to help get this young lady's money into the right place once she becomes an adult to keep more in her pocket.
Thanks in advance.
Find a CPA.
It's not all that difficult really but if she's reporting all the income she brings in and really only gets half of it obviously she's paying taxes on more than she needs to. It's irrelevant what kind of accounts she uses. I just use my personal bank accounts. For convenience and because I'm terrible at keeping records I run all business expenses through one credit card that I only use for business expenses, so software, equipment, office supplies, parking, tax preparation costs, meals, hotels when traveling all goes on that credit card which makes it easier to keep track of.
To a certain degree especialyl as a low wage contractor you will just "get killed" on taxes relative to what an employee would. That's simply because there is no withholding of social security taxes and as a contractor you're paying both the employee/emplyoyer portions. Self-employment tax is 15.3%. So even if you're a low income person that doesn't pay any income taxes you'll be paying that 15.3%. But again, if she's making $100 gross and turns around and pays $50 the agency she contracts with and then has $22 in expenses... her net is not $100. It's $28 and that's what she should be paying taxes on. For people who have no idea what they're doing sometimes they're reporting gross income rather than net.
50/50 split sounds high but it just depends on what shes' doing. When I do the entirey of the work I take a 90% split and pay 10% out as a referral fee. More commonly what I do is prepare the rough workproduct for the agency who then is responsible for any formatting specific to the client's needs, printing and copying where needed, scheduling, billing, bad debt risk. They point me at a job, I do the job, I get paid is 70%. CPA may be able to advise her whether this business relationship is worth even being involved with.
How long has she been doing this? Did she file taxes last year too? Seems like she would just be getting ready to file her first tax return, wondering if she just put the totals in a turbotax type program without doing the deductions.
Terrible advice, 1099 workers normally have to pay self employment taxes, so they need all the available deductions ( which are many) to lower the taxable income.
Her age does not matter on the tax return, she needs to maximize her deductions. Find a CPa that specializes in small business.
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