Don't incorporate just because the big boys tell you to.

Hi June -

GREAT info, i could spend hours reading your fantastic advice!

A couple questions please: 1. I just completed a 3 week freelance job - they want me to incorporate to be paid (they have Department of Labor issues) - I think this is crazy and makes little sense, which I told them.

They then asked me to do an EIN with a DBA, I'm slightly more open to that, although I still think it's a lot to ask (and potential cans of worms for me) for just 3 weeks of pay.

They claim they can't do 1099 because of their upcoming audit, can't take chances. Any ideas?

2. Once this job is over, I will file for unemployment (I was laid off prior to this 3 week gig) from a major corporation. Will any of the above scenarios prevent me from collecting? Because I don't want to jeopardize unemployment (I'll need it to fill gaps between freelance assignments) by filing a sole proprietorship EIN, etc - that would be truly unfortunate.

Thanks for your help!
Kelly
PRODUCER, JUST BEGINNING!
BROOKLYN, NY


Wow, Kelly! What an endorsement. Hours reading tax stuff. Thanks.

Many corporations attempted to skirt around the regs dealing with employee versus self-employed so that they could save about 25% to 30% in payroll taxes and employee benefits. They cheated. Some got caught. What often happens is that they devise ways that "look good" but really aren't so good.

By that I mean, the corporation will hire someone who should be classified as an employee but instead hires that person as an indie. The corp then insists that the indie incorporate in order to cover its own rear-end should there be an audit.

Don't incorporate unless the three weeks of income is really, really a lot of money.

An EIN and a DBA is no problem for you. Just a little extra work. Check these posts on EIN-employer identification # and these on DBA - Doing Business As . If your bank won't accept payments to your DBA name then you'll need to open another bank account.

Each state's unemployment regs are different. Check New York's requirements before you take any action. Might want to read these posts first unemployment compensation .

Best,
June

No indie business means no indie business expenses to deduct.

Hi June,

Structural drafter for 20 + years , I have been self-employed for the last 6 years up till June 2009 when I lost my self-employment business and had to seek a part-time as a temp employee.

I lost that job in August, now I am unemployed.

My question is, will I still be able to write-off any expenses after losing my self-employed business while I seek work?, Like supplies, transportation for interviews etc.

cesar
fairfield, ca


Hello Cesar,

First, be sure to read this post Unemployment Compensation .

You may deduct self-employed expenses that occurred only during your period of self-employment. If you were no longer self-employed you may not deduct any indie business costs.

-- June

Unemployment Compensation

"W-2 people" is my shorthand for employees who receive wages or a salary.

Someone can be both an employee and self-employed. For instance, someone works 9 to 5 for the local pet shop and is pet sitter by night and weekends.

I have received many questions from former W-2 people about receiving unemployment compensation and how it impacts self-employment. And vice versa. Here are two typical emails followed by my response.


Hi -
I have an odd question... I was laid off from a tv station in June 2007.. got unemployment for 20 weeks - when it ran in December of 2007 I was still unable to find full time work but did pick up
several short term (independent contract) gigs last year.

I got notice that unemployment insurance was extended in June 2008 but since I had some short term projects I didn't enroll. When those projects dried up - I did enroll and am back on Unemployment Insurance extended for the next 20 weeks.

My question is: When I do my taxes for 2008, if I file as a self-employed will that create a problem with the current unemployment that I am collecting?

Just not sure what to do.
Dee


June --

I am from Portland, Maine. I am a graphic designer/editor. Just started as an indie.

My question is with regard to unemployment insurance, taxes and self-proprietorship. When I was laid off last year, I began to collect unemployment insurance. This year, I have started an indie biz as a freelance designer/editor. I have a small amount of money coming in, but it does not cover my start-up and operating expenses.

Can I continue to collect my unemployment insurance payments while I get the biz off the ground?

What are the tax implications of this?

My unemployment benefits will run out before the end of the year. Is it possible/advisable to postpone payments from clients until the benefits run out, and if so, how do I report it on quarterly estimated tax payments?

Michael
Portland, Me


Unemployment Compensation -- let's call it UC -- is a benefit provided by both the federal and state governments. That means that the Feds as well as each state has a say in how it is regulated.

The intention of UC is help W-2 people who are temporarily unemployed due to work-related circumstances which are beyond their control.

Typically state laws require that someone requesting UC meet the following conditions:
** is not currently employed
** is able to work
** is available for work
** is actively seeking work

If you are self-employed you are you own employer. That means that even though you may not be making any money you are working. You are currently employed by yourself. So you are not currently unemployed.

An odd job to pick up some money does not make you a self-employed in business. Read these posts being self-employed for more info.

Your circumstances and your state's laws determine which conditions must be met.

For instance, if yours is a temporary layoff from your job and you have a reasonable expectation of being recalled, you may not be required to seek work.

If the work you did is no longer in demand, and you are not trained to do anything else, the state agency may provide you with vocational training and your work search requirements may be waived so that you may collect unemployment while going to school.

And, some states will pay UC while you start a business of your own.

Call or log onto your state agency and get an explanation of the benefit requirements. Know before you act so that you don't mess up.

Tax treatment for indies, whether on or off self-employment, is the same. One does not alter the other.

June

Unemployment Benefits for the Self-employed

Hi,

I am graphic designer/cartographer in San Francisco, CA and have been self employed on and off for over 12 years, including the last 3 years (prior to that, was employed by my dad's marketing llc). I am currently just a sole proprietor, paid by 1099s, haven't even done a DBA since I am just using my own name.

I did search the site and read many of your posts, which are extremely informative and helpful--thanks! I didn't see a specific answer to this question, although there was some info in the posts about LLCs.

I am getting increasingly nervous about unemployment, as people are dropping all around me (aunt, uncle, cousin, best friend). I currently do most of my work with one company and they are starting to cut back. I do know that I should be getting at least $20,000 next year, based on work I have started but not billed for yet. So my question--Can I structure my business so that I can pay into, and therefore be eligible for, unemployment insurance?

Would the simplest way be to set up an LLC, and pay myself through payroll? Is there any other way?

thanks
jennie


Dear Jennie,

I just spoke with the IRS to confirm what I am about to tell you. It was surprisingly easy to get through to them. I suppose there's not a lot of people thinking about taxes on the day before Christmas.

Unemployment benefits are a combination of federal and state regulation. Were you to be an employee of your own S-corporation or C-corporation you would pay into the federal unemployment system. You would need to check with California to see if there were any state restrictions on receiving unemployment benefits as the only employee of your own corporation.

You might want to consider the cost and hassle of incorporation as well as corporate recordkeeping, and that as employer you will pay into the system versus the small amount of unemployment benefit you would receive after only a year of income of about $20,000.

Happy Holidays!
June

What'll it cost me to leave my W-2 job for the indie life?

Hi June,

I currently work full time and my salary is 95k + bonus (8k this year). I am married, own my own home. I have no children. I have been offered a consulting position at a 1099 rate of $65 hr. My other option is $55 hr as W-2.

I am an IT professional. I have expressed an interest in taking the position as a 1099 consultant. I donate to charity at least 10% per year. My wife is employed, but I would probably make her my employee for tax advantages. I don't go to the doctor often at all and am an aggressive investor for now, not interested in the lower interest returns of 401-Ks and such. Dentist twice a year, and we own 2 automobiles, one paid off and one leased.

What is your opinion? Do you think it would benefit me to move over to be independent?

Thanks, Dan


Hello Dan,

There are two sides from which to look at your question.

For only $10 more per hour, definitely not. For a measly $10 an hour you are giving up benefits which could be vacation and sick pay, unemployment compensation, health insurance. And your employer is saving those costs. Don't think of your health costs as two dental visits per year it's the skiing accident or the fall in the bathtub or worse for which you have medical insurance. Take a look at this on my website
What'll it cost me to leave my W-2 job for the indie life?

On the flip side, you could reduce taxes substantially by being able to directly deduct all business expenses. And with your wife on payroll, if you give her good benefits like a pension and health insurance, it may make it worthwhile.

I suggest you push the company for more than $65 per hour.

Best,
June