How does 1099 work with my own company
Can I work on 1099 from my own company instead of on W2? The reason is   on W2 I can't deduct my commute, Health Insurance and some other   expenses while on 1099 I think I can able do that. Since I am going to   client place to work not at my own office, I am not sure whether I   should able to do that or not. If you have LLC, unless you elected to tax it as a corporation, you need neither 1099 nor W2. For tax purposes the LLC is disregarded. So it is, from tax perspective, a sole proprietorship (or partnership, if multiple members). Being a W2 employee of your own LLC is a bad idea. For all these above expenses, which can I use company's debit/credit   card or I need to use only my personal debit/credit card? It would be better to always use a business account for business purposes. Doesn't matter much for tax per se, but will make your life easier in case of an audit or a legal dispute (limited liability protection may depend on it). If I work on 1099, I guess I need to file some reasonable taxes on   quarterly basis instead of filing at year end. If so, how do I pay my   tax on quarterly basis to IRS? I mean which forms should I file and   how to pay tax? Unless you're a W2 employee, you need to do quarterly estimate payments using form 1040-ES. If you are a W2 employee (even for a different job, and even if it is not you, but your spouse with whom you're filing jointly) - you can adjust your/spouse's withholding using form W4 to cover the additional tax liability. This is, IMHO, a better way than paying estimates. There are numerous questions on this, search the site or ask another one for details.
I strongly recommend that you talk to an accountant right away because you could save some money by making a tax payment by January 15, 2014. You will receive Forms 1099-MISC from the various entities with whom you are doing business as a contractor detailing how much money they paid you. A copy will go to the IRS also. You file a Schedule C with your Form 1040 in which you detail how much you received on the 1099-MISC forms as well as any other income that your contracting business received (e.g. amounts less than $600 for which a 1099-MISc does not need to be issued, or tips, say, if you are a taxi-driver running your own cab), and you can deduct various expenses that you incurred in generating this income, including tools, books, (or gasoline!) etc that you bought for doing the job. You will need to file a Schedule SE that will compute how much you owe in Social Security and Medicare taxes on the net income on Schedule C. You will pay at twice the rate that employees pay because you get to pay not only the employee's share but also the employer's share. At least, you will not have to pay income tax on the employer's share. Your net income on Schedule C will transfer onto Form 1040 where you will compute how much income tax you owe, and then add on the Social Security tax etc to compute a final amount of tax to be paid. You will have to pay a penalty for not making tax payments every quarter during 2013, plus  interest on the tax paid late.  Send the IRS a check for the total. If you talk to an accountant right away, he/she will likely be able to come up with a rough estimate of what you might owe, and sending in that amount by January 15 will save some money. The accountant can also help you set up for the 2014 tax year during which you could make quarterly payments of estimated tax for 2014 and avoid the penalties and interest referred to above. "I've hired a lawyer to make sure all the T's are crossed.   - I am not charging my employer for the service. I created a ""Free tier"" that fits the scale of my employer, and implemented it that way for them. Larger government bodies are paying for the higher tiers. On multiple levels, i've been sure that nothing conflicts with either our purchasing policy, or any written employee policies.    - I did 100% of the work on my own time and using my own resources. I was extremely careful to ensure this was the case. There is no clause anywhere in my employment agreement that says the company owns anything I do outside of company time. Believe it or not, this is actually less of an issue for a government body because the government doesn't exist to make a profit from services, and because they are getting an expensive service for free, it's actually a significant net benefit for them.  I certainly would be at a significantly higher risk if I was working for a for-profit corporation as they certainly would try to go after me.    - I was also careful in how the software was presented. While I agree there is a level of a obfuscation without a doubt, I've confirmed it certainly not a legal issue for the company, nor is it grounds for a lawsuit, and likely not even grounds for termination (although at this point, I don't really care as I have bigger fish to fry)" "I agree that you should have received both a 1099 and a W2 from your employer. They may be reluctant to do that because some people believe that could trigger an IRS audit. The reason is that independent contractor vs employee is supposed to be defined by your job function, not by your choice. If you were a contractor and then switched to be an employee without changing your job description, then the IRS could claim that you should have always been an employee the entire time, and so should every one of the other contractors that work for that company with a similar job function. It's a hornet's nest that the employer may not want to poke. But that's not your problem; what should you do about it? When you say ""he added my Federal and FICA W/H together"", do you mean that total appears in box 4 of your 1099? If so, it sounds like the employer is expecting you to re-pay the employer portion of FICA. Can you ask them if they actually paid it? If they did, then I don't see them having a choice but to issue a W2, since the IRS would be expecting one. If they didn't pay your FICA, then the amount this will cost you is 7.65% of what would have been your W2 wages. IMHO it would be reasonable for you to request that they send you a check for that extra amount. Note: even though that amount will be less than $600 and you won't receive a 1099 in 2017 for it, legally you'll still have to pay tax on that amount so I think a good estimate would be to call it 10% instead. Depending on your personality and your relationship with the employer, if they choose not to ""make you whole"", you could threaten to fill out form SS-8. Additional Info: (Thank you Bobson for bringing this up.) The situation you find yourself in is similar to the concept of ""Contract-to-Hire"". You start off as a contractor, and later convert to an employee. In order to avoid issuing a 1099 and W2 to the same person in a single tax year, companies typically utilize one of the following strategies: Your particular situation is closest to situation 2, but the reverse. Instead of retroactively calling you a W2 employee the entire time, your employer is cheating and attempting to classify you as a 1099 contractor the entire time. This is frowned upon by the IRS, as well as the employee since as you discovered it costs you more money in the form of employer FICA. From your description it sounds like your employer was trying to do you a favor and didn't quite follow through with it. What they should have done was never switch you to W2 in the first place (if you really should have been a contractor), or they should have done the conversion properly without stringing you along." He gets upset if I insist on bringing an extra person to help him out but then he complains about his work load and how he's running the company alone. Why complain if I offered him an assistant?  I wish my boss would've offered me an assistant when I worked at companies. He refuses to take paid vacations. If he does take a vacation he'll tell me 2 to 3 weeks in advance. My red flag is he never ever takes a paid vacation. If he does take a paid vacation he plans it out a few weeks in advance. This is the perfect way to cover up anything. Basically, no. You have retirement plan options and can either go with a Roth option, which won't change your current tax burden, or go with a traditional plan, which is tax deductible  but won't change your business deductions or self-employment taxes. This article has an explanation of options for setting up SEP or Solo 401k plans. Key quote for all the pre-tax retirement plans: Because pre-tax employer and employee contributions are deducted in   the same way, neither one is more tax-efficient than the other. The article goes on to say that if you were an S Corp or LLC that elected to be taxed as an S Corp, a Solo 401(k) plan would allow the business to make an employer contribution to your 401(k) and even then there's no tax advantage to the employer contribution. Conclusion for S-corps: [Employer contributions] would reduce the amount of income from the S-corporation that   would be passed through to you as the owner, thereby reducing your   income tax. But, because this income is not subject to payroll taxes   in the first place, these contributions will not reduce your payroll   taxes. "This seems to depend on what kind of corporation you have set up. If you're set up as a sole proprietor, then the Solo 401k contributions, whether employee or employer, will be deducted from your gross income.  Thus they don't reduce it. If you're set up as an S-Corp, then the employer contributions, similar to large employer contributions, will be deducted from wages, and won't show up in Box 1 on your W-2, so they would reduce your gross income.  (Note, employee contributions also would go away from Box 1, but would still be in Box 3 and 5 for FICA/payroll tax purposes). This is nicely discussed in detail here. The IRS page that discusses this in more (harder to understand) detail is here. Separately, I think a discussion of ""Gross Income"" is merited, as it has a special definition for sole proprietorships. The IRS defines it in publication 501 as: Gross income.    Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. If you are married and live with your spouse in a community property state, half of any income defined by state law as community income may be considered yours. For a list of community property states, see Community property states under Married Filing Separately, later. Self-employed persons.    If you are self-employed in a business that provides services (where products are not a factor), your gross income from that business is the gross receipts. If you are self-employed in a business involving manufacturing, merchandising, or mining, your gross income from that business is the total sales minus the cost of goods sold. In either case, you must add any income from investments and from incidental or outside operations or sources. So I think that regardless of 401(k) contributions, your gross income is your gross receipts (if you're a contractor, it's probably the total listed on your 1099(s))." If this is something you plan to continue doing it would make sense to create it as it's own business entity and then to get non-profit status eg: 501c3.   Otherwise I'm pretty sure you have to think of it as YOU receiving the money as a sole proprietor - and file a couple more tax forms at the end of the year. I think it's a Schedule C.  So essentially if you bring in $10,000, then you spend that $10,000 as legit business expenses for your venture your schedule C would show no profit and wouldn't pay taxes on it. BUT, you do have to file that form. Operating this way could have legal implications should something happen and you get sued. Having the proper business entity setup could help in that situation. IANAL (and nor am I an accountant), so I can't give a definitive answer as to legality, but AFAIK, what you propose is legal.  But what's the benefit?  Avoiding corporation tax? It's simplistic – and costly – to think in terms like that. You need to run the numbers for different scenarios, and make a plan.  You can end up ahead of the game precisely by choosing to pay some corporate tax each year. Really! Read on. One of the many reasons that self-employed Canadians sometimes opt for a corporate structure over being a sole proprietor is to be able to not pay themselves everything the company earns each year. This is especially important when a business has some really good years, and others, meh.  Using the corporation to retain earnings can be more tax effective. Example: Imagine your corporation earns, net of accounting & other non-tax costs except for your draws, $120,000/year for 5 years, and $0 in year 6.  Assume the business is your only source of income for those 6 years.  Would you rather: Pay yourself the entire $120,000/yr in years 1-5, then $0 in year 6 (living off personal savings you hopefully accumulated earlier), subjecting the $120,000/yr to personal income tax only, leaving nothing in the corporation to be taxed? Very roughly speaking, assuming tax rates & brackets are level from year to year, and using this calculator (which simplifies certain things), then in Ontario, then you'd net ~$84,878/yr for years 1-5, and $0 in year 6. Overall, you realized $424,390. Drawing the income in this manner, the average tax rate on the $600,000 was 29.26%. vs. Pay yourself only $100,000/yr in years 1-5, leaving $20,000/yr subject to corporation tax. Assuming a 15.5% combined federal/provincial corporate tax rate (includes the small business deduction), then the corp. is left with $16,900/yr to add to retained earnings in years 1-5. In year 6, the corp. has $84,500 in retained earnings to be distributed to you, the sole owner, as a dividend (of the non-eligible kind.) Again, very roughly speaking, you'd personally net $73,560/yr in years 1-5, and then on the $84,500 dividend in year 6, you'd net $73,658.  Overall, you realized $441,458.  Drawing the income in this manner, the average tax rate on the $600K was 26.42%. i.e. Scenario 2, which spreads the income out over the six years, saved 2.84% in tax, or $14,400. Smoothing out your income is also a prudent thing to do. Would you rather find yourself in year 6, having no clients and no revenue, with nothing left to draw on? Or would you rather the company had saved money from the good years to pay you in the lean one?