Differences in taxes paid for W2 employee vs. 1099 contractor working on sites like ODesk.com?
Yes, you've summarized it well. You may be able to depreciate your computer, expense some software licenses and may be home office if you qualify, but at this scale of earning - it will probably not cover for the loss of the money you need to pay for the additional SE tax (the employer part of the FICA taxes for W2 employees) and benefits (subsidized health insurance, bonuses you get from your employer, insurances, etc). Don't forget the additional expense of business licenses, liability insurances etc. While relatively small amounts and deductible - still money out of your pocket. That said... Good luck earning $96K on ODesk.
I'm not sure why you're confusing the two unrelated things. 1040ES is your estimated tax payments. 941 is your corporation's payroll tax report. They have nothing to do with each other. You being the corporation's employee is accidental, and can only help you to avoid 1040ES and use the W2 withholding instead - like any other employee. From the IRS standpoint you're not running a LLC - you're running a corporation, and you're that corporation's employee. While technically you're self-employed, from tax perspective - you're not (to the extent of your corporate salary, at least). This answer is assuming you're in the US, which apparently you're not. I doubt that the rules in the EU are significantly different, but I don't know for sure. In case of an IRS control, is it ok to say that I regularly connect   remotely to work from home although in the work contract it says I   must work at client's office? No. Are there any other ways I can prove that this deduction is valid? No. You can't prove something is valid when its not. You can only deduct home office expense if it is used exclusively for your business, and your bedroom obviously is not. As a nonresident sole proprietor or partnership You are not a sole proprietor or a member of a legal partnership. You are an employee for a corporation.  Does the nature of your work require you to be present in New York regularly? If you are in New York for personal reasons, you are simply telecommuting. You must pay taxes personally for your W-2 income, but your business entity never moved from Wyoming. If this were not true, companies would have to pay corporate income tax to every state in which they have a telecommuter. For example, I live in Florida but telecommute to a company in Michigan. Does my employer pay Florida business tax? Of course not. Your business would only owe New York if the nature of the business requires a consistent and regular business presence in New York, such as maintaining an office for a portion of every year so clients could see you. "Littleadv is incorrect because receiving a 1099 means she will be taxed self-employment tax on top of federal income taxes. Your employer will automatically withhold 7.65% of payroll taxes as they pay you each paycheck and then they'll automatically pay the other half of your payroll tax (an additional 7.65%) to bring it to a total of 15.3%. In other words, because your wife is technically self employed, she will owe both sides of payroll tax which is 15.3% of $38k = $5,800 on TOP of your federal income tax (which is the only thing the W-4 is instructing them about what amount to withhold). The huge advantage to a 1099, however, is that she's essentially self-employed which means ALL of the things she needs to run her business are deductible expenses. This includes her car, computer, home office, supplies, sometimes phone, gas, maintenance, travel expenses, sometimes entertainment, etc - which can easily bring her ""income"" down from $38k to lets say $23k, reducing both her federal income tax AND self-employment tax to apply to $15k less (saving lets say 50% of $15k = $7.5k with federal and self employment because your income is so high). She is actually supposed to pay quarterly taxes to make up for all of this. The easy way to do this is each quarter plug YOUR total salary + bonus and the tax YOU have paid so far (check your paystubs) into TurboTax along with her income so far and all of her expenses. This will give you how much tax you can expect to have left to owe so far--this would be your first quarter. When you calculate your other quarters, do it the exact same way and just subtract what you've already paid so far that year from your total tax liability." "There are way too many details missing to be able to give you an accurate answer, and it would be too localized in terms of time & location anyway -- the rules change every year, and your local taxes make the answer useless to other people. Instead, here's how to figure out the answer for yourself. Use a tax estimate calculator to get a ballpark figure. (And keep in mind that these only provide estimates, because there are still a lot of variables that are only considered when you're actually filling out your real tax return.) There are a number of calculators if you search for something like ""tax estimator calculator"", some are more sophisticated than others. (Fair warning: I used several of these and they told me a range of $2k - $25k worth of taxes owed for a situation like yours.) Here's an estimator from TurboTax -- it's handy because it lets you enter business income. When I plug in $140K ($70 * 40 hours * 50 weeks) for business income in 2010, married filing jointly, no spouse income, and 4 dependents, I get $30K owed in federal taxes. (That doesn't include local taxes, any itemized deductions you might be eligible for, IRA deductions, etc. You may also be able to claim some expenses as business deductions that will reduce your taxable business income.) So you'd net $110K after taxes, or about $55/hour ($110k / 50 / 40). Of course, you could get an answer from the calculator, and Congress could change the rules midway through the year -- you might come out better or worse, depending on the nature of the rule changes... that's why I stress that it's an estimate. If you take the job, don't forget to make estimated tax payments! Edit: (some additional info) If you plan on doing this on an ongoing basis (i.e. you are going into business as a contractor for this line of work), there are some tax shelters that you can take advantage of. Most of these won't be worth doing if you are only going to be doing contract work for a short period of time (1-2 years). These may or may not all be applicable to you. And do your research into these areas before diving in, I'm just scratching the surface in the notes below." I do something pretty simple when figuring 1099 income.  I keep track of my income and deductible expenses on a spreadsheet.  Then I do total income - total expenses * .25. I keep that amount in a savings account ready to pay taxes.   Given that your estimates for the quarterly payments are low then expected, that amount should be more then enough to fully fund those payments.   If you are correct, and they are low, then really what does it matter?  You will have the money, in the bank, to pay what you actually owe to the IRS. I took littleadv's advice and talked to an accountant today. Regardless of method of payment, my US LLC does not have to withhold taxes or report the payment as payments to contractors (1099/1042(S)) to the IRS; it is simply a business expense.  He said this gets more complicated if the recipient is working in the US (regardless of nationality), but that is not my case After reading OP Mark's question and the various answers carefully and also looking over some old pay stubs of mine, I am beginning to wonder if he is mis-reading his pay stub or slip of paper attached to the reimbursement check for the item(s) he purchases.  Pay stubs (whether paper documents attached to checks or things received in one's company mailbox or available for downloading from a company web site while the money is deposited electronically into the employee's checking account) vary from company to company, but a reasonably well-designed stub would likely have categories such as Taxable gross income for the pay period: This is the amount from which payroll taxes (Federal and State income tax, Social Security and Medicare tax) are deducted as well as other post-tax deductions such as money going to purchase of US Savings Bonds, contributions to United Way via payroll  deduction, contribution to Roth 401k etc. Employer-paid group life  insurance premiums are taxable income too for any portion of the policy  that exceeds $50K. In some cases, these appear as a lump sum on the last pay stub for the year. Nontaxable gross income for the pay period: This would be sum total of the amounts contributed to nonRoth 401k plans, employee's share of group health-care insurance premiums for employee  and/or employee's family, money deposited into FSA accounts, etc. Net pay: This is the amount of the attached check or money sent via ACH to the employee's bank account. Year-to-date amounts: These just tell the employee what has been earned/paid/withheld to date in the various categories. Now, OP Mark said My company does not tax the reimbursement but they do add it to my running gross earnings total for the year. So, the question is whether the amount of the reimbursement is included in the Year-to-date amount of Taxable Income. If YTD Taxable Income does not include the reimbursement amount,  then the the OP's question and the answers and comments are moot; unless the company has really-messed-up (Pat. Pending) payroll software that does weird things, the amount  on the W2 form will be whatever is shown as YTD Taxable Income  on the last pay stub of the year, and, as @DJClayworth noted cogently, it is what will appear on the W2 form that really matters. In summary, it is good that OP Mark is taking the time to investigate the matter of the reimbursements appearing in Total Gross Income, but if the amounts are not appearing in the YTD Taxable Income, his Payroll Office may just reassure him that they have good software and that what the YTD Taxable Income says on the last pay stub is what will be appearing on his W2 form.  I am fairly confident that this is what will be the resolution of the matter because if the amount of the reimbursement was included in Taxable Income during that pay period and no tax was withheld, then the employer has a problem with  Social Security and Medicare tax underwithholding, and nonpayment of this tax plus the employer's share to the US Treasury in timely fashion. The IRS takes an extremely dim view of such shenanigans and most employers are unlikely to take the risk. "I've been in a similar situation before. While contracting, sometimes the recruiting agency would allow me to choose between being a W2 employee or invoicing them via Corp-2-Corp. I already had a company set up (S-Corp) but the considerations are similar. Typically the C2C rate was higher than the W2 rate, to account for the extra 7.65% FICA taxes and insurance. But there were a few times where the rate offered was identical, and I still choose C2C because it enabled me to deduct many of my business expenses that I wouldn't have otherwise been able to deduct. In my case the deductions turned out to be greater than the FICA savings. Your case is slightly different than mine though in that I already had the company set up so my company related costs were ""sunk"" as far as my decision was concerned. For you though, the yearly costs associated with running the business must be factored in. For example, suppose the following: Due to these expenses you need to make up $3413 in tax deductions due to the LLC. If your effective tax rate on the extra income is 30%, then your break even point is approximately $8K in deductions (.3*(x+3413)=3413 => x = $7963) So with those made up numbers, if you have at least $8K in legitimate additional business expenses then it would make sense to form an LLC. Otherwise you'd be better off as a W2. Other considerations:" If the $882 is reported on W2 as your income then it is added to your taxable income on W2 and is taxed as salary. Your basis then becomes $5882. If it is not reported on your W2 - you need to add it yourself. Its salary income. If its not properly reported on W2 it may have some issues with FICA, so I suggest talking to your salary department to verify it is. In any case, this is not short term capital gain. Your broker may or may not be aware of the reporting on W2, and if they report the basis as $5000 on your 1099, when you fill your tax form you can add a statement that it is ESPP reported on W2 and change the basis to correct one. H&R Block and TurboTax both support that (you need to chose the correct type of investment there). "TL;DR: Get a tax adviser (EA/CPA licensed in your State) for tax issues, and a lawyer for the Operating Agreement, labor law and contract related issues. Some things are not suitable for DIY unless you know exactly what you're doing. We both do freelance work currently just through our personal names.   What kind of taxes are we looking into paying into the business   (besides setup of everything) compared to being a self proprietor?   (I'm seeing that the general answer is no, as long as income is <200k,   but not certain). Unless you decide to have your LLC taxed as a corporation, there's no change in taxes. LLC, by default, is a pass-through entity and all income will flow to your respective tax returns. From tax perspective, the LLC will be treated as a partnership. It will file form 1065 to report its income, and allocate the income to the members/partners on schedules K-1 which will be given to you. You'll use the numbers on the K-1 to transfer income allocated to you to your tax returns and pay taxes on that. Being out of state, will she incur more taxes from the money being now   filtered through the business? Your employee couldn't care less about your tax problems. She will continue receiving the same salary whether you are a sole proprietor or a LLC, or Corporatoin. What kind of forms are we looking into needing/providing when   switching to a LLC from freelance work? Normally we just get 1099's,   what would that be now? Your contract counterparts couldn't care less about your tax problems. Unless you are a corporation, people who pay you more than $600 a year must file a 1099. Since you'll be a partnership, you'll need to provide the partnership EIN instead of your own SSN, but that's the only difference. Are LLC's required to pay taxes 4 times per year? We would definitely   get an accountant for things, but being as this is side work, there   will be times where we choose to not take on clients, which could   cause multiple months of no income. Obviously we would save for when   we need to pay taxes, but is there a magic number that says ""you must   now pay four times per year"". Unless you choose to tax your LLC as a corporation, LLC will pay no taxes. You will need to make sure you have enough withholding to cover for the additional income, or pay the quarterly estimates. The magic number is $1000. If your withholding+estimates is $1000 less than what your tax liability is, you'll be penalized, unless the total withholding+estimates is more than 100% of your prior year tax liability (or 110%, depending on the amounts). The LLC would be 50% 50%, but that work would not always be that. We   will be taking on smaller project through the company, so there will   be times where one of us could potentially be making more money. Are   we setting ourselves up for disaster if one is payed more than the   other while still having equal ownership? Partnerships can be very flexible, and equity split doesn't have to be the same as income, loss or assets split. But, you'll need to have a lawyer draft your operational agreement which will define all these splits and who gets how much in what case. Make sure to cover as much as possible in that agreement in order to avoid problems later." If the money comes to you, then it's income.  If the money goes out from you, it's an expense.  You get to handle the appropriate tax documentation for those business transactions. You may also have the pleasure of filing 1099-MISC forms for all of your blogging buddies if you've paid them more than $600.  (Not 100% sure on this one.) I was in a blog network that had some advertising deals, and we tried to keep the payments separate because it was cleaner that way. If I were you, I'd always charge a finder's fee because it is extra work for you to do what you're doing. Don't overthink it. As an employee, whether of your own corporation or of someone else, you get a salary and there are deductions taken out. As the owner of a business you get (hopefully) business profits as well. And, in general, you often have other sources of income from investments, etc. Your estimated tax payments are based on the difference between what was withheld from your salary and what you will owe, based on salary, business income, and other sources. So, in essence, you just add up all the income you expect, estimate what the tax bill will be, and subtract what's been withheld. That's your estimated tax payment. 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. "It seems that you think you are freelancing, and they think you are an employee. What's bad for you, the tax office will also think you are an employee if they withhold tax for you. Alternatively, they think you are stupid, and they keep the money, but are actually not paying it to the tax office at all, in which case you will have a bad surprise when you do your tax returns.  First, I'd ask them for proof that they are indeed paying these taxes into some account related to you. I'd then ask a tax adviser for some serious advice. If they are acting out of incompetence and not out of malice, then you should be mostly fine, but your work there will count as employment.  Heaven knows why they treat you as an employee. Check your contract with them; whether it is between you and them or your company and them. It maybe that they never hired a contractor and believe that they have to pay employment tax. They don't. If your company sends them a bill, then they need to pay that bill, 100% of it, and that's it. Taxes are fully your business and your responsibility. As ""quid"" said, if they say they are withholding tax, then at the very least there must be a paystub that proves they have actually been paying these taxes. If they withhold taxes, and there is no paystub, then this looks like a criminal attempt to cheat you.  If they have actually paid taxes properly into your account, then they are merely creating a mess that can hopefully be fixed. But it is probably complicated enough that you need a tax advisor, even if you had none before, since instead of paying to your company, they paid some money to the company, and some to you personally."