How are taxes handled differently in a sole proprietorship or just as an independent contractor?

Question

I do financial research as an independent contractor for a hedge fund part time. I've done it for about 4 months and haven't set up a sole proprietorship.

It is to my understanding that if you do independent contract work you have to file taxes multiple times throughout the year?

If I make my job a sole proprietorship will I only have to file when I do my personal taxes?

What are the differences between the two approaches?

Thanks!

Answer 1

From the best of my knowledge, a sole proprietor is really a default situation.  If you claim money on your taxes that is not associated with a known business, then you are a sole proprietor.

If I understand what you do correctly, then you should actually set up a corporation, either an S-Corp or an LLC.  That way you don't get dinged so badly with the self employment tax.  What happens is if you do a sole proprietorship you end up paying self employment tax on the whole net amount that you brought in.  A corporation minimizes the final tax amount because it pays its employee (you) a certain salary which is taxed with the self employment, and the remaining income (company profit)  is taxed without self employment tax.  So depending on your income and the amount that the corporation pays it's employee you could end up paying a lot less in taxes overall.

I have a corporation and this is how it has worked best for me.

Filing depends on income level.  If you are above a certian amount then you have to pay quarterly, or even monthly.  If you are below that amount you can pay yearly.  Regardless it is in your favor to do a corporation if you are making over ten thousand or so per year, the return is usually greater than the cost.

Answer 2

A Sole Proprietorship is the standard type of business if you are not part of a partnership or are not incorporated.  An IC who doesn't incorporate IS a Sole Proprietor by definition.

Contrary to what another poster recommends, there is little if any benefit from forming an S-Corp for most small businesses.  It complicates your tax filing and can significantly increase taxes and fees especially at the State level.  The limited shield to your personal assets can easily be covered with a good general liability insurance policy.

Answer 3

No, it's the same.  You file an actual return just once a year in either case, using schedules C and SE and form 1040.  The quarterly filings are to pay your estimated tax with form 1040ES, and are required whether you are a sole proprietor or an independent contractor.

Answer 4

Read more about self employed tax filing: http://taxipay.blogspot.com/2008/04/tax-...