I have been an employee until now (W-2 income) and now I am switching to independent contracting (corp-to-corp deal) through my own S-corporation in CA. I wanted to know what are my obligations to CA state and federal govt (IRS)? Do I pay social security taxes? self-employment taxes? what else?
What do I get in return as advantages being independent contractor? Can I deduct travelling/commute expense? meals/lunch etc while on travel for the consulting job? home rent, etc if I have home office?
Update:
I am not asking if I should do independent consultancy (over employment) or not. I don;t have choice there.
Choice I have is in whether to do contracting as 1099 earner or as corp-to-corp basis when I already have S-Corp in CA.
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✅ Answers
If the services that you are providing to this firm legitimately can be considered contracted services (this is rare but there are a few occasional cases where it may be) be SURE that your gross compensation will roughly double from what it is as an employee.
As a self-employed individual you will no longer be covered by employer sponsored health insurance, workers comp insurance, unemployment insurance, vacations, etc. so you must allocate funds from your gross receipts to cover these items out of your own pocket.
There are no tax benefits in doing this. In fact, your total outlay for taxes will increase, significantly in some cases. Your tax prep costs will rise dramatically unless you are sufficiently capable of doing them yourself. Depending upon your state’s laws there may be additional filing requirements in addition to tax returns, including public disclosures of information that you might not wish to be disclosed.
You don’t get to deduct anything that wouldn’t be deductible as an employee. Commuting is non-deductible whether as an employee or self-employed. Any deduction for a home office still needs to meet the same exclusive use rules and still must be your principal place of business. (If most of your work is performed at a single customer’s location, the IRS will routinely deny the deduction out of hand.) Meals in the local area are still non-deductible unless there is a clear and convincing business connection. (Having lunch with a sole customer won’t likely pass muster. And if it does, probably no more often than once a month if you’re lucky.)
To top it all off, you are MUCH more likely to be the subject of an IRS audit as a small business owner than you every were as a W-2 employee. Small businesses are hit with audits more than 10 times as often as ordinary employees are.
Do you understand that the IRS frowns on this?
The nature of your work must change in order for this to be legal. You must have a opportunity for profit, supply your own equipment, choose your own hours and even have the right to send someone else to do the work.
As 1% owner of the s-corp in California, your costs jump.
You have an $8 annual franchise fee.
You HAVE to issue yourself a W-2 and arrange for proper withholding for fica/mc and taxes, ensure these are deposited on time, pay FUTA (even though you can’t collect), file 941s 940 and issue W-3 and W-2 on time.
You must file a federeal and state corporate returns by March 15.
Your expenses do not increase. If it wasn’t deductible as an employee, it’s not deductible as an S-corporation. If you have one client, it’s still called commuting and lunch. The home office must still be justified…
Oh, and the IRS is kind of hot to audit you.
PS, tro is guessing again. Corporations issue W-2s to their owner/employees. The do NOT issue 1099s. You would still pay the 15.3%, but it’s on the W-2 not through the k-1. since you are probably 1% services, your W-2 needs to be pretty much what you make–saving you nothing on fica/mc with your corporation.
S-corp earnings pass through to you. You pay regular CA income tax, regular federal income tax, and federal self-employment tax. You may or may not also be required to collect CA sales tax from your customers/clients and send that to the state.
You are not allowed to deduct commuting expenses. However, if you qualify for a home office deduction, then travel between the home office and any other place where you work is not commuting, and may be deductible. The home office deduction is a fraction of your home rent, not all of it. The home office must be used “regularly” and “exclusively” for business; if it is not, then you do not qualify for the home office deduction or the deduction for travel between the home office and any other place where you work.
your S corp reports on 1065 and the partner form for Calif
your partnership will issue a K-1 showing your gain from the business and yes, you will pay your own SE tax on it like you would a 1099
your partnership will report all income and expenses of the partnership on 1065, these are not related to your 1040 in any way
you essentially have created another entity and it files all its own —-income expenses etc
your 1040 merely is reflected by the result on the 1065
use of your home, any part, will depend on what it is, any room that you use for the business must be exclusively for the use of the business, no personal use at all, you can file 8329 on the portion that applies to your business use
COMMUTING is NEVER deductible, ever