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Don't overlook state and local taxes! Depending on where you live, you might need business licenses or permits even for freelance work. I got hit with a fine in my city because I didn't get a business license, even though my "business" was just me doing graphic design on the side. Also, track EVERYTHING. I use a separate credit card for all business expenses so they're easy to separate at tax time. And set aside way more than you think you need for taxes - like 30% of every payment. Better to have extra money than to come up short.
Do you need a separate bank account too? Or can you just use your personal account as long as you keep good records?
You don't absolutely need a separate bank account from a legal standpoint if you're a sole proprietor, but I highly recommend it. Having a dedicated business account makes it so much easier to track income and expenses cleanly, and it looks more professional when clients pay you. If you ever get audited, having separate accounts makes it much easier to prove which transactions were business-related. It's also helpful for calculating your actual profit each month. Most banks offer free or low-cost business checking accounts for small businesses, so there's really no downside to setting one up.
Has anyone used QuickBooks Self-Employed for tracking freelance income? My first client is starting next month and im trying to figure out the best way to keep track of everything. Is it worth the monthly fee or should I just use a spreadsheet?
I've used it for 2 years for my web development side gig. Honestly it's been worth every penny. It automatically categorizes expenses, tracks mileage if you need that, and separates business from personal transactions. The best part is at tax time - it generates all the reports you need and transfers everything to TurboTax if you use that.
One option nobody's mentioned - have you considered having your daughter remain as your dependent for this final year? The test for qualifying child includes support, and if you paid for more than half her support for the year (including that expensive final semester tuition, housing, etc.), you might still be able to claim her. If her job doesn't start until June, and you supported her completely until then, you might still meet the support test for the full year, especially if the tuition amount is significant. You'd need to calculate all support provided versus her income after graduation. This would allow you to claim the LLC since she would still be your dependent.
I hadn't considered that approach! Her tuition for spring was around $15,000 plus I covered about $8,000 in housing and other expenses through May. Her job pays about $60,000 annually, so she'll make roughly $35,000 for the 7 months she works this year. Would the tuition I paid count toward the support calculation?
Yes, the tuition you paid absolutely counts as support! The IRS considers support to include tuition, fees, books, supplies, and room and board. So the $15,000 tuition plus the $8,000 in housing and other expenses means you provided $23,000 in support. For your daughter's income, it's not just what she earns but what she actually spends on support items. If she makes $35,000 but saves some of it or spends on non-support items like retirement contributions or entertainment, that doesn't all count as self-support. You'd need to calculate what she actually spends on housing, food, medical expenses, etc. after graduation.
Just want to point out something important regarding the LLC that hasn't been mentioned yet. Unlike the AOTC which is partly refundable, the Lifetime Learning Credit is NON-REFUNDABLE. This means it can reduce your tax liability to zero, but you won't get any excess as a refund. This might affect your decision about who should claim it. If your daughter has a low tax liability in her first partial working year, she might not be able to use the full credit amount. If you have a higher tax liability, you might benefit more if you can legitimately claim her as a dependent.
This is such a confusing area! My wife's company has a similar setup where they have a partnership with a daycare center in the same office park, but it's not exclusively for employees. When I called my company's benefits hotline (not the IRS), they explained that the question is about facilities that are operated BY the employer primarily FOR employees. If the general public can use it, it's usually not considered "employer-provided on-site childcare" even if they give employees preference or discounts. They also mentioned that the $5k in Box 10 is probably from a Dependent Care FSA, which is already receiving tax benefits and is handled separately from this question.
Does your wife's company give priority enrollment to employees or just a discount? Our company does both and I'm still confused if that counts.
They give both priority enrollment and a discount, but it's still not considered "employer-provided on-site childcare" for tax purposes. The key factor is whether the facility is operated by the employer primarily for their employees. Even with priority enrollment and discounts, if it's open to the public and operated as a separate entity, it doesn't qualify as employer-provided on-site childcare for the tax benefits.
I had this exact confusion on my taxes last year! What helped me figure it out was looking at the specific wording in IRS Publication 503. It says employer-provided on-site childcare means "services provided by a qualifying childcare facility of the employer." For it to be a "qualifying childcare facility," your employer must actually be operating the facility primarily for employees' children. The fact that anyone can send their kids there (even with your discount) means it's NOT employer-provided on-site childcare for tax purposes. The $5k in Box 10 is almost certainly from a Dependent Care FSA or other benefit program, which is totally separate. So you'd answer "No" to the on-site childcare question.
One thing nobody has mentioned yet - if your son has expenses related to earning that 1099-NEC income, he should definitely track those and deduct them on Schedule C. For example, if he bought any supplies, paid for software, or used his car for this work, those are legitimate business expenses that can reduce his taxable income and therefore the self-employment tax he owes.
That's a great point! My son did buy some design software and a drawing tablet specifically for this work. Would those be fully deductible even though he also uses them sometimes for school projects?
You would deduct the percentage used for business purposes. So if he uses the software and tablet 70% for paid work and 30% for school, you'd deduct 70% of the cost. Make sure to keep receipts and documentation about the business use percentage in case of questions later. A good practice is to have him keep a simple log for a few weeks noting when he uses the equipment for business vs. personal use to establish a reasonable percentage. For items under $2,500, you may be able to deduct them fully in the year of purchase rather than depreciating them over several years, using the de minimis safe harbor election.
Don't forget that your son might also have to make quarterly estimated tax payments for next year if he continues this work! If he expects to owe more than $1,000 in taxes for the year, he should make estimated payments to avoid penalties.
Andre Moreau
I went through this last year with my NYS business. For anyone dealing with this issue, make sure you're filing the right type of extension. If your business is a single-member LLC and treated as a disregarded entity, you'd file an extension for Form 1040-NR with Form 4868. But if your LLC elected to be treated as a corporation, you'd need to file Form 7004 for an extension instead. Also, remember that the ITIN application (Form W-7) generally CAN'T be filed by itself - it must be attached to a valid tax return unless you meet one of the exceptions. This tripped me up badly.
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Nia Harris
ā¢That's a really good point about the different forms. My LLC is set up as a disregarded entity, so I'll need the Form 4868. I didn't realize the W-7 has to be attached to a tax return - does that mean I need to complete a full tax return even though I'm filing for an extension?
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Andre Moreau
ā¢Yes, that's one of the trickier parts of this process. You'll need to complete your tax return (Form 1040-NR in your case as a foreign person with a disregarded entity LLC), attach the W-7 application, and then submit them together. The extension (Form 4868) gives you more time to file the return, but you'll still need to prepare the return to get your ITIN. It seems contradictory, but what many people do is prepare the full return, attach it to the W-7, and submit both while also filing the extension to avoid penalties. When your ITIN is assigned, the IRS will process the already-submitted return.
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Zoe Christodoulou
Don't forget about state taxes too! If your LLC is in Florida that's good news because Florida doesn't have state income tax, but you might still have other state filing requirements depending on where you conducted business. Also, for the payment itself, if you don't have an ITIN yet, you can use the Electronic Federal Tax Payment System (EFTPS) or send a money order with Form 4868. Just make sure your name and address are exactly the same on all documents so they can match everything up later.
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Jamal Thompson
ā¢The EFTPS system requires an EIN though, which they might not have either as a foreign person. I think mailing a check or money order with Form 4868 is the safest option in this situation.
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