Miscellaneous

Hi Christopher-

I recommend claiming married filing jointly with two jobs only and no dependent. Then you need to do a tax projection to see if you are having enough withheld and to see if your wife is making adequate quarterly estimated payments.

At the end of each year, all S corporation profits are allocated to the corporation's shareholders. Even if you and your fellow shareholders choose to leave some or all of the profits in the corporation, taking nothing as distributions or salaries, you will still be required to pay tax on those profits. In technical lingo, an S corporation is not permitted to have any retained earnings. This is different from a regular corporation, which can retain—and pay taxes on—its earnings.

However, S corporation shareholders may be able to deduct 20% of their business income with the pass-through deduction established under the Tax Cuts and Jobs Act. 

I can tell you put some thought into your questions. First, congratulations on the freelance work.

To set aside money for taxes on any profit, you are right that it is a good idea to have a separate account for the taxes. Keep in mind that you need to be very careful to keep your business separate from your personal life. Therefore, you shouldn’t be paying business expenses out of a personal account or depositing business income directly into a personal account. That’s called commingling. If you commingle accounts and you ever got audited by the IRS, you’d have a nightmare on your hands because an IRS agent could subpoena ALL your bank accounts and assert that any deposits to ALL bank accounts (even personal accounts) is income, subject to tax. Then, the burden of proof would shift to you. Why go through all that torture? So do it the right way from the beginning.

Consider your freelance work a business, even if it’s conducted as merely a sole proprietorship without a dba (assumed name). Each business should have its own bank account, separate from any personal account and separate from the bank account for any other business you own. That is, each different type of business must be treated separately. To illustrate, if you had one business where you did consulting and a second business where you did dog grooming, each of those businesses should have its own bank account. Why? Because on your tax return, you’re required to separately report each activity/business. So you’d have personal accounts, at least 1 business account for each activity/business, and then yet another account to set aside money for taxes. I don’t think it matters whether that “tax” account was a checking or a savings account.

If you take the business to the next level, I would recommend an LLC in the beginning. An LLC will give you (as an individual) some legal liability protection, by separating the business from you personally. If the business got to a certain level of profitability, making an S election would be wise. A C corporation might also be a good option; it depends on your specific situation. I don’t counsel my clients to do a C corporation or S corporation on day one because those entities require you to file separate federal business tax returns, which means having to pay someone (like me) to do the tax returns. It doesn’t make sense to incur those additional compliance costs if you’re not making a profit.

You are right that taxes vary from location to location. That is, state and local taxes differ. Federal taxes are the same, regardless of where you live in the 50 states. Being in New York, you’re definitely subject to state income tax.

Feel free to contact me, if you wish to engage me for assistance.

As a CPA, I came across this website and joined just last week, and I just came across your question.

Good question. I commend you for planning ahead so that you don’t end up owing a large balance or incurring the estimated income tax penalty (Form 2210) come tax-time next year.

Both of your suggestions are acceptable. You are right that there is still a lot of time left in the year, so increasing your federal income tax withholding is an option. Alternatively, you could start making estimated income tax payments via Form 1040-ES for 2021.

If you receive a notice from IRS and you suspect your identity has been used fraudulently, respond immediately by calling the number on the notice.
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Also, fill out the IRS Identity Theft Affidavit, Form 14039. Please write legibly and follow the directions on the back of the form that relate to your specific circumstances.

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