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Don't forget about Section 195 of the tax code! You can elect to deduct up to $5k of your startup costs in the year your business becomes active, and then amortize any remaining startup costs over 15 years. But the $5k immediate deduction starts getting reduced if your total startup costs exceed $50k (which doesn't sound like an issue in your case). The key is that you have to make this election in the year your business becomes active. If you don't make the election, you have to amortize ALL the costs over 15 years instead of getting that immediate $5k deduction.
Wait, so this is an "election" we have to specifically make? How do we do that? Is there a specific form or do we just deduct the $5k on our Schedule C?
You make the election by attaching a statement to your tax return for the year your business begins operations. The statement needs to include the amount you're electing to deduct, a description of the expenses, and the month your business began active operations. You'll also report the actual deduction on either Schedule C (for sole proprietors) or your business entity return. The remaining amount over $5,000 would then be amortized over 15 years starting with the month your business began. Most tax software will walk you through this if you indicate you have startup costs, but it's good to be aware of the requirement for the election statement.
Make sure you're tracking these expenses properly from the beginning! I messed up my first year in business by just throwing all receipts in a shoebox and trying to sort it out at tax time. NIGHTMARE. For your daycare business, you should set up separate categories right now: - Supplies (consumable items like art supplies, cleaning products) - Equipment (durable goods like furniture, play structures) - Professional services (licensing fees, legal costs) - Marketing/advertising - Insurance - Training/education costs Trust me, you'll thank yourself next April!
Are there any good apps you recommend for tracking this stuff? I'm starting a small side business too and want to do it right from the beginning.
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I used to work in payroll and this sounds like your employer is having cash flow problems. They're essentially using your first check of the month as an interest-free loan. They don't withhold taxes so they can pay you the full amount, then they catch up on the withholding with the second check when (presumably) they have more cash on hand to cover payroll AND tax remittance. Super sketchy and definitely not proper payroll practice. The overtime issue is a separate and clear violation. Document everything! If they're cutting corners on payroll, they might not be remitting those withheld taxes to the government either, which can cause YOU problems down the road.
Wait, how could this cause ME problems if they don't remit the taxes they're withholding? I thought once it's withheld from my check, it's their responsibility to send it to the IRS? Could I end up owing those taxes again?
If your W-2 at the end of the year shows that taxes were withheld but the company never actually sent those funds to the IRS, you could potentially face issues. The IRS will expect those tax payments based on what's reported on your W-2. While you can prove the withholding through your paystubs, it creates a complicated situation where you might initially appear delinquent on tax payments. It's one of those situations where you'd eventually get it sorted out, but it can cause significant headaches, potential notices from the IRS, and time spent proving that the withholding occurred. In extreme cases of employer fraud, employees sometimes have to file Form 8919 (Uncollected Social Security and Medicare Tax on Wages) to properly report and pay these taxes that should have been handled by the employer.
Has anyone considered that this might be a "semi-monthly" pay schedule rather than biweekly? With semi-monthly, you get paid twice a month (like on the 15th and last day of month) regardless of weekdays, while biweekly is every two weeks (26 paychecks per year). The amount per check would be more consistent with semi-monthly, and some payroll systems handle withholding differently for the two checks in a semi-monthly system. Still doesn't excuse the lack of proper paystubs or overtime pay though.
That's actually a good point. My company does semi-monthly (5th and 20th) and the first check of the month has different withholding than the second. But we definitely get paystubs for both! And they certainly pay overtime when applicable. The real red flag to me is the missing paystub - that's not legal anywhere I know of.
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Have you tried Credit Karma Tax? It's completely free for all forms and I found it actually gave me a slightly better refund than TurboTax free did when I tried both last year. Worth checking out as another option.
I haven't tried Credit Karma Tax yet. Is it really completely free even for state returns? No hidden charges or upgrade prompts halfway through?
Yes, it's completely free for both federal and state returns. I used it last year and didn't encounter any upgrade prompts or hidden fees at all. They offer all the major forms and schedules at no cost. It's now called Cash App Taxes (Credit Karma sold that part of their business), but it's still free. The interface isn't quite as polished as TurboTax, but it works well and covers most tax situations including self-employment, investments, and homeowner deductions without charging anything.
Your refund is probably tiny because your withholding was more accurate this year, meaning you got more money in each paycheck instead of giving the IRS an interest-free loan. A smaller refund can actually be a good thing! Check your W2 box 2 and compare it to last year to see if you had less federal tax withheld.
This is the correct answer. People think big refund = good, small refund = bad, but that's backward. Ideally you want your refund to be as close to $0 as possible, meaning you paid exactly what you owed throughout the year.
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Something nobody's mentioned yet - if your LLC is taxed as an S-Corporation, there's another wrinkle to consider. You need to be really careful about how you document any money moving from personal to business accounts to avoid it looking like constructive dividends going the wrong way. My accountant always advises setting up a clear paper trail showing the funds as either 1) additional paid-in capital or 2) a formal loan to the business with proper documentation. Just randomly moving money between accounts without documentation is asking for trouble if you're ever audited.
What kind of documentation would you need for the loan option? Is a simple promissary note enough or does it need to be more formal?
For a loan to your business, you need more than just a promissory note, though that's a good start. You should have a formal loan agreement that includes the principal amount, interest rate (should be at or above the applicable federal rate), repayment schedule, and consequences of default. Both parties should sign and date it. You also need to treat it like a real loan - make the scheduled payments, record the interest properly, and have your business actually pay you back according to the terms. If you don't follow through with actual repayments, the IRS could reclassify it as a capital contribution or income.
Just FYI - no matter how you structure moving the money from personal to business accounts, you're still gonna pay the same taxes on your stock gains. The only difference is whether you'll have proper documentation for the business side of things. And don't forget that different tax rates apply to stock gains depending on how long you held them! If you held the stocks for more than a year, those are long-term capital gains with lower tax rates. If less than a year, they're short-term gains taxed at your ordinary income rate.
This is the key point - the stock profits are taxed the same either way. What you're really asking about is the best way to get money into your business for equipment purchases, not how to reduce taxes on your stock gains.
Jamal Anderson
Make sure your subcontractor knows he needs to file Schedule C and Schedule SE with his tax return. Those are the forms for self-employment income and self-employment tax calculation. Also, he should track ALL his business expenses - miles driven, tools purchased, insurance, phone use for business, even a portion of home internet if used for business. These deductions can really reduce his taxable income. A friend of mine doing construction subcontracting saved over $4,000 in taxes last year just by properly tracking and deducting legitimate business expenses!
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Mei Wong
•Do you have a simple system for tracking expenses? I always mean to keep good records but end up with a shoebox full of receipts at tax time lol.
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Jamal Anderson
•I use a combination of a dedicated credit card for all business purchases and a simple spreadsheet. The credit card gives me electronic records for most expenses, while the spreadsheet is for tracking mileage and cash purchases. There are also some good apps specifically for contractors that let you snap pictures of receipts on the go and categorize them immediately. Much better than the shoebox method! Even just taking photos of receipts with your phone and organizing them into folders by month is better than nothing.
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QuantumQuasar
As someone who's been a construction subcontractor for years, tell him he's probably overthinking this. Yes, taxes on 1099 income can be significant, but the deductions in construction work are HUGE. If he's smart about tracking expenses (vehicle, tools, supplies, insurance, phone, even some clothing and meals), he'll likely only end up paying effective tax of 20-25% on what's left after deductions. I've been doing this for 15 years and rarely pay more than that percentage on my 1099 income.
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Liam McGuire
•This matches my experience too. The first year I paid way too much because I didn't track expenses well. Now I pay way less because I deduct everything legitimate. What tax software do you use? I've been using TurboSelf-Employed but wondering if there's something better for construction specifically.
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