Reporting income on contract work

[UnknownXV]

Hi,

I've got an issue I want to resolve now as it won't apply for a few months, but it's stressing me out a bit as taxes generally do.

I currently work at a job I don't like much. I was speaking to my mother before, and she told me she has a cleaning contract with a CLSC (it's a clinic here). It's pretty good. 12 hours a week, roughly, but the pay is $900 a month. About @20 an hour for cleaning is decent.

She offered to let me do the work, but I'm not sure how to approach this.

She has the contract from another company that subcontracts it out to her. She had to open her own company (insurance reasons) to get it.

So either I can open my own company to claim the contract under me directly, or I could simply do the work and let it go through my mom who would pay me. The question is how does this translate to taxes? If I open my own company, does the revenue generated here count towards corporate tax? Personally tax too? Or only one?

Would it be best to open my own company for this, or simply filter it through my mom? My concern is that, if it went through my mom, she'd have to report the income I actually make as her own, which would put her in a higher tax bracket.

To note, I wouldn't be making more than $900 for the first year, I'd take it slow. But after this, I would look for an additional cleaning job, to try and double that figure. $900 wouldn't actually make me owe any taxes, if this would apply at the normal personal income rate.

Damn this is confusing. I can't believe how annoying it is to try and get a contract type job. I would definitely appreciate any help.

And yes, this is in Canada, Quebec to be specific.

[snafu]

If your mom holds the contract she can hire you [or anyone] at an agreed rate. She with holds tax and EI + submits to CRS as she would for any employee. If you take over the contract you must have completed the paperwork and be registered as an LTD company. It's an expensive process and you will need a business bank account. In this province the course to explain the requirements cost $ 300. Your business files tax forms and your business pays you having with held income tax. Self employed people aren't eligible for EI. When you ultimately file personal tax [April 2013 for income earned in 2012] the sum earned from the cleaning contract is added to any other income earned from January 1 - December 31, 2012.

[UnknownXV]

How does subcontracting work though? Since she would be paying me every penny from the contract, is deducting taxes necessary? It's much easier if I just pay them for myself.

[GrimJack]

How does subcontracting work though? Since she would be paying me every penny from the contract, is deducting taxes necessary? It's much easier if I just pay them for myself.

Will she be sending you a 1099 at the end of the year or will she be sending you a W-2? That will lead you in the correct direction - if she isn't going to provide either, that is a third option and a third direction.

[UnknownXV]

Well, her company is hers alone, no employees. It's just for this one contract that I will be taking over, so she wouldn't be sending me any forms. Maybe it would be a possibility, but it's not something either of us have much experience with.

[mgkimsal]

Are you in the US?

You do the work, she will pay you. She will need to pay you whatever you agree on, then file 1099 paperwork. You would do well to give her a W9 form as well, for her records. That will indicate your tax ID. She will indicate on the 1099 form that she paid you $xxx ($900? $1800? $2700?), as well as your tax ID. She will then get to deduct that amount as an expense - she won't be paying tax on it. You will then add that 1099 income to your taxable income on next year's tax forms, and you'll need to pay tax on it then.

If this is just side work now and then, that's fine. You don't need to set up a full company for all of this right now. If you start doing more of this, set up a basic sole proprietor LLC, get a separate tax ID from the IRS, and have everyone report their payments to that tax ID.

If you end up doing a lot of this work for her, to the point where it becomes a moderate portion of your income, you'll definitely be considered an employee, and she'll need to file different paper work, withhold money and pay some of your taxes to the IRS. It's a little bit of a grey area as to what constitutes an employee - google around for that - but in the scenario you described, it doesn't necessarily seem like it to me, and given the amounts you're talking about, this alone isn't going to trigger an audit of any penalties. Just report the income and pay taxes on it.

[UnknownXV]

Thank you for your attempt, but I live in Canada. Sorry.

I may just contact the government for precise information.. hopefully they'll have it. Bah, I hate dealing with taxes.

[mgkimsal]

I subcontract out people in Canada sometimes. I pay them via paypal or check, and they're responsible for filing their own tax paperwork - it can't be that hard.

Yes, contact the gov't - they have to have some website up about this very topic.

[UnknownXV]

So from what I've been reading, it seems like my best option would be to open a Limited liability partnership instead of an incorporated business.

I understand it less for canada though, am I right that this would act as a pass-through in terms of tax income? I want to file personal only. I don't want to end up paying corporate AND personal income tax on $25,000 a year.

[mgkimsal]

You won't end up paying twice - just follow the forms. I don't even know what forms they are, but follow them. Or hire an accountant. If at some point you think you overpaid, refile and claim the money back.

[Mjenn]

You might want to double check the additional costs that are included when you contract work before getting excited about 20 dollars an hour. I do contract work in another country and I always have to bill almost double what I would make if I were employed, to cover all of my payroll tax, vacation and other benefits I would get if I were an 'employee.' This is common in B2B where I am based and my rates are still competitive.

[UnknownXV]

Well, Vacation time isn't an issue for me, I don't intend to take any. And medical costs are not a factor as health care is free here.