Dear June:
Generally speaking, I don't see much information on the web for those who become consultants mid-year.
For example, IRS doesn't clarify if covered by a retirement plan at work for part of the year constitutes eligibility to make other contributions or not.
I quit my job late in the year, and have $1,200 of consulting income since then. I am tempted to just ask the client to pay me next year so I don't have to get into making SS payments, set up a SEP-IRA etc. But if I could consider myself not covered by a retirement plan, it would be neat to fund a deductible IRA this year.
Rajeev
Dear Rajeev:
The rules and regulations that apply to self-employment are the same whether you are self-employed for part of the year or for the entire year or even if you are concurrently an employee and self-employed.
Some tax items may be affected by the business start date, for instance, the amount of deduction for equipment purchases or the maximum pension contribution allowed.
Also, the important date is not when you left your job, but when you actively started to pursue self-employment . That is, when did you start to look for clients, or set up shop?
Generally, it is to your advantage to collect and claim the small amount of earned income and then deduct all business expenses against it. You will likely end with a loss in your new consulting business and that loss can be deducted from the wages at your former job.
You did not say what your indie business is and so I am limited in the advice I can give. A tax pro tuned in to the needs of an indie would suggest something to you like looking at a deduction for a computer already in your home that you purchased a while ago for, let's say, $3,000. If on the start date of your solo venture you could have sold that used computer for $1,000 and you use that computer in your new business you may have a $1,000 equipment expense this year.
Many pension rules have recently changed. For self-employeds they are much more liberal and flexible than ever before. Having a pension this year from a former employer does nor preclude your having another pension as a self-employed. Your contribution amount is limited by the maximum allowed and net self-employed income.
You mention making SS payments, I assume by SS you mean Social Security. A self-employed pays Self-Employment [SE] Tax. SE tax is a combination of Social Security Tax (also known as the employee's FICA) and Medicare tax. You may or may not have an SE tax liability. It depends on total wages from your job as well as your net self-employed income.
You may get more info on SE Tax by reading
Feature #9, Taxes: Which ones and how much do I pay? on my website,
junewalkeronline.com .
And, as always, read the book that can simplify your tax and financial life
and save you money!
SELF-EMPLOYED TAX SOLUTIONS .
I wish you success in your new indie venture,
