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 effective Dec 10, 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.
Some tax items may be affected by the business start date, for instance, the amount of deduction for equipment purchases.
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? The moment you started to try to make money is the start date of your self-employment, your business.
Generally, it is to your advantage to collect and claim the small amount of earned income -- in your case $1200 -- 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 such as 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. Those for the self-employed 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.
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 (FICA for an employee) 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.
I offer more info on SE Tax here Taxes: Which ones and how much do I pay?.
And here you'll find a lot about being self-employed.
I wish you success!
June