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Sole proprietor using payroll service for a W2 vs 1099 income

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Level 3

I am a sole proprietor financial advisor and tax preparer... I know I know I'm taking away accountants business... That aside, I am trying to determine if there would be any benefit to me using a payroll service to pay myself via W-2 vs just using the 1099 that I get from my Broker Dealer. Basic #'s I earn now via 1099 $200,000, the Tax business brings in $20,000 (Mainly helping my financial clients).

Would there be any benefit to me to use the payroll service for my 1099 income and keep the tax income as business/Schedule C income, and or put all of the income through the payroll service?

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13 Replies 13
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Level 12

You really should already know these things. That's your profession.

"if there would be any benefit to me using a payroll service to pay myself via W-2 vs just using the 1099 that I get from my Broker Dealer"

W-2 = Employee of that entity.

1099 = Contractor to that entity, running your own business.

You cannot pay Yourself through Payroll using W2, as a Sole Proprietorship. I got confused understanding who you feel Employs you, in this discussion.

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"Level Up" is a gaming function, not a real life function.
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Level 3

If you weren't so bent up on being a rude person, "You really should already know these things. That's your profession.", you would realize that you can "Hire" someone to do payroll , and you CAN pay yourself through that same payroll company.

Anybody out there that actually understands what I am trying to figure out here please reply. RUDE people NEED NOT REPLY!

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Level 15

A Sole proprietor cannot be an employee of his sole proprietorship. (not withstanding that a payroll company will let you do this).


ex-AllStar
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Level 12

There's no reason to assume I was being rude; it was Concern for you. I'm concerned that, given you told us your profession, you didn't know this. So, of course I and others here are willing to Help. That's what we do. I teach this. I teach this to business people, such as you would take my class. So, Calm Down.

It isn't an issue of hiring someone to do payroll. Here's what you seem to be asking:

First, 1099 is Not Income. It is the reporting of business payments from one business to another for professional services (for NEC) when the amount reaches at least $600. That means you can even make $2 million as a Sole Prop and as long as the people paying you either are paying for Personal work (not a business-to-business relationship) or they each pay under $600, you would never get a 1099 from anyone. Your Income is not the 1099. It's the Income you actually get from your business activity.

Second, you asked if You should be paid via W-2 and I was confused and commented on this. Are you asking about being paid by some Broker that you work under? Because now you would need to learn about Worker Classification. We cannot tell you if you are Misclassified.

You indicate you are running your own business. You can be an Employee for someone, and still have other clients that you work With (not For) as your independent business. Your own Sole Prop entity cannot pay you through payroll and W2 by law.

Hope that helps.

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"Level Up" is a gaming function, not a real life function.
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Level 3

I understand that, "Your own Sole Prop entity cannot pay you through payroll and W2 by law."  I can however "hire" or "Pay" a company such as ADP to do this for me. I am NOT "Paying" or giving "Myself" a W2, ADP would be.

I have asked ADP and a couple of others if this was possible as a sole proprietor, and they ALL say yes, just pay them the money and give them the links to the accounts. They withhold taxes and pay me - granted from my own account to another of my own accounts, but it is run through them, who if I needed it, I could get health insurance and a SEP IRA going etc.

That being said, would there be any "Benefit" tax wise to run it this way? Most likely, I would run the FA biz through the payroll Co. and the Tax Biz as business income/ Scd C.

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Level 12

If you really want to learn and understand this, you should pay attention to what we are explaining.

"I can however "hire" or "Pay" a company such as ADP to do this for me. I am NOT "Paying" or giving "Myself" a W2, ADP would be."

You are confusing being the Employee of someone, and having that Employer's Payroll Outsourced.

"I have asked ADP and a couple of others if this was possible as a sole proprietor, and they ALL say yes, just pay them the money and give them the links to the accounts."

They do not know you have this Wrong and are trying to get your business as a customer. I have caught ADP and other payroll services providers making many errors.

"They withhold taxes and pay me - granted from my own account to another of my own accounts, but it is run through them, who if I needed it, I could get health insurance and a SEP IRA going etc."

But all of that stuff doesn't even rely on you getting Payroll. Your Sole Prop as an employer cannot hire You; you can hire others, but you are You, already. That's the definition of Sole Prop entity.

You can get health insurance a number of ways, right now, and it goes to the 1040, and except for SE, you might even get fully credited for the premiums, essentially removing the business Net Income from the 1040.

You can establish a number of different retirement plans, such as right now, you could establish an SEP and a ROTH, as well. The Sched C would be used for the SEP amount, and the Roth would be allowed up to the limits for you, the tax year, the earned income, etc.

"That being said, would there be any "Benefit" tax wise to run it this way? Most likely, I would run the FA biz through the payroll Co. and the Tax Biz as business income/ Scd C."

Again, what is FA? What is Tax Biz? Who do you work for, other than Yourself?

It's a discussion. We need details.

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"Level Up" is a gaming function, not a real life function.
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Level 11

Wrong still. ADP is not the employer, you are. A SOLE PROPRIETOR CANNOT PAY HIMSELF VIA W2.

** I'm still a champion... of the world! Even without The Lounge.
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Level 12

If you perform Financial Advisor services through ADP by being Hired by ADP, ADP would then pay you through payroll as their Employee.

If, on the other hand, ADP contracts with your business to have you consult with them and/or their staff as a Benefit to inform their employees, you sign a contract and get paid as an Independent business providing services to ADP, who is your Client. And you get paid Independently, as a Business to Business relationship. And if that is $600 or more, ADP will report that to the IRS and you through the use of a 1099-NEC form. That way, the IRS has been given notice to expect a Business Return from you when you file your own tax return. And you would report Gross Income; if ADP is not the only customer, then you would be reporting All income, not just that 1099-NEC.

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"Level Up" is a gaming function, not a real life function.
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Level 12

Oh, sorry; I forgot this one:

If a Broker oversees your work and gives you work assignments, you would be their employee. They send you to ADP. Your broker, the employer, can also have hired me or ADP to "run payroll" but the Broker still is your Employer.

Many variations, that all depend on Who You Work For. Do you work for yourself?

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"Level Up" is a gaming function, not a real life function.
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Level 11

I am not an expert(caveat). If this is referring to ADP as a Professional employer organization(PEO), then the question becomes "can I avoid being an employer if I use a PEO?"

I would question the avoidance by the company(you) of being classified as an employer, since sole proprietor's may not pay themselves wages.

This PEO told you yes, because THAT'S THEIR JOB, and that's how they make money. I would not take income tax advice from a payroll company, any more than taking income tax advice from a financial planner.

"A professional employer organization (PEO) is an outsourcing firm that provides services to small and medium sized businesses (SMBs). ... Through co-employment, the PEO becomes the employer of record for tax purposes through filing payroll taxes under its own tax identification numbers." Wikipedia
 
** I'm still a champion... of the world! Even without The Lounge.
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Level 15

Sorry, I heard the word RUDE being shouted and thought someone was calling me.  But as long as I am here, I think the whole issue can be cleared up by listening to a simple little rock tune by some band called the Rolling Stones - "You Can't Always Get What You Want".

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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Level 12

Oh, good point.

It is more than semantics. The Relationship matters. "Who" pays is not "whoever does payroll literally paid me." It's the Relationship that matters. That's why I keep asking about Employers, and who is considered to be working for whom.

An Example of PEO is a local "Labor-Ready Temp Placement Agency" so if you applied to Your own business through this entity, I suppose you can be paid through payroll, and then your business would be charged for their placement service. Then, the IRS would discover this relationship is Invalid, of course.

It isn't clear if there is a desire to form a Corporation? Then you would be hiring yourself, even though you might also be the only Shareholder.

No, there's not much advantage to that. Yes, there are new Costs associated.

And this is Important. If a person has been doing tax returns, this is part of basic business return information. So we want to make sure you get this right, because it is something you should already be using for your own clients. That's the Concern. Let us help you get this knowledge now.

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"Level Up" is a gaming function, not a real life function.
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Level 12

One thing I encourage professionals, such as yourself, to do is Sign Up for governmental e-newsletters. This came in yesterday:

Worker Classification Webinar

The Tax Exempt and Government Entities Division would like to invite you to register to watch the free Worker Classification Webinar on October 7, 2020 at 1:00 p.m. (ET).

 

This webinar is designed to help government and private sector entities understand the definition of an employee and determine whether a worker is an employee or independent contractor. It will also cover Form SS-8, Classification Settlement Agreements and what to do if an individual is an employee.

 

Questions emailed to: [email address removed]  with the subject line “Pre-submitted questions for the Workers Classification webinar (October 7)” will be answered as time permits.

For further details, see Webinars for Tax Exempt & Government Entities.

 

Sign up here for all categories that are of interest to you:

 

https://service.govdelivery.com/accounts/USIRS/subscriber/new

 

 

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"Level Up" is a gaming function, not a real life function.