If you are an employee, then get paid like one. If you are an independent contractor, then get paid like one.

QUESTION.
I've just been hired as a "1099" employee who provides a variety of "business services" (customer support, graphics design, running sales reports, entering data into expense reports, etc) to a company based in Asia with USA division in the United States. I'll be helping their East Coast USA customers and sales team. I have never been a 1099 employee before and am not sure how to manage the finances. I work out of my home office. I do not have a business plan, and no business background. Would it be beneficial for me---as far as taxes go---to incorporate as a Sole-proprietor, or LLC? My immediate concern is that I need to know how much to withhold for Federal and State taxes, how much to withhold for Social Security taxes, and what other items I should be deducting from the check I receive every two weeks. I will be paid $51,500 per year. I'll need to pay for my own health, medical, dental, an vision insurance. Haven't picked out a provider for that yet. currently I'm covered under COBRA. Do I need a business checking account? I've already set up another free checking account that can be linked to my personal free checking account. And I've already set up an ING account where I can deposit money held for tax payments. It is also linked to my personal checking account so I can transfer money easily. I just don't know how much to withhold and what to do with it after I've set it aside. Is there some kind of coupon book I need to get for the taxes? Also: I 'm fairly certain I'll need to hire an accountant but how do I decide who to hire to manage my accounting?

ANSWER.
Let's get one thing straight right up front: There's no such thing as a 1099 employee. You are either an employee or a 1099 independent contractor. And if this foreign company treats you like an employee, then you are an employee in the eyes of the IRS. And if you are an employee in the eyes of the IRS, then the company has to withhold your taxes and pay unemployment insurance and Social Security for you. If you are an independent contractor, then you can have other clients, too. And I would advise that you do that if you are going to be an independent contractor. And if you are an independent contractor, then your hourly billable rate should be about 3 times what you would expect to get paid as an employee. If you are accepting a pay rate similar to a mere employee, then you are cheating yourself out of fair compensation. As an independent contractor you will have business expenses and you seem to know this since you have asked me some questions about them. You don't incorporate to be a sole proprietorship or an LLC. You can be a sole proprietorship, an LLC or a corporation. You incorporate to be a corporation. I recommend you contact your local SCORE chapter and sit down with two SCORE volunteer counselors to discuss what you are getting involved in. See www.score.org/findscore/chapter_maps.html. Type your home zip code to find the chapter nearest to you. The sessions are free and I expect one will help you tremendously. Take a look at my Web site. On the home page you will see links to booklists and guides I have created at Amazon. A few of them might prove helpful to look at. Good luck! Regards, -Jeff

Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
http://www.scoreprinceton.org/
http://www.jlippin.com/