W9 - Backup withholding.

[manjitr]

Hey Webmasters,
A business newbie here. I just incorporated a LLC and one of my clients needs me to send in a W9. What I am concerned about is the backup witholding. Do I check that box or no. I googled about it and got even more confused.

[ImperialCommand]

No, you do not want backup withholding.
If you don't submit the W9, then the client would be required to take backup withholding.
You don't want that because it is a headache for the client and puts you at a competitive disadvantage.

I also recommend that you apply for a Tax Identification Number (TIN) which is the same as a social security number but is used by businesses. You can continue to use your SS# but as you gain more clients you will have to send each one a W9 - thus your SS# ends up in many offices and under who-knows-what circumstances.
With a TIN, you don't have that risk.

[manjitr]

I had filed the LLC as a sole proprietor and I had read somewhere that sole proprietor's are NOT exempt.

[ImperialCommand]

True, sole proprietors are not exempt from paying income taxes.
As a sole proprietor you must be responsible for your own withholding tax.
If you feel more comfortable shifting that burden onto your clients, your clients will find it easier to find someone else.

I realize your dilemma. You don't want to do your own taxes.
The easiest way to handle this is to find an H&R Block tax store - they'll give a free hour's time in discussing what to do about your taxes - you'll feel MUCH better about it then.

Simple method: Open a business checking and savings. Take 30-percent of your income and stash it in the savings - plan on using it for paying taxes at the end of the year. Note: as a sole proprietor, you don't have to pay your income tax until end of year. When/if you get employees, that's a different matter.

[bobothecat]

Note: as a sole proprietor, you don't have to pay your income tax until end of year.

That's not correct, as a sole proprietor you're still expected to make estimated tax payments quarterly.

[ImperialCommand]

hehehe. . .true, true. . .you do when you're making enough money.
(I've always referred to that situation as the "un-avoidable profit" - thats when no matter how much you spend in expenses, you still end up with a taxable profit.) When you turn a profit, you will be expected to pay quarterly.

In this case, I think we're talking about a start up company, we have to assume that "net" is zero or close to it. Its easy to rack up huge expense write-offs in those first years. The IRS "fine" for not paying quarterly taxes is zero if you netted zero.

But if you're turning a profit your first year out, then yes you will have to pay quarterly - but that won't be determined until after the first year when you file your taxes - in other words; you won't pay taxes until the end of the year.

(a little off topic now. . .)
Not only can you have lots of tax-deductible material goodies, you can actually reduce the family's total taxable income if your losses are structured properly (assuming you have a working spouse).

The W9 and tax filing issues are pretty simple.

But if you know how to structure your expenses properly you shouldn't have to pay any tax in the startup year.
That is why my recommendation to seek professional tax council is most important. (especially when you can get it free)

[manjitr]

thank you Imeperial and others. You have been of great help.