How does taxes work?

How do my taxes work, now that I have a side business in addition to my fulltime job?

• So, I need an accountant obviously, which I'm working on, but haven't found one yet. I'll explain my situation. Sorry if I've included irrelevant information, but just want to be clear. I work full-time as a designer at a big company. Let's call it Agency101 I'm employed with a W4 form. I've been here for years. I've always paid my taxes every year through HR Block. Very simple. I go in, and hand in my paperwork, and leave. Four months ago, I made a side business. Let's call it CoolDesigns Me and my buddy get a lot of freelance design gigs. So we formed an LLC, and we're 50/50 ownership. We made a business account with Chase Business. Both of us have a debit card for the business account. Here's the way we work together We take on freelance work about once a month. We work on it at night, outside of our regular jobs. Say someone approaches us to do a logo. We quote them at say, $10,000 (just an example). We finish the job, and make $10,000 total. We always split the job 50/50, no matter what. After each job, I write a check to myself from CoolDesigns, and deposit it into my personal bank account. We have no other employees. Expenses We have no office-space. We don't have the normal 'real' expenses a normal business does, because we just work from our respective apartments at night. Occasionally, if I need a new monitor or computer upgrade, I purchase it with my CoolDesigns debit card (the Chase bank one). Bryan does the same thing, using his card. Let's say CoolDesigns makes a total of $40,000 this year. That means I'll have paid myself $20,000 total through CoolDesigns. My question is, next year when it's time for taxes... what happens? Like, how many different taxes am I suddenly paying? Do I have to pay the government taxes on the $40,000 that CoolDesigns made, and then pay the government AGAIN for the $20,000 I personally made? Can I just hand all of my paperwork (including Agency101, an excel sheet showing the money CoolDesigns made, and all of my receipts) to one accountant, and they'll magically handle it? Or do I need two accountants who specialize? I have a lot more questions but it's hard to articulate them. I guess I'm just looking for someone to break down how this stuff all comes together.

• Answer:

  An LLC with more than one owner is treated as a partnership, unless the LLC chooses to be taxed as a corporation. I don't see any particular reason for you to choose the latter option. As a partnership, the LLC files Form 1065 to report its income and expenses. The $40K of income would be reduced by any deductible expenses that the business incurred - disposable supplies such as printer ink, paper, etc, plus the depreciation on the equipment that you purchased for the business, and so forth. As a partnership, the LLC itself does not pay taxes on the net income from the business; that net income flows through to the partners. You will receive a Schedule K from the partnership, which will show the information that you must report on your own tax return. The Schedule K instructions tell you where the items reported on the schedule flow through to your own return. Generally, assuming that this is your only business, the amount of income on which you will be personally taxed is 50% of the partnership's net business income - so if the net business income for the partnership after deductions is, say, $30K, you will be taxed on $15K. On your personal return, the partnership information shows up on Schedule E, page 2 and on Form 1040, line 17. Some things are stated separately - section 179 deductions and non-deductible expenses such as 50% of meals and entertainment, for example - because the tax implications of those items depend on the partner's specific situation and may be treated differently depending on what else the partner has on his personal return. If you are a general partner (and I presume that both you and Diego are from the facts presented), then you will also have to pay self-employment tax on the net income from the partnership. Take a look at IRS Publication 541, Partnerships, http://www.irs.gov/publications/p541/index.html, for more information.