Self employed full time traders
- Thread starter polpolik
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Here is My understanding to the tax law.
They (self-employed, corporation) are pretty equivalent in terms of tax.
If you claim yourself self-employed, you need to pay social security tax (so called self-employement tax) and medical tax, and you can claim business expenses just as much as a corporation. However, a corporation gives you a legal protection: limited liability. If you have any client, you should incorporate your business to protect yourself. Of course, you have more paperworks as a corporation.
What will happen if you don't claim yourself self-employed? You can pay short term capital gain tax just as anybody does. The advantages: you don't need to pay social security tax or medical tax. The disadvantages: you claim your business expense only after it exceeds 2% of your income, you cannot set up any tax-deductible self-employed retirement plan (up to 25% of your gross income until hit $40,000/year), you don't have social security benefits (not bad considering that our government is not going to fix this system soon). There are other subtle differences, such as, it is more likely that IRS will audit your tax return if you don't incorporate yourself; it is not easy to set up a no-minimum-balance bank account for a corporation; etc
Just my two cents. You are welcome to bash my post as long as you really know what you are talking about.
They (self-employed, corporation) are pretty equivalent in terms of tax.
If you claim yourself self-employed, you need to pay social security tax (so called self-employement tax) and medical tax, and you can claim business expenses just as much as a corporation. However, a corporation gives you a legal protection: limited liability. If you have any client, you should incorporate your business to protect yourself. Of course, you have more paperworks as a corporation.
What will happen if you don't claim yourself self-employed? You can pay short term capital gain tax just as anybody does. The advantages: you don't need to pay social security tax or medical tax. The disadvantages: you claim your business expense only after it exceeds 2% of your income, you cannot set up any tax-deductible self-employed retirement plan (up to 25% of your gross income until hit $40,000/year), you don't have social security benefits (not bad considering that our government is not going to fix this system soon). There are other subtle differences, such as, it is more likely that IRS will audit your tax return if you don't incorporate yourself; it is not easy to set up a no-minimum-balance bank account for a corporation; etc
Just my two cents. You are welcome to bash my post as long as you really know what you are talking about.
John, you sound more like an investor.
The OP probably falls into one of these 2 categories. Both of which are subject to social security taxex under SE. Probably #2
1. Note, commodity traders who are registered as dealers or traders on a commodities exchange are subject to SE taxes. See more details about this exception in our Commodities Examples Guide.
2. Proprietary traders who are treated as independent contractors receive a Form 1099-Misc for non-employee compensation. They are usually subject to SE tax. Click here to learn more.
The OP probably falls into one of these 2 categories. Both of which are subject to social security taxex under SE. Probably #2
1. Note, commodity traders who are registered as dealers or traders on a commodities exchange are subject to SE taxes. See more details about this exception in our Commodities Examples Guide.
2. Proprietary traders who are treated as independent contractors receive a Form 1099-Misc for non-employee compensation. They are usually subject to SE tax. Click here to learn more.
i'm a full time retail trader and trade billions of shares a year. the #2 you put down a prop trader is usually not correct. MOST PROP TRADERS GET A K-1 NOT A 1099 MISC AND PAY NO SOCIAL SECURITY TAXES. SOME PROPS DUE GIVE 1099'S AND I'D CLARIFY THAT UP FRONT AND NOT ALLOW THAT AND DEMAND A K-1 OR GO TO ANOTHER FIRM
This causes a lot of confusions even among professional tax accountants. Let's look at IRS tax rule:
âSuch person recognizes gain or loss on any security held in connection with the trade or business at the close of any tax year as if the security were sold for its fair market value on the last business day of such taxable year, and
âAny gain or loss is taken into account for such taxable year. (IRC section 475(f)(1)(A).)â
The code then explains that gains and losses from applying the mark-to-market provision, while they may be ordinary income or loss, they are not subject to self-employment taxes (IRC section 475(f)(1)(D)). That is, the ability to avoid self-employment taxes from this section does not apply to realized gains or losses; it merely applies to the revaluation of a portfolio of securities from cost to market value occurring at the end of a tax year.
In other words, any realized gains and losses from your trading are subject to self-employed tax, and those unrealized gains/losses are not subject to SE tax. I hope this will settle the argument once for all. Those who don't believe my understanding should try to look for a really good lawyer or find a new accountant to fix your previous tax returns.
K-1? We're talking self employed here. #2 says nothing about a prop shop.
Well said.
John is correct as applied to a retail trader. Look at the following irs publication pg. 72.
http://www.irs.gov/pub/irs-pdf/p550.pdf
According to the IRS, Gains and losses from selling securities as part of a trading business are not subject to self employment tax.
I was personally contacted by the IRS for not paying self-employment taxes a couple years ago and after directing them to their own rules, they agreed that SE taxes did not apply to me.
http://www.irs.gov/pub/irs-pdf/p550.pdf
According to the IRS, Gains and losses from selling securities as part of a trading business are not subject to self employment tax.
I was personally contacted by the IRS for not paying self-employment taxes a couple years ago and after directing them to their own rules, they agreed that SE taxes did not apply to me.
Last year, I reported some income tax while claiming self-employment and I believe I had to pay social security but that was not from trading, but from some IT consulting work I did for a company.
This year, my income has been solely from trading futures. Based on not4kids' post, I can choose not to be "self-employed" nor be an LLC and just pay my taxes based on futures capital gains rule, correct? Pretty much like being unemployed and just trading to get income. I only do futures so I don't need the mark-to-market status. I do like the idea of an LLC to seem legitimate for when I borrow money from the bank since I plan to start another business unrelated to trading some day.
I don't mind not being able to deduct my expenses since I don't spend too much for my "business" anyways and I doubt I spent over 2% of my income in expenses unless rent, utilities, gas and food is counted which I doubt (or am I wrong)?
I'll check out greencompany and try to talk to some accountant in a few weeks and get all this clarified.
I'm beginning to think one of you guys who posted will be in trouble when you get audited since we're getting conflicting information here
to THE-BEAKER: I'm not being a prick to anyone except to BNB.
This year, my income has been solely from trading futures. Based on not4kids' post, I can choose not to be "self-employed" nor be an LLC and just pay my taxes based on futures capital gains rule, correct? Pretty much like being unemployed and just trading to get income. I only do futures so I don't need the mark-to-market status. I do like the idea of an LLC to seem legitimate for when I borrow money from the bank since I plan to start another business unrelated to trading some day.
I don't mind not being able to deduct my expenses since I don't spend too much for my "business" anyways and I doubt I spent over 2% of my income in expenses unless rent, utilities, gas and food is counted which I doubt (or am I wrong)?
I'll check out greencompany and try to talk to some accountant in a few weeks and get all this clarified.
I'm beginning to think one of you guys who posted will be in trouble when you get audited since we're getting conflicting information here
to THE-BEAKER: I'm not being a prick to anyone except to BNB.