Make the Switch from a W-2 Employee to a 1099 Freight Agent
You’re taking the leap from being someone’s employee to brokering on your own. If you join a Freight Agent Program such as the one offered by LDI, you’ll be going from a W-2 for your taxes to a 1099-MISC. So what should you expect when switching from an employer’s Form W-2 to a Form 1099?
This post is to help you plan for this switch. In addition to the information here, we recommend you find a business tax accountant. They will help you choose all the credits and deductions available to you as a 1099 agent during tax season. It’s also wise to have someone knowledgeable in money matters on hand to advise you on more than just taxes. You can usually find a reliable accountant, and other supportive entrepreneurs, through a local entrepreneurial meet up group or your chamber of commerce.
Let’s jump right in to how to switch from a W-2 career to a 1099 self-employed freight brokerage!
Choose How To File
When you contract with an Agent Program, you’ll fill out a W-9 for the 3PL’s accounting purposes. The information provided on this W-9 will be used to prepare your 1099.
Use Your Social Security Number
For the identifying tax information, you can use your own social security number on a W-9. If you intend to be the only person brokering and therefore collecting all the profit, then using your personal SSN is the easiest option.
Use an Employer Identification Number
If you’re planning on expanding your operation to include others (or if you just already have an EIN), you’re welcome to use an Employer Identification Number (EIN) on your W-9. All your earnings are contributed to this number and are completely separate from your personal finances. If you are running your brokerage with a partner, or if you hire employees to work under you at your own expense, you’ll want to file for and use this.
For more information on which option is better for your long term goals, consult with a business accountant.
Set Up A “Business” Savings Account
This doesn’t have to be an official business account, but you’ll want to refer to it as such for yourself. Open a savings account specifically for a portion of your own business earnings.
When working with a 1099, absolutely no taxes are withheld. This means you receive every penny earned. That makes for a great looking paycheck, but come tax time, Uncle Sam is going to want his share.
Allocate Income For Taxes
That first year as a 1099 freelancer, many self-employed individuals are hit hard and left unprepared to pay the taxman, and agents are no exception.
When working for an employer under a W-2, about 7% of your paycheck was withheld for federal taxes. Your employer contributed roughly another 7% out of pocket, for a total of around 15% of your take home pay. Now that you’re your own boss, you will assume the full responsibility of those taxes.
By setting up a “business” savings account, you’ll put money away specifically for your Self-Employment Tax. This is where your own accountant will come in handy: you’ll need to put away about 15% of your total income for federal taxes (social security and Medicare). But you’ll also need to put away some money for other taxes of some kind, like property tax and possibly State tax, depending on where you live. Your accountant can advise you on how to best prepare for that.
After your first year, you should have an idea of how much you will bring in annually. After that, you can set up quarterly installation payments to the government(s). When tax season rolls around, you will either be completely settled with your taxes, or the amount you’ll need to pay will be easily manageable with your business savings.
Consider Health Insurance
Health Insurance was probably covered at your place of employment, where again, some of the premium came out of your paycheck and your employer made up the rest. If you’re with LDI, your business development partner can give you more specific information about health insurance options. Regardless of the Agent Program you go with, you’ll want to think about health insurance coverage for yourself and your family.
There are a few ways you can obtain health insurance. The first option would be to see if you can secure coverage through your spouse, partner, or depending on your age, your parent.
If those options aren’t viable, check out your eligibility through the Healthcare Marketplace. Depending on your circumstances, you could qualify for a premium credit that can bring your monthly bill down a few dollars or a couple hundred dollars. There are a variety of plans available, so look through the options to see which plan best fits your lifestyle.
Think About The Future
When you’re your own boss, you’ll want to consider retirement plans. Again, as an LDI Agent you can speak with us and get more information. Alternatively, you can look into Retirement Fund options provided through the IRS.
Businesses like Edward Jones, Merrill Lynch, or others can also help you think about investment options for financial planning for a fee. Or ask your tax accountant about the best routes for retirement that will benefit you at your current age and situation.
Turn these and your personal tax information over to your accountant as close to January 31st as possible. Those filing with 1099’s have a due date of February 28th when filing by paper, or April 2nd when filing electronically. As discussed before, the accountant can help you secure all the eligible deductions and credits for which you qualify. They can also advise you about the pre-pay schedule mentioned earlier.
You Got This
Feel confident! You have the freight agent tax pieces figured out. For the pieces that are still uncertain, you know who to ‘search’ to find that specific information ([your city/town] small business accountant).
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