Dear Liz: Our son is graduating from college and needs a car for his new job. Is this an opportunity to help him establish a good credit rating? His credit union offers loans to first-time auto buyers who don't have a credit history, but the interest rate is 8.4% (6 percentage points more than standard auto loans). We parents intend to help pay for the car, so we could provide a larger down payment or help with larger payments to pay off the loan sooner as a way to reduce the higher interest costs. Would doing either of these, however, lower the credit rating he might earn? He has no other debt and has two credit cards (co-owned by us) on which he pays monthly in full. Are there better ways to help him establish his own credit rating?
Answer: If your son is a joint account holder on two credit cards, he might not have to bother with a "credit builder" loan. He should already have credit histories and credit scores that would qualify him for better rates.
He should first check his credit reports at http://www.annualcreditreport.com, the federally mandated site where people can check their credit histories annually for free.
If he has credit histories, he can take the additional step of buying at least one of his FICO scores from MyFico.com. (He can buy a total of three, one for each credit bureau.) There are other sources for free scores, but they're usually not the scores used by most lenders. He then can ask the credit union for a quote on the interest rate he'd be charged, given his score or scores. It probably will be lower than 8.4% if he has a good history with these cards.
If he doesn't have credit reports in his own name, he probably is an authorized user rather than a joint account holder on your cards. (Some issuers don't export the primary cardholder's history with a card into an authorized user's credit files, although many do.) In that case, the credit-building loan could be a good idea, particularly if you were willing to help him pay off the loan quickly. Although there's some advantage to paying off a loan according to schedule, your son will get most of the credit-scoring benefit just by having the loan, and he'll save by paying it off fast.
Another way you could help is by co-signing the loan, but then you're putting your credit at risk. If he makes a single late payment, your credit scores could suffer. If the credit union is willing to make the loan, that's usually a better way to go.
Paying taxes on consulting work
Dear Liz: I am a full-time employee who just started independent consulting work on the side. I have submitted my W-9 with the company with which I am a consultant, but I know the onus will be on me to set aside federal tax payments. Here's my question: Will I pay state taxes on my consulting income? And if so, will those taxes be paid in the state where I live or the state where the company is based?
Answer: If you live in a state that taxes income, and you have income to tax, then yes, you'll probably have to pay state income taxes on your net income — your gross revenue minus your expenses.
"Since you are in business for yourself, contracting with another company, you will pay taxes in the state where you do the work," said enrolled agent Eva Rosenberg of the TaxMama.com site. "If you perform the services in your own state, that's where your taxable responsibilities lie. However, if you frequently go to the client's location and do work there, you will be liable for taxes in that state as well."
A good rule of thumb is to set aside half of any money you make to cover the various taxes you'll owe, Rosenberg said.
"Payroll taxes are 15.3%. If you're making enough to live on, you're in the 25% bracket at least. That's 40%," she said. "Depending on the state, that could be another 5% to 10%."
You probably should make quarterly estimated tax payments to avoid a penalty. Business owners, especially newly minted ones, would be smart to hire a tax pro to help them navigate their obligations.