I have a single-member LLC that does tutoring. For the last 18 months, I’ve been going it alone. I am ready to bring on another tutor so I can expand into more subjects. Ideally, I’d like to pay them per session. I have been charging $32/hour for tutoring, and it is time to increase my prices again to $40/hour. (I have found that at my current client load, $32/hour is breaking even) I am planning to pay $25 per hour for the new tutor.

I have a few questions.

Is 1099 the correct method of payment? They will use their own equipment, locations, and scheduling, but my pre-existing POS.

I have heard that a rule of thumb is to set aside 25% for taxes. I have been doing so, immediately moving 25% of each receivable invoice into a business savings account set aside for taxes. Last year, as my business lost money, it didn’t end up mattering and I didn’t owe taxes. I just left the money there.

Should I continue setting aside 25% of each $40 session? Should I set aside 25% of every $40 each client pays, or 25% of each $15 after I pay the other tutor?

So I guess my question is: does the math work like this

Cost client pays - 25% of what client pays for taxes - what I pay tutor = profit

So the math on my numbers would be: 40 - (.25*40) - 25 = $5

Or does it work like this:

Cost client pays - What I pay tutor - 25% of what’s left for taxes = profit?

40 - 25 - (.25*15) = $11.25

I know there are a lot of other things that go into this math, cost of customer acquisition, customer lifetime value, daily operating expenses, etc. Those things I can handle, I’m trying to simplify this “paying someone else” part, as its a new chunk of the equation for me.

I would like to be able to pay them as much as possible and still turn a profit from acquiring the clients, but if it’s the first equation where I come away with $5, my other expenses mean I make almost nothing for having hired them. But if it’s the second equation, I think $25 is about right, maybe even a little low.

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