Paying Quarterly Self Employment

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Topic Author
closetoreality
Posts: 352
Joined: Mon Apr 06, 2015 5:46 pm

Paying Quarterly Self Employment

Post by closetoreality »

Ok, new to the self employment scene. This will be my first quarter self employed (part time side work gig). I use quickbooks online based to organize all of it. With what my taxable income is after deductions, how can I then invest as much which is left into an IRA?

For example if someone has 5000 taxable income after deductions, how would one go about investing as much of that remaining 5k as possible so in theory lowering their taxable income even more. Additionally how would I report that so the IRS knows about it.

Thanks.
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vitaflo
Posts: 1905
Joined: Sat Sep 03, 2011 3:02 pm

Re: Paying Quarterly Self Employment

Post by vitaflo »

Self-employed people will be looking to get a SEP-IRA or Solo 401k. Both retirement options are described on the wiki:

http://www.bogleheads.org/wiki/SEP
http://www.bogleheads.org/wiki/Solo_401(k)_plan

Different people will have different opinions on which is better/worse but in my opinion there is really no wrong answer as long as you use one of them. It's probably the best benefit any self employed person has.

There are various formulas to figure out how much you are able to contribute to each per year, but generally it is much more than the typical 401k contribution limits. You will want to max it out to get the biggest tax benefit.

For reporting you do this when you do your taxes. For example see line 28 of form 1040.
Topic Author
closetoreality
Posts: 352
Joined: Mon Apr 06, 2015 5:46 pm

Re: Paying Quarterly Self Employment

Post by closetoreality »

Still a bit confused. When I pay quarterly taxes for being self employed, how do I handle the investment side of it? Do I invest just before paying quarterly taxes and subtract that from my earnings?
jane1
Posts: 801
Joined: Mon Dec 26, 2011 1:00 am

Re: Paying Quarterly Self Employment

Post by jane1 »

Assuming sole prop self-employment.
Everything ultimately gets adjusted on your tax return. The order of things is not as critical. You can put into solo401k/SEP IRA anytime by writing a check for contribution to that account. Note, deadlines of Dec 31/April 15.
Self-employment taxes can also be 'paid' with additional withholding on other federal taxes (say if you or your spouse has a w2 job). It will all get accounted when you do your taxes.
Topic Author
closetoreality
Posts: 352
Joined: Mon Apr 06, 2015 5:46 pm

Re: Paying Quarterly Self Employment

Post by closetoreality »

So I pay quarterly taxes and handle the investments at years end? I really need to sit down with someone but I just figured I would get a little info on here.

So Lost.

My disconnect in understanding is that I use quickbooks and I track all my expenses and miles traveled. But there is no option to invest or how investing will manipulate my quarterly taxes. How do I claim investments so my quarterly taxable income is lower?
Spirit Rider
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Joined: Fri Mar 02, 2007 1:39 pm

Re: Paying Quarterly Self Employment

Post by Spirit Rider »

You need to take a step back and separate the tax issues and the retirement contribution issues. Both of these can be dependent on your W-2 employment. A barebones description of the tax issues, you will need do more research:
  • SE tax = net business profits * 0.9235 <= $118,500 (2015) * 0.153 (15.3%, SS + Medicare) + SE income > $118,500 * 0.029 (2.9%, Medicare only). If your W-2 income is >= $118,500, only the Medicare rate applies to this amount.
  • Self-Employment (SE) income = net business profits - 1/2 SE tax.
  • Taxable income = W2 wages + SE income.
  • Net taxable income = Taxable income - tax deductions/credits (including 1/2 SE tax deduction).
  • Additional liability = SE income at marginal rate + SE tax.
Your tax liability can be done by withholding and/or estimated taxes. There are three options with regards to payment of the additional liability:
  • Since this is the first year of this moonlighting, you may not have to make any additional payments until you file your taxes. This is because there is a safe harbor if your payments are >= last years tax liability (110% if last year's AGI >= $150K). Just make sure that your withholding will meet the safe harbor requirement.
  • If the above safe harbor is not met your withholding/estimated payments must be >= 90% of your ultimate liability.
    • If the moonlighting SE income - pre-tax retirement contribution is modest, you may just be able to increase your tax withholding by decreasing your W4 exemptions and/or adding a lump sum/pay period.
    • If the safe harbor can not be met or you choose not to accomplish this with additional withholding, you should make estimated tax payments. There is one due 9/15 for 6/1 - 8/31 and another one due 1/15 next year for 9/1 - 12/31.
anonenigma
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Re: Paying Quarterly Self Employment

Post by anonenigma »

I recommend that you do not contribute too much to your SEP-IRA before you do your taxes in April. I did that a couple of years ago, and it wasn't easy to claw the overcontribution back and figure out how to reflect it on the tax return. To this day, I'm not sure I did it correctly.
Topic Author
closetoreality
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Re: Paying Quarterly Self Employment

Post by closetoreality »

I will not receive a W2. Im a sole proprietor. I do contract work. I receive a check with no deductions.
Spirit Rider
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Re: Paying Quarterly Self Employment

Post by Spirit Rider »

closetoreality wrote:I will not receive a W2. I'm a sole proprietor. I do contract work. I receive a check with no deductions.
The below statement from your OP would indicate that this work is in addition to a main W-2 job. That is what a side gig is.

Ok, new to the self employment scene. This will be my first quarter self employed (part time side work gig).
Topic Author
closetoreality
Posts: 352
Joined: Mon Apr 06, 2015 5:46 pm

Re: Paying Quarterly Self Employment

Post by closetoreality »

Your right, bad explaining. Im in school under the GI Bill. I receive non-taxable monthly stipends. This side job is my only source of taxable income, hence no W2.

Sorry about that.
kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Re: Paying Quarterly Self Employment

Post by kaneohe »

closetoreality wrote:So I pay quarterly taxes and handle the investments at years end? I really need to sit down with someone but I just figured I would get a little info on here.

So Lost.

My disconnect in understanding is that I use quickbooks and I track all my expenses and miles traveled. But there is no option to invest or how investing will manipulate my quarterly taxes. How do I claim investments so my quarterly taxable income is lower?
Spirit Rider has given you some good advice re: estimated tax and safe harbors. Perhaps this is the missing piece you are seeking:
http://www.irs.gov/pub/irs-pdf/f2210.pdf which calculates any penalty for not paying enough estimated tax. If you have
lumpy income, you may have to fill out Sch AI of F2210 which on the last page. Line 1 of that schedule asks for your AGI......note that your AGI is your gross income less adjustments for your contributions to your retirement plan or IRA. That is where you make your adjustment for your contributions which will lower your required estimated tax.
jane1
Posts: 801
Joined: Mon Dec 26, 2011 1:00 am

Re: Paying Quarterly Self Employment

Post by jane1 »

closetoreality wrote:So I pay quarterly taxes and handle the investments at years end? I really need to sit down with someone but I just figured I would get a little info on here.

So Lost.

My disconnect in understanding is that I use quickbooks and I track all my expenses and miles traveled. But there is no option to invest or how investing will manipulate my quarterly taxes. How do I claim investments so my quarterly taxable income is lower?
As I said earlier, your tax return is where all this is eventually done. Quickbooks is your accounting software. You will use that information to fill out Schedule C. Your taxable income is based on your personal tax return, not just on what Quickbooks reports as your income.
As a sole proprietor you will fill Schedule C along with your tax return
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
The information from Schedule C flows into your Form 1040 Line 12 (Business income).

Any contributions to qualified plans you make will get reported/deducted on Line 28 on Form 1040.
Your SE taxes will get calculated/reported on Line 57 & Line 27.

IRS does not care about Quickbooks. That is for yourself to track stuff and if you get audited, you can show IRS your books. Instead of Quickbooks you can use pen-paper, spreadsheets or anything else.
Hope that clarifies things.
kaneohe
Posts: 6786
Joined: Mon Sep 22, 2008 12:38 pm

Re: Paying Quarterly Self Employment

Post by kaneohe »

kaneohe wrote:
closetoreality wrote:So I pay quarterly taxes and handle the investments at years end? I really need to sit down with someone but I just figured I would get a little info on here.

So Lost.

My disconnect in understanding is that I use quickbooks and I track all my expenses and miles traveled. But there is no option to invest or how investing will manipulate my quarterly taxes. How do I claim investments so my quarterly taxable income is lower?
Spirit Rider has given you some good advice re: estimated tax and safe harbors. Perhaps this is the missing piece you are seeking:
http://www.irs.gov/pub/irs-pdf/f2210.pdf which calculates any penalty for not paying enough estimated tax. If you have
lumpy income, you may have to fill out Sch AI of F2210 which is on the last page. Line 1 of that schedule asks for your AGI......note that your AGI is your gross income less adjustments for your contributions to your retirement plan or IRA (among other things). That is where you make your adjustment for your contributions which will lower your required estimated tax.
.......oops,sorry, thought I was editing previous post; quoted instead.
WhyNotUs
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Joined: Sun Apr 14, 2013 11:38 am

Re: Paying Quarterly Self Employment

Post by WhyNotUs »

You have a few different things going on. Your SEP IRA investments are not deducted on Schedule C.

My short answer is to pay quarterlies as if you are going to make $5k unless you know your business deductions. You will have a quarterly due in April 2016 and if you overpaid instead of a refund it can be applied to your first quarterly payment. Once you have a tax year under your belt, you can do a better job of projecting quarterlies. If you use Turbo Tax, it will even suggest a schedule for the following year to avoid potential penalty.
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