Declaring Tutoring Income

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Cosmo
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Declaring Tutoring Income

Post by Cosmo » Sun Dec 01, 2013 4:44 pm

My wife started providing some tutoring services earlier this year and it unexpectedly grew into more business than she (we) thought. Although it still didn't amount to much, we have approached $2,000 income so far, with 75% of the earned money in the form of checks. So the first thing I will disclose is that I did not pay any estimated quarterly taxes this year (or at least so far) because I did not really give much thought to it. So I feel like I complicated our tax situation greatly by my wife keeping herself busy (stay at home mom) for a couple hours a week. In addition, we never formally set this up as a small business, corporation, etc.

So a couple of questions:

1) Will I still be able to use Quicken deluxe to do our taxes, including this self-employment income? Or do I need to get Turbotax for small businesses?

2) Will I need to pay penalties for not paying the estimated quarterly taxes? Does the fact that we normally get around $2,000 back in the form of a refund every year as a household (from my job) change any of this?

Any advice or things to consider would be greatly appreciated.

Thanks,
Cosmo

livesoft
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Re: Declaring Tutoring Income

Post by livesoft » Sun Dec 01, 2013 4:57 pm

1. Yes TurboTax Deluxe can do your taxes. I don't think Quicken does taxes.

2. It is unlikely you will pay a penalty for underpaying taxes. There are several safe harbors to avoid penalties. An easy one is to change your withholding for your December paychecks to cover the taxes which are probably less than $1000 (FICA, medicare, income) by filing a new W-4 with your employer. Another one would be to up your retirement plan contributions. You can also file the 4th quarter estimated tax payment in January. Search for tax safe harbor
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manwithnoname
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Re: Declaring Tutoring Income

Post by manwithnoname » Sun Dec 01, 2013 6:02 pm

there are several ways to avoid income tax on tutoring.

1. any expenses incurred in her tutoring business are deductible on sked C. Expenses can include a separate phone/cell line (not general home phone) that she uses for tutoring.

2. If she has a dedicated area such as a room that she uses to tutor students she can deduct up to $5 x the square feet of the room (up to $1500) as a home office deduction under IRS safe harbor.

3. if she has sked C income after deductions she can contribute all sked C income to a tax deductible IRA if your MAGI is no more than about $175k. Deduction phases out between 175-185k. See Pub 590 P 15. Or she can contribute to a Back door roth regardless of MAGI.

4. Underpayment penalty is a joke. 3% on amount of underpayment in each quarter. Over withholding on your W-2 will reduce amount subject to penalty.

5. If she has Sked C income she will have to pay SECA tax on Sked SE.
Last edited by manwithnoname on Sun Dec 01, 2013 6:08 pm, edited 1 time in total.

livesoft
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Re: Declaring Tutoring Income

Post by livesoft » Sun Dec 01, 2013 6:06 pm

3. She doesn't need Schedule C income to contribute to an IRA. The family needs income to cover it. And if she contributes to a Roth IRA, then be aware of the contribution limits.
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manwithnoname
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Re: Declaring Tutoring Income

Post by manwithnoname » Sun Dec 01, 2013 6:18 pm

livesoft wrote:3. She doesn't need Schedule C income to contribute to an IRA. The family needs income to cover it. And if she contributes to a Roth IRA, then be aware of the contribution limits.
Of course, but then she would not have to worry about any income tax or penalty for tutoring because she would take an above the line deduction up to $5500/6500 and OPs question would be moot because there would be no under payment of estimated taxes. OP only needs to pay withholding tax equal to 90% of 2013 tax due minus $1000 to avoid underpayment penalty.

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Cosmo
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Re: Declaring Tutoring Income

Post by Cosmo » Sun Dec 01, 2013 7:11 pm

Thank you for the responses, everyone.

Manwithnoname, you echo what my father-in-law just told be regarding the tax penalty is a total joke as far as the $ amount.

Livesoft, it sounds like overwithholding this month shouldn't be an issue. They already overwithhold during the year by around $2,000 to $3,000 so that should be more than enough to offset any tax underpayments but I still am not 100% sure that the IRS looks at it that way.

Thanks again, everyone.

Cosmo

MarkNYC
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Re: Declaring Tutoring Income

Post by MarkNYC » Sun Dec 01, 2013 7:20 pm

manwithnoname wrote: OP only needs to pay withholding tax equal to 90% of 2013 tax due minus $1000 to avoid underpayment penalty.
If a taxpayer does not have a safe harbor based on the prior year's federal tax, then to avoid an underpayment penalty the taxpayer must either: (1) pay 90% of the current year tax through withholding and/or timely estimated payments, OR (2) have current year tax minus withholding be less than $1,000.

The "$1,000 rule" is separate and apart from the "90% rule."
Last edited by MarkNYC on Wed Oct 25, 2017 9:14 pm, edited 1 time in total.

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Pranav
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Re: Declaring Tutoring Income

Post by Pranav » Tue Oct 24, 2017 2:06 pm

Cosmo wrote:
Sun Dec 01, 2013 4:44 pm
My wife started providing some tutoring services earlier this year and it unexpectedly grew into more business than she (we) thought.
...
Thanks,
Cosmo
Cosmo, my spouse is considering offering tutoring service in our neighborhood. Could you and others please share how to start and grow a tutoring service? Thanks!
Last edited by Pranav on Tue Oct 24, 2017 2:29 pm, edited 2 times in total.
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dodecahedron
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Re: Declaring Tutoring Income

Post by dodecahedron » Tue Oct 24, 2017 2:17 pm

Cosmo wrote:
Sun Dec 01, 2013 7:11 pm

Livesoft, it sounds like overwithholding this month shouldn't be an issue. They already overwithhold during the year by around $2,000 to $3,000 so that should be more than enough to offset any tax underpayments but I still am not 100% sure that the IRS looks at it that way.
Yes, the IRS does in fact look at it that way. As long as you file a joint return, the fact that you are overwithheld by so much means no worries about quarterly estimated taxes this year.

Your wife can report her tutoring income on a Schedule C-EZ with net profits (bottom line) and Self-Employment Tax from Form SE (Short Schedule, page 1 only) reported on your Married Filing Joint Form 1040 on lines 12 and 57, respectively. Most basic tax software can handle that easily. No need for the extra cost business software.

Edited to add: In fact, it really isn't exactly rocket science to do this kind of tax return by hand, using the IRS instructions for the relevant forms listed above. It is kind of instructive to do it that way. Even if you use software, you should try to understand what's going on with your forms so you can understand your future tax scenarios more clearly as your wife's business (hopefully) flourishes!

mrsbetsy
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Re: Declaring Tutoring Income

Post by mrsbetsy » Tue Oct 24, 2017 4:29 pm

I am a private tutor working out of my home for the past 12 years. I strongly recommend finding a copy of the book Lower Your Taxes Big Time by Sandy Botkin, CPA, Esq.

Most likely if she's only earned 2K, she is not making any money because her tax deductions are more than that.

I would caution her about setting herself up as a Sole Proprietor. There are many risks involved when working with children in your home. She needs to think about ways to eliminate those risks.

Betsy

Spirit Rider
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Re: Declaring Tutoring Income

Post by Spirit Rider » Tue Oct 24, 2017 5:25 pm

mrsbetsy wrote:
Tue Oct 24, 2017 4:29 pm
I would caution her about setting herself up as a Sole Proprietor. There are many risks involved when working with children in your home. She needs to think about ways to eliminate those risks.
I am not sure what you are getting at here. You don't set yourself up as a sole proprietor. That is what a self-employed individual is by default.

If you were suggesting that she set up an LLC for liability protection, this is a common misperception. LLCs provide little to no liability protection for the personal/professional acts of the LLC owner.

Now with that said, in this current environment. I would not provide any professional services involving children without personal/business liability insurance.

mrsbetsy
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Re: Declaring Tutoring Income

Post by mrsbetsy » Tue Oct 24, 2017 7:37 pm

Do as you wish....just recommending best practice guidelines for the industry.

YMMV,

Betsy

Spirit Rider
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Re: Declaring Tutoring Income

Post by Spirit Rider » Tue Oct 24, 2017 8:29 pm

You didn't answer my question of exactly what you are proposing. Exactly what is the source of these best practices on tutoring business entity type.

Conventional Wisdom can and very often is wrong, when is comes to the need/usefulness of an LLC in an owner only business providing personal services.

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dratkinson
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Re: Declaring Tutoring Income

Post by dratkinson » Wed Oct 25, 2017 4:38 pm

Additional tax owed. Can also send in additional tax owed with form to request extension of time to file taxes.
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Cosmo
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Re: Declaring Tutoring Income

Post by Cosmo » Wed Nov 08, 2017 7:02 pm

Pranav wrote:
Tue Oct 24, 2017 2:06 pm
Cosmo wrote:
Sun Dec 01, 2013 4:44 pm
My wife started providing some tutoring services earlier this year and it unexpectedly grew into more business than she (we) thought.
...
Thanks,
Cosmo
Cosmo, my spouse is considering offering tutoring service in our neighborhood. Could you and others please share how to start and grow a tutoring service? Thanks!
It has been entirely word of mouth! This post is from four years ago and she is perhaps a little bit busier than when she first started. She really enjoys doing it. Her approach is to tutor within only a few subjects: Algebra, Pre-Algebra and Geometry. That way, she gets intimately familiar with the subject matter and the teacher's syllabus. It's tiring work mentally. She usually doesn't like to go more than two hours (students) per day. I think presently she only has 5-6 students per week but this number will go up and down during the year. Unfortunately, she has had to turn people down because sometimes the business comes all at once. This past summer she was lucky enough to get some steady students wanting help between school years. The money is pretty good in our area. She can command around $60 per hour here. (north side of Houston).

Cosmo

ryman554
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Re: Declaring Tutoring Income

Post by ryman554 » Thu Nov 09, 2017 9:48 am

mattyfu1 wrote:
Wed Oct 25, 2017 5:15 pm
I ask for cash...
Promoting tax evasion (and that's what it is) is not allowed on this board.

SRenaeP
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Re: Declaring Tutoring Income

Post by SRenaeP » Thu Nov 09, 2017 10:29 am

manwithnoname wrote:
Sun Dec 01, 2013 6:02 pm
there are several ways to avoid income tax on tutoring.
...

2. If she has a dedicated area such as a room that she uses to tutor students she can deduct up to $5 x the square feet of the room (up to $1500) as a home office deduction under IRS safe harbor.

...
Note that dedicated really means dedicated. In order to qualify for the home office deduction, the space has to be used *solely* for her business. As in not a guest room or den or anything other type of room that you *ever* occupy for personal use. No storing off-season clothes in there, no nothing.

-Steph

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