self employed tax question

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Topic Author
Bones_Jones
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self employed tax question

Post by Bones_Jones »

hi guys,

i'm self-employed. i'll be filing married separately. my first time being self-employed.

and i'm little confused. every self employment or 1099 tax calculator says self employment tax is 15.3%

IRS says it's 15.3%
The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
https://www.irs.gov/businesses/small-bu ... care-taxes


but when i entered 1099 to turbo tax(i don't have real 1099 yet, i just guestimated) the rate was like 27.3%+. :shock:

let's say i made 100k as self employed. how much taxes do i have to pay not counting deductions and credits? shouldn't it be 15.3k?

:confused
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Rob5TCP
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Re: self employed tax question

Post by Rob5TCP »

Does Turbo Tax include 12% for your F.W.T.?
mx711yam
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Re: self employed tax question

Post by mx711yam »

Self employment tax is in addition to income tax.
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

so i'm paying whatever i make + 15.3%? :shock:
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

Rob5TCP wrote: Wed Jan 02, 2019 9:12 pm Does Turbo Tax include 12% for your F.W.T.?
what is F W T?
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

ok, so i live in washington with no state tax.

let's say i made 100k as an independent contractor.

how much tax do i pay?

turbo tax say i have to 27.3k


i want to know why i have to pay 27.3k...
Topic Author
Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

and is there any way to save on taxes? form LLC? :shock:
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Elric
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Re: self employed tax question

Post by Elric »

As @mx711yam said. The "self-employment tax" is your social security and medicare tax. It covers what would be both the employee's and the employer's contribution if you weren't self-employed. That's why it's higher than the tax employees of companies pay directly. That tax is in ADDITION to Federal Income Tax (just as it is for those who work for others).

While Turbo Tax should cover it, make sure you get the deductions you're entitled to for self-employed. If you didn't have an option to get your health insurance another way, and you bought it yourself as a sole proprietor, that gets deducted from your self-employment income (up to the amount you made from self-employment). Also, this year, most (but not all) self-employed can deduct 20% of their self-employment income.

While there are several ways to handle LLC taxes, most self-employed sole proprietors with an LLC find it best to go the pass-through route, where it's no different for tax purposes than if you don't have an LLC. There are other reasons, though, to consider an LLC going forward, depending on your particulars.
Last edited by Elric on Wed Jan 02, 2019 9:28 pm, edited 1 time in total.
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Rob5TCP
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Re: self employed tax question

Post by Rob5TCP »

Bones_Jones wrote: Wed Jan 02, 2019 9:20 pm
Rob5TCP wrote: Wed Jan 02, 2019 9:12 pm Does Turbo Tax include 12% for your F.W.T.?
what is F W T?
Federal Witholding Tax
Topic Author
Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

darn it. i thought i was paying 15.3 :D
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mister_sparkle
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Re: self employed tax question

Post by mister_sparkle »

Self-employment tax is the employer and employee portion of FICA (Social Security and Medicare). It is separate from and in addition to Federal (and state) income tax. So if you're in the 22% tax bracket, you'll pay somewhere south of 15.3% + 22% in Federal tax, taking into account the tax brackets below 22%.
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

ok, so please someone enlighten me on why it's 27.3k when i entered 100k 1099 misc. :confused
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

mister_sparkle wrote: Wed Jan 02, 2019 9:29 pm Self-employment tax is the employer and employee portion of FICA (Social Security and Medicare). It is separate from and in addition to Federal (and state) income tax. So if you're in the 22% tax bracket, you'll pay somewhere south of 15.3% + 22% in Federal tax, taking into account the tax brackets below 22%.
so that's how 27.3% came from? 22% + somewhere south of 15.3%?
SrGrumpy
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Re: self employed tax question

Post by SrGrumpy »

Bones_Jones wrote: Wed Jan 02, 2019 9:19 pm so i'm paying whatever i make + 15.3%? :shock:
You can deduct part of the self-employment tax if that makes you feel a little better. But yeah ...
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

darn it. i thought i would be saving a ton. i really hated crazy amount of taxes getting withheld..

thx guys
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

would my tax rate change if i formed an LLC? or even incorporated? this is all so new to me. i never had to worry about taxes because i was always employed..
colddeadfish
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Re: self employed tax question

Post by colddeadfish »

Bones_Jones wrote: Wed Jan 02, 2019 9:21 pm ok, so i live in washington with no state tax.

let's say i made 100k as an independent contractor.

how much tax do i pay?

turbo tax say i have to 27.3k


i want to know why i have to pay 27.3k...
Hi, I have been self employed for several years. 15% of gross income is a good place to start..but you will certainly have multiple deductions.

Questions:
Did you pay quarterly estimated taxes in the past year?
Did you have any expenses (gas/travel, equipment, fees, licenses, insurance)? related to your contract business? Can you document/prove these expenses?
Did you contribute to an HSA or a tIRA in the last year? or can you in the near future?
Do you have a mortgage or student loan interest to write off? Property taxes? other taxes?

As an independent contractor you must pay self employment tax / FICA . That's the deal. You should factor this tax 'estimate' into your hourly rate or fees you charge in the future.

You have to pay this $ because you will want social security and medicare when you retire. The reason it hurts is because in the past your employer paid it for you. Clearly you are making more $ but don't have someone else paying the FICA.

On a side point I will say that if you really made $100k last year, paying $27K is a not that much unless you didn't plan for it and spent it all......
bhsince87
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Re: self employed tax question

Post by bhsince87 »

You must pay the 15% or so "self employment tax" in addition to what you would normally pay as "income tax" .

It's actually only around 12% when deducted properly.

When you worked as a W-2 employee, you paid half of this and your employer paid the other half, but it was noted in a separate box on your W-2.

Now that you're self employed, you're responsible for paying all of it.

Welcome to the real wold....
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colddeadfish
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Re: self employed tax question

Post by colddeadfish »

bhsince87 wrote: Wed Jan 02, 2019 10:08 pm You must pay the 15% or so "self employment tax" in addition to what you would normally pay as "income tax" .

It's actually only around 12% when deducted properly.

When you worked as a W-2 employee, you paid half of this and your employer paid the other half, but it was noted in a separate box on your W-2.

Now that you're self employed, you're responsible for paying all of it.

Welcome to the real wold....
+1
I don't make anywhere near 100k a year but with deductions I pay around 12% with the new tax minimums.
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

thx for all the input...ok, so here is where i'm at....

i quit my job and i'm doing telemedicine. and for 2019 i believe i can somehere between 240- 260k+ using 4 different telemedicine platform.

our income bracket most likely will be 165000-315000 24% bracket if filed jointly.
i was planning to file separately because my wife would save money on student loan payments if she does income-driven plan (she makes so little). but i guess that idea is sailed since filing jointly would save us more money.


ok, so is my question - is there anyway to save more $ on taxes... :D like becoming a corporation or do LLC? :shock: i mean technically my telemedicine can become a business if i wanted to...

and let's say somehow i become 37% bracket then the thought of paying that much to the government really makes me feel nauseated...



well thx for all the input guys!! :sharebeer
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

colddeadfish wrote: Wed Jan 02, 2019 9:58 pm
Bones_Jones wrote: Wed Jan 02, 2019 9:21 pm ok, so i live in washington with no state tax.

let's say i made 100k as an independent contractor.

how much tax do i pay?

turbo tax say i have to 27.3k


i want to know why i have to pay 27.3k...
Hi, I have been self employed for several years. 15% of gross income is a good place to start..but you will certainly have multiple deductions.

Questions:
Did you pay quarterly estimated taxes in the past year?
Did you have any expenses (gas/travel, equipment, fees, licenses, insurance)? related to your contract business? Can you document/prove these expenses?
Did you contribute to an HSA or a tIRA in the last year? or can you in the near future?
Do you have a mortgage or student loan interest to write off? Property taxes? other taxes?

As an independent contractor you must pay self employment tax / FICA . That's the deal. You should factor this tax 'estimate' into your hourly rate or fees you charge in the future.

You have to pay this $ because you will want social security and medicare when you retire. The reason it hurts is because in the past your employer paid it for you. Clearly you are making more $ but don't have someone else paying the FICA.

On a side point I will say that if you really made $100k last year, paying $27K is a not that much unless you didn't plan for it and spent it all......
thx! no i haven't paid qtrly estimated taxes... are there any benefits to it?
i plan to tackle all the deduction and stuff. :) my state license alone gonna be like $5000.

27k still sounds so much, but i just entered bunch of random expenses and deductions and it went down to like 19k. i know i can deduct alot of things :sharebeer
Katietsu
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Re: self employed tax question

Post by Katietsu »

Well, the good news is that you do not pay the 12.4% social security part of it on any earnings over $132900. Of course, there is an additional Medicare tax of 0.9% if your income is over $200,000 single or $250,000 married.
Katietsu
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Re: self employed tax question

Post by Katietsu »

It sounds like you are going to be charged penalties for not having made estimated tax payments. I would seriously consider hiring someone to help you with this. You can then do it yourself in the future.
Spirit Rider
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Re: self employed tax question

Post by Spirit Rider »

You should really think about engaging a professional for tax preparation and tax planning.

After the end of the year is not a good time to start to ask about tax issues. Your questions indicate a lack of any knowledge about self-employment.

As has been pointed out, the 15.3% Self-Employment (SE) taxes are just the substitution for the 7.65 % FICA paid by both a W-2 employee and their employer.

Like W-2 employees, you still have to pay federal and possibly state/local income taxes on your taxable income.

These all require the payment of estimated taxes. Your failure to pay estimated taxes is likely to result in penalties.
tibbitts
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Re: self employed tax question

Post by tibbitts »

Spirit Rider wrote: Thu Jan 03, 2019 1:08 am You should really think about engaging a professional for tax preparation and tax planning.

After the end of the year is not a good time to start to ask about tax issues. Your questions indicate a lack of any knowledge about self-employment.

As has been pointed out, the 15.3% Self-Employment (SE) taxes are just the substitution for the 7.65 % FICA paid by both a W-2 employee and their employer.

Like W-2 employees, you still have to pay federal and possibly state/local income taxes on your taxable income.

These all require the payment of estimated taxes. Your failure to pay estimated taxes is likely to result in penalties.
I'll second that suggestion. You may be an expert at your profession, but you're entirely out of your element when it comes to finances. You need professional help. Also due to the nature of your employment, you need to makes sure you have your liability bases covered.
Spirit Rider
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Re: self employed tax question

Post by Spirit Rider »

I would add that forming an LLC will not save you any taxes. By default a single member LLC is taxed as a sole proprietor.

With ~$250K in net profit an S-Corp is likely to cost you more in taxes. This is because you "reasonable" compensation will need to be close to or > the SS maximum wage base. This means any minimal S-Corp savings you might have in Medicare taxes will be dwarfed by the reduced QBI deduction the S-Corp will have compared to a sole proprietor.

It is too late to adopt a one-participant 401k for the 2018 tax year, but you can still adopt a SEP IRA. You can contribute up to 20% of your net self-employment earnings (business profit - 1/2 SE tax).

This is probably the only way at this point to significantly reduce your taxes for 2018. However, it will require more dollars to make the contribution than you will save in taxes. You will need to have the money to contribute.
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

Katietsu wrote: Thu Jan 03, 2019 1:05 am It sounds like you are going to be charged penalties for not having made estimated tax payments. I would seriously consider hiring someone to help you with this. You can then do it yourself in the future.
i became self employed around august. so i had to pay taxes in advance? oh my gawd. i had no idea... :oops:

ok, so if i hire someone to do my taxes how much $ am i looking at? :shock: my wife never had to do estimated tax payments and she was a sole prop for past 10 years... we just did turbo tax.

is estimated tax payments a recent thing?
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

Spirit Rider wrote: Thu Jan 03, 2019 1:36 am I would add that forming an LLC will not save you any taxes. By default a single member LLC is taxed as a sole proprietor.

With ~$250K in net profit an S-Corp is likely to cost you more in taxes. This is because you "reasonable" compensation will need to be close to or > the SS maximum wage base. This means any minimal S-Corp savings you might have in Medicare taxes will be dwarfed by the reduced QBI deduction the S-Corp will have compared to a sole proprietor.

It is too late to adopt a one-participant 401k for the 2018 tax year, but you can still adopt a SEP IRA. You can contribute up to 20% of your net self-employment earnings (business profit - 1/2 SE tax).

This is probably the only way at this point to significantly reduce your taxes for 2018. However, it will require more dollars to make the contribution than you will save in taxes. You will need to have the money to contribute.
thx. i guess i'll stay sole prop then.

i started SEP IRA recently. but since our tax bracket is 165000 - 315000 24%, it won't really matter much, no? even if i max contribute i'm still gonna be in that 24% bracket...
uclalien
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Re: self employed tax question

Post by uclalien »

Bones_Jones wrote: Thu Jan 03, 2019 1:53 am i started SEP IRA recently. but since our tax bracket is 165000 - 315000 24%, it won't really matter much, no? even if i max contribute i'm still gonna be in that 24% bracket...
This comment and some of your earlier comments make me think you don't understand how marginal tax brackets work. You don't pay 24% on all of your taxable income.

https://www.fool.com/taxes/2018/12/10/w ... ckets.aspx

For married filing jointly, you pay 10% on the first $19,400 of taxable income, 12% on taxable income from $19,401-$78,950, 22% on taxable income from $78,951-$168,400, 24% on taxable income from $168,401-$321,450, etc.

While your marginal tax bracket may be 24%, your effective tax rate should be much lower (plus FICA/self-employment taxes). In other words, for every $100 you put into a pre-tax retirement account, you are likely to reduce your federal tax liability by $24. (until your taxable income drops below $168,401). In addition, you will reduce your state tax liability as well.

Either way, I echo the sentiments of others. You should hire a tax accountant until you have a better handle on how taxes work.
Spirit Rider
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Re: self employed tax question

Post by Spirit Rider »

Bones_Jones wrote: Thu Jan 03, 2019 1:42 am my wife never had to do estimated tax payments and she was a sole prop for past 10 years... we just did turbo tax.

is estimated tax payments a recent thing?
No, estimated taxes are not recent.

However, you have two ways to ensure your total MFJ tax liabilty is made in a timely manner. Estimated tax payments are made quarterly and count for the quarter they are received for. Tax withholding it treated as if was made equally during the whole year. The sum of these must reach one of the safe harbor or you have under paid your taxes and are subject to penalties.

If your wife was self-employed for 10 years. Was her SE income significant?

Either you had a sufficient withholding rate from a W-2 job to cover her SE taxes and marginal taxes on her SE income. Or TurboTax calculated under payment penalties each year and you paid them without realizing it.
Katietsu
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Re: self employed tax question

Post by Katietsu »

Going forward, an individual 401k with a Backdoor Roth is probably better than a SEP IRA. Also, does your wife have a individual 401k? This is a topic to discuss with your tax advisor. Find one that can help you with these topics and not just doing your tax return retroactively. Discuss your expenses for your business- which ones are deductible and what records to keep. Pay for good advice now. You may able to take over in the future.
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

uclalien wrote: Thu Jan 03, 2019 2:22 am
Bones_Jones wrote: Thu Jan 03, 2019 1:53 am i started SEP IRA recently. but since our tax bracket is 165000 - 315000 24%, it won't really matter much, no? even if i max contribute i'm still gonna be in that 24% bracket...
This comment and some of your earlier comments make me think you don't understand how marginal tax brackets work. You don't pay 24% on all of your taxable income.

https://www.fool.com/taxes/2018/12/10/w ... ckets.aspx

For married filing jointly, you pay 10% on the first $19,400 of taxable income, 12% on taxable income from $19,401-$78,950, 22% on taxable income from $78,951-$168,400, 24% on taxable income from $168,401-$321,450, etc.

While your marginal tax bracket may be 24%, your effective tax rate should be much lower (plus FICA/self-employment taxes). In other words, for every $100 you put into a pre-tax retirement account, you are likely to reduce your federal tax liability by $24. (until your taxable income drops below $168,401). In addition, you will reduce your state tax liability as well.

Either way, I echo the sentiments of others. You should hire a tax accountant until you have a better handle on how taxes work.


thx. i'll take a look into tax accountant, but turbo tax seems pretty easy... and it seems like it covers all the basis. from now till the deadline, i have time to do some home work. :sharebeer
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

Spirit Rider wrote: Thu Jan 03, 2019 2:51 am
Bones_Jones wrote: Thu Jan 03, 2019 1:42 am my wife never had to do estimated tax payments and she was a sole prop for past 10 years... we just did turbo tax.

is estimated tax payments a recent thing?
No, estimated taxes are not recent.

However, you have two ways to ensure your total MFJ tax liabilty is made in a timely manner. Estimated tax payments are made quarterly and count for the quarter they are received for. Tax withholding it treated as if was made equally during the whole year. The sum of these must reach one of the safe harbor or you have under paid your taxes and are subject to penalties.

If your wife was self-employed for 10 years. Was her SE income significant?

Either you had a sufficient withholding rate from a W-2 job to cover her SE taxes and marginal taxes on her SE income. Or TurboTax calculated under payment penalties each year and you paid them without realizing it.
her income has been inconsistent and not really significant. and i worked till May so i should have sufficient withholding. well i hope so.

so from now on i should pay estimated tax payments quarterly? that sucks. :x
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Bones_Jones
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Re: self employed tax question

Post by Bones_Jones »

Katietsu wrote: Thu Jan 03, 2019 10:46 am Going forward, an individual 401k with a Backdoor Roth is probably better than a SEP IRA. Also, does your wife have a individual 401k? This is a topic to discuss with your tax advisor. Find one that can help you with these topics and not just doing your tax return retroactively. Discuss your expenses for your business- which ones are deductible and what records to keep. Pay for good advice now. You may able to take over in the future.
we now only have sep IRA and we are planning to max contribute to sep ira only for now. i was advised here to do sep ira :happy
oh well, i'll just keep SEP IRA for now and see how it goes.

i was hoping to get advises from you guys. :D i'll have some time to homework. hopefully i'll learn the material fast!
BusterMcTaco
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Re: self employed tax question

Post by BusterMcTaco »

Bones_Jones wrote: Thu Jan 03, 2019 10:41 pm thx. i'll take a look into tax accountant, but turbo tax seems pretty easy... and it seems like it covers all the basis. from now till the deadline, i have time to do some home work. :sharebeer

TurboTax didn't warn you that you had to pay estimated taxes (fortunately, probably not so bad if you only started in August). TurboTax might help you reduce penalties by filing the right form indicating that you earned your self-employment income in the latter part of the year, but you would have to know to fill that part out. TurboTax doesn't advise you about a SEP-IRA, solo 401(k), managing your QBI threshold, and whether forming an LLC and then whether electing S Corp taxation makes sense.

If you want to DIY, you have to actually do the work. Coming to this forum is a start but our advice won't make you an expert overnight. You have to read, read, read, and start understanding this. Or, you could pay someone around $1000 and get good advice from someone who knows what s/he's doing. You've probably already cost yourself several multiples of that in tax inefficiencies and penalties last year alone.
Spirit Rider
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Re: self employed tax question

Post by Spirit Rider »

Bones_Jones wrote: Thu Jan 03, 2019 10:46 pm her income has been inconsistent and not really significant. and i worked till May so i should have sufficient withholding. well i hope so.

so from now on i should pay estimated tax payments quarterly? that sucks. :x
It is unlikely that your withholding up to May will be anywhere near enough to even cover your June - December income taxes, let alone the SE taxes .

You should at a minimum do a proforma tax return using your W-2 wages/withholding and your self-employment income. Then you should pay estimated taxes by 1/15. You will be paying the amount you should have paid for the third quarter on 9/15 late, but the 4th quarter on-time by 1/15. This will significantly reduce your penalties.

The amount should be one of your safe harbors for 2018 tax liability - your W-2 withholding from January to May. You should be able to get your W-2 withholding from your last pay stub.

Yes, for 2019 and beyond, you will have to pay quarterly estimated taxes. I don't know why you think this is a bad thing. You are still paying far later each quarter than W-2 withholding would be.
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Wricha
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Re: self employed tax question

Post by Wricha »

Bones_Jones wrote: Wed Jan 02, 2019 9:10 pm hi guys,

i'm self-employed. i'll be filing married separately. my first time being self-employed.

and i'm little confused. every self employment or 1099 tax calculator says self employment tax is 15.3%

IRS says it's 15.3%
The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
https://www.irs.gov/businesses/small-bu ... care-taxes


but when i entered 1099 to turbo tax(i don't have real 1099 yet, i just guestimated) the rate was like 27.3%+. :shock:




let's say i made 100k as self employed. how much taxes do i have to pay not counting deductions and credits? shouldn't it be 15.3k?

:confused
Bones,
Get a tax accountant. You can spend an inordinate amount of time trying to understand tax codes in the end you are going to pay a boat load of taxes, irrespective of how much you know about tax law. It is far easier for you to do a few more procedures per month and pay a tax expert to do your taxes. I have been lucky to be in a similar situation as you my entire career (retired). Given the information provided, count on effective tax rate of 33%. If you come in lower than you will be happy. Even in retirement, given your income over a career you are going to be subject to “unfair tax treatment” that’s how the systems works.

Actionable: Get your spouse and a few close friends together (ply them alcohol) and you have 30 minutes to tell them how screwed up the tax system is (which I agree) and then never talk about it again. It will make everyone happier.
simas
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Re: self employed tax question

Post by simas »

Recommend listening to what Spirit Rider suggestions. Also, I would strongly recommend treating this seriously , you are running a business in the eyes of the authority. Focus on what you do great, think of what you need to offload, and hire help as needed and where needed.

Business has revenue and has expenses, hopefully the difference between revenue and expense is positive and is called your profit on which you will pay taxes on. Business (on discretion of the owner(s)) can provide various programs/benefits to its personnel , including retirement plan , health insurance, etc. Retirement benefits (solo 401k, etc) could be very significant part of your planning as both helping you save (a lot) and reducing taxes.

I will give you my example (if interested ) - I provide solutions (design, development, delivery, program, project, product management and implementation) in data and analytics space, meaning I am the guy that gets called when things are on the line for key deliveries promised and they do not work in reporting or analytics. big bosses cant get their bonuses, little people will get fired, so consultants are brought it to assess and fix 'performance'. Sometimes it is actually performance, more often than not it is bad design, bad architecture, lack of any planning so you are fixing and re-engineering this as you go.

my business has revenue in terms of payments for services (either 'fixed bid' or time and materials based on statements of work we agree to). my business has normal expenses of traveling to client site (mandatory at kick off and finally at delivery, and occasional throughout the project for face to face meetings). When I meet clients and we go to lunch, I pay (so that is 'entertainment' expense ). When I am not on client site(s), I work from home office so relevant expenses are deductible as well .To maintain the relevance and expertise I have to be at the top of my field so I pay for training, conferences, and hardware/lab environment to learn and keep the knowledge of how technologies develop and apply (also to test scenarios). It used to be that I had to buy servers, now I can rent them from company like Microsoft and pay for what is needed when it is needed. convenient. I maintain solo401k plan through discountsolo401k that I pay annual fee for to ensure it continues to be reviewed, updated, and in compliance with IRS regulations.

What I learned about myself
- focus on what I do great, offload the rest and not try to be in too many places at the same time
- my value is not in saving $20 by trying to figure out how to manually submit 1099R to IRS (there is a service for that that I can login online and use very affordable), or be the best expert on 401k plans and keep afloat of all regulations and changes (there is a company that does it)
- have general idea of what it is (i.e. regardless of what does your taxes , it is you who is ultimately responsible for them), and use specialists where specialists are relevant
- pay for qualified help upfront, in my experience it is MUCH cheaper than correcting issues after the fact
- use automation/shared services/cloud where it makes sense. in the scope of things, these are pennies that make my life my easier and simple

So sit down and think about how you want to run your business. what is your competency, what you need to figure out, where you need help and do that.
Topic Author
Bones_Jones
Posts: 126
Joined: Thu Aug 11, 2016 2:27 pm

Re: self employed tax question

Post by Bones_Jones »

hi guys,

i thank you for all the input here. i learned so much(still long long ways to go!). i didn't even know what the marginal tax rate was. that's how clueless i'm. this year i'm doing turbo tax and it's all good. and i considered hiring a pro, but i thought turbo tax wasn't too bad. i didn't make much last year, did all the deductions and done. looks like 2018 tax is done. and i'm feeling more confident regarding doing my own taxes.

but

it looks like our income for 2019 will be closer to 400k.. maybe even more if i work harder... it's a huge jump in my income. i could even make up to 450k if i seriously do nothing but work.

i should be very happy making a big jump in my income, but i kinda feel :x because of the thought of paying huge amount taxes is making me nauseous.

one poster mentioned that i'll be better off being a sole prop if the profit is 250k. but now that we are making a big jump should we consider an LLC or s corp? is staying sole prop the best way to do it?


any kind of advise is appreciated! :sharebeer
Last edited by Bones_Jones on Sun Feb 17, 2019 2:13 am, edited 1 time in total.
Lafder
Posts: 4127
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: self employed tax question

Post by Lafder »

Does your work in the different states mean you have to pay income tax in those states?

Are you licensed in all of the states you are "practicing" in ?

Are there gross receipts taxes on any states you are practicing in? (In my state, payments made directly to the Dr from the patient are taxed sales tax as purchases in stores :())

I do a lot of my accounting and paperwork myself. But I did meet with an accountant the first year who also helped set me straight on what expenses to keep track of for deductions, and when estimated taxes are due. I still get all of the numbers to an accountant for taxes. They give me my estimated tax payment slips for the year and always set the payments 10% over last year so no penalties are due if I underestimated. ((This is called the Safe Harbor Rule I believe)).

Indeed you may be good at turbo tax. But there are too many things you do not know that you need an expert to help you with at least just to get set up.

A solo401k allows you too put 62k into retirement accounts pretax, that lowers your taxable income by that much to put it away to grow. (it is 56k if you are under 50) A solo 401k allows you to put away into retirement accounts as the employer and employee as long as you only have a spouse employee at most and no other employees. At your tax rate, not paying tax on that much is a nice chunk of change in your retirement account!

Yes it hurts my stomach to send my estimated tax payments too!

lafder
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: self employed tax question

Post by Spirit Rider »

Most states have a physical presence test for state income taxation. Only Delaware, Nebraska, New York, and Pennsylvania have a convenience of the employer test for telecommuting income taxation. Also, there is an exception for telecommuting that is mandatory which would seem to be implied by telemedicine.
colonialrampage
Posts: 21
Joined: Tue Aug 21, 2018 12:38 am

Re: self employed tax question

Post by colonialrampage »

I'm not an expert here, but I have been self-employed for the last 8 years or so and here are the top things I would keep in mind:

1. It is painful paying quarterly taxes. It is much less painful if you set that money aside in a savings account little by little as you get paid. When it comes time to write the big check the money is already there (and you get some interest for your trouble).
2. For 2019 set up a Solo 401k. If you're a solo business making a lot of money you can put a lot into your retirement and decrease your tax liability.
3. Section 199A (which was part of the Trump tax plan) is extremely beneficial for solo businesses. But it is also extremely complicated maybe especially in a situation like yours where your business relies on your individual skill rather than capital expenditures and makes a lot of money. Which leads to...
4. When you're a solo business you either do everything yourself or you hire someone to do it for you. If you decide to do everything yourself and get audited you can't just tell your finance department to take care of it. Before you even get to all the penalties you may end up owing, think of all the time you'd spend not working and making money while you get your documentation together. I strongly agree with previous posters who say it's worth it to hire an expert. You can learn some of the expert's tips and tricks and take over taxes in the future when you know what you need but maybe not year 1.

Good luck.
spectec
Posts: 1828
Joined: Mon Jul 14, 2014 8:00 am

Re: self employed tax question

Post by spectec »

I'm not sure if anyone has mentioned this because I only scanned the comments. But it's important conceptually to understand the MARGINAL cost of the self-employment tax, because it is actually slightly less than 7.65%.

If you were an employee, your employer would withhold 7.65% and your employer would then pay the matching 7.65% over and above your salary. So when you calculate the self-employment tax you are effectively only picking up the employer portion as an additional expense. Furthermore the effective overall S/E rate is really about 14.1% and your effective marginal S/E rate is 6.45% because you get to deduct a portion of the self-employment tax as an adjustment to income. I calculate it that way because you're going to pay the first 7.65% under any scenario. (Also, the net 14.1% estimate may be a little high, depending upon your income tax rate.)

The number seem huge only because you are seeing the end result in black and white. If you are an employee, withholding-at-the-source somewhat masks the actual amount of total taxes you are paying into the separate buckets unless you take the time to add up everything at year-end.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: self employed tax question

Post by Spirit Rider »

colonialrampage wrote: Thu Feb 14, 2019 2:05 am I'm not an expert here, but I have been self-employed for the last 8 years or so and here are the top things I would keep in mind:

1. It is painful paying quarterly taxes. It is much less painful if you set that money aside in a savings account little by little as you get paid. When it comes time to write the big check the money is already there (and you get some interest for your trouble).
This is probably the worst advice in this thread.

It you don't pay estimated taxes you will pay an under payment penalty far greater than any possible interest you might earn.

4% Q1/18, 5% Q2/18, 5% Q3/18, 5% Q4/18 and 6% Q1/19.
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: self employed tax question

Post by SuzBanyan »

Spirit Rider wrote: Thu Feb 14, 2019 9:42 am
colonialrampage wrote: Thu Feb 14, 2019 2:05 am I'm not an expert here, but I have been self-employed for the last 8 years or so and here are the top things I would keep in mind:

1. It is painful paying quarterly taxes. It is much less painful if you set that money aside in a savings account little by little as you get paid. When it comes time to write the big check the money is already there (and you get some interest for your trouble).
This is probably the worst advice in this thread.

It you don't pay estimated taxes you will pay an under payment penalty far greater than any possible interest you might earn.

4% Q1/18, 5% Q2/18, 5% Q3/18, 5% Q4/18 and 6% Q1/19.
I think colonialrampage was only suggesting setting aside money from every customer payment into a separate account, then using that account to pay quarterly estimated taxes. So money goes into the account maybe 24 times a year and comes out 4 times a year to pay estimated taxes and earns a little interest in-between.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: self employed tax question

Post by Spirit Rider »

SuzBanyan wrote: Thu Feb 14, 2019 9:55 am
Spirit Rider wrote: Thu Feb 14, 2019 9:42 am
colonialrampage wrote: Thu Feb 14, 2019 2:05 am I'm not an expert here, but I have been self-employed for the last 8 years or so and here are the top things I would keep in mind:

1. It is painful paying quarterly taxes. It is much less painful if you set that money aside in a savings account little by little as you get paid. When it comes time to write the big check the money is already there (and you get some interest for your trouble).
This is probably the worst advice in this thread.

It you don't pay estimated taxes you will pay an under payment penalty far greater than any possible interest you might earn.

4% Q1/18, 5% Q2/18, 5% Q3/18, 5% Q4/18 and 6% Q1/19.
I think colonialrampage was only suggesting setting aside money from every customer payment into a separate account, then using that account to pay quarterly estimated taxes. So money goes into the account maybe 24 times a year and comes out 4 times a year to pay estimated taxes and earns a little interest in-between.
In re-reading after your note, I believe you might be right. I guess I never considered doing it any other way. I always saved 50%-60% of every client payment. Then I would pay estimated SE/income taxes and one-participant 401k contributions each quarter.
colonialrampage
Posts: 21
Joined: Tue Aug 21, 2018 12:38 am

Re: self employed tax question

Post by colonialrampage »

Spirit Rider wrote: Thu Feb 14, 2019 9:42 am
colonialrampage wrote: Thu Feb 14, 2019 2:05 am I'm not an expert here, but I have been self-employed for the last 8 years or so and here are the top things I would keep in mind:

1. It is painful paying quarterly taxes. It is much less painful if you set that money aside in a savings account little by little as you get paid. When it comes time to write the big check the money is already there (and you get some interest for your trouble).
This is probably the worst advice in this thread.

It you don't pay estimated taxes you will pay an under payment penalty far greater than any possible interest you might earn.

4% Q1/18, 5% Q2/18, 5% Q3/18, 5% Q4/18 and 6% Q1/19.
By "the big check" I meant the quarterly payments. Sorry for any confusion.

Very early in solo ventures lots of people get caught up in the "wow, this is a big check" idea. Pulling it out right away to save for taxes is the big idea.
Topic Author
Bones_Jones
Posts: 126
Joined: Thu Aug 11, 2016 2:27 pm

Re: self employed tax question

Post by Bones_Jones »

Lafder wrote: Wed Feb 13, 2019 11:19 pm Does your work in the different states mean you have to pay income tax in those states?

Are you licensed in all of the states you are "practicing" in ?

Are there gross receipts taxes on any states you are practicing in? (In my state, payments made directly to the Dr from the patient are taxed sales tax as purchases in stores :())

I do a lot of my accounting and paperwork myself. But I did meet with an accountant the first year who also helped set me straight on what expenses to keep track of for deductions, and when estimated taxes are due. I still get all of the numbers to an accountant for taxes. They give me my estimated tax payment slips for the year and always set the payments 10% over last year so no penalties are due if I underestimated. ((This is called the Safe Harbor Rule I believe)).

Indeed you may be good at turbo tax. But there are too many things you do not know that you need an expert to help you with at least just to get set up.

A solo401k allows you too put 62k into retirement accounts pretax, that lowers your taxable income by that much to put it away to grow. (it is 56k if you are under 50) A solo 401k allows you to put away into retirement accounts as the employer and employee as long as you only have a spouse employee at most and no other employees. At your tax rate, not paying tax on that much is a nice chunk of change in your retirement account!

Yes it hurts my stomach to send my estimated tax payments too!

lafder

i have license in 5 states, but 2 of them are no tax states. and i know doctors who have licenses in 40+ states. i'll double check, but it would really suck if i have to pay state taxes when i work from home in the state of washington.

somebody advised me SEP IRA is better than solo 401k in my case, so i just went with it. i know it's simpler to set up and max contribution is about the same.

so should switch it to solo 401k? what are the major advantages of solo 401k over SEP IRA :?: i know i can borrow from loan from it, but i don't think i need that.

and for this year regardless of hiring pros or not i should overestimate the estimated tax, right? that would really suck... :x
Topic Author
Bones_Jones
Posts: 126
Joined: Thu Aug 11, 2016 2:27 pm

Re: self employed tax question

Post by Bones_Jones »

and back to my other question - so i guess s corp is no go? i really liked the idea of paying a reasonable salary to my wife and myself...
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: self employed tax question

Post by Spirit Rider »

Using an S-Corp and paying yourself a reasonable salary does not change your income taxation. Both your W-2 wages and distributions are subject to ordinary income taxes. An S-Corp only reduces your employment taxes.

For an S-Corp 2% shareholder-employee's W-2 wages above the SS maximum wage base (MWB), 2019 = $132,900. The employment tax savings of an S-Corp is only 2.9% (3.8% > $250K).

However, with the new 199A 20% QBI deduction even that advantage is reduced/removed. While a sole proprietor's QBI is their business profit - 1/2 SE tax - self-employed health insurance deduction - deductible retirement plan contributions. An S-Corp 2% shareholder-employee's QBI is limited to their distributions maybe less.

The bottom line for a 199A SSTB with a reasonable salary > the SS MWB and eligible for the QBI deduction. An S-Corp is counter-productive.
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