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tax for self employment

Posted: Thu Jul 09, 2020 8:27 am
by viewer0
Hi

My daughter earned ~5K on W2 and also earned ~$600 selling art , which resulted in a 1099-K from PayPal. While filling out the tax forms, I was surprised to see a federal self employment tax of $82 on the $600 ( and no tax on the W2 income). Is that expected ? I thought that if you earn less than a threshold, you do not pay any tax. I have claimed her as my dependent, if that matters, and filed my taxes separately.

Thanks

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:31 am
by muddgirl
There are multiple criteria for filing an income tax return. One is net self employment earnings over $400. Once you meet any of the filing requirements (or if you choose to file a return to reclaim withheld taxes), all self employment income must be reported and is taxed.

Make sure to reduce the 1099 revenue by expenses. Does she actually need to file a return?

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:44 am
by jfave33
It is expected unfortunately. Welcome to self employment.

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:47 am
by jebmke
jjface wrote: Thu Jul 09, 2020 8:44 am It is expected unfortunately. Welcome to self employment.
W2 income is subject to the same taxes on first dollar. It just comes out differently.

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:48 am
by retiredjg
Self employment tax is specifcally paying the Social Security tax and Medicare tax. In her W2 job, these would have already been withheld by her employer. When you have 1099 income like this, you pay it yourself.

https://www.irs.gov/businesses/small-bu ... care-taxes


Agree that your daughter needs to calculate her net income - after expenses - because her SE tax is based on that.

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:49 am
by sailaway
Your child will likely not owe any income tax, which is separate from payroll taxes. And being self employed, they need to pay both the employee and the employer portion of those payroll taxes that show on the W-2 as FICA.

I disagree slightly with the wording of previous posters: the child will need to report the whole 1099, but can reduce the taxable portion by filling out the appropriate schedule to deduct expenses.

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:53 am
by viewer0
Thanks for all the insights. I went to this questionnaire https://www.irs.gov/help/ita/do-i-need- ... tax-return if I need to file a tax and the result was :

"You are not required to file a tax return because your income does not equal or exceed $5,750, nor do you owe any special taxes or have any special situations that require you to file."

I did not get any question regarding self employment earnings, they asked for earned income and unearned income, which bucket does this self employment income fall under ?

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:06 am
by jfave33
jebmke wrote: Thu Jul 09, 2020 8:47 am
jjface wrote: Thu Jul 09, 2020 8:44 am It is expected unfortunately. Welcome to self employment.
W2 income is subject to the same taxes on first dollar. It just comes out differently.
True but you pay double as self employed since the employer doesn't pay half. It is a big chunk.

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:21 am
by retiredjg
sailaway wrote: Thu Jul 09, 2020 8:49 am I disagree slightly with the wording of previous posters: the child will need to report the whole 1099, but can reduce the taxable portion by filling out the appropriate schedule to deduct expenses.
You are right. My wording was poor. :oops:

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:25 am
by muddgirl
viewer0 wrote: Thu Jul 09, 2020 8:53 am I did not get any question regarding self employment earnings, they asked for earned income and unearned income, which bucket does this self employment income fall under ?
Self employment income is earned income.

When it asked for employment status did you answer that she was BOTH employed and self-employed? I took the quiz and it did ask me if my net self-employment earnings were over $400.

Yes the whole 1099 is reported but I believe when they ask for net earnings for filing requirements, that is 1099 income minus expenses.

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:45 am
by jebmke
jjface wrote: Thu Jul 09, 2020 9:06 am
jebmke wrote: Thu Jul 09, 2020 8:47 am
jjface wrote: Thu Jul 09, 2020 8:44 am It is expected unfortunately. Welcome to self employment.
W2 income is subject to the same taxes on first dollar. It just comes out differently.
True but you pay double as self employed since the employer doesn't pay half. It is a big chunk.
yes; but that is just a framing issue and a pricing issue. If you are self-employed, you are the employer.

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:47 am
by viewer0
When it asked for employment status did you answer that she was BOTH employed and self-employed? I took the quiz and it did ask me if my net self-employment earnings were over $400.

That was my mistake perhaps, as I chose NEITHER. I chose that as she is a full time student.

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:54 am
by jfave33
jebmke wrote: Thu Jul 09, 2020 9:45 am
jjface wrote: Thu Jul 09, 2020 9:06 am
jebmke wrote: Thu Jul 09, 2020 8:47 am
jjface wrote: Thu Jul 09, 2020 8:44 am It is expected unfortunately. Welcome to self employment.
W2 income is subject to the same taxes on first dollar. It just comes out differently.
True but you pay double as self employed since the employer doesn't pay half. It is a big chunk.
yes; but that is just a framing issue and a pricing issue. If you are self-employed, you are the employer.
Sure but doesn't change the fact that you personally pay double and so it will seem like a big chunk taken out.

But for the op they aren't escaping the employee portion from their w2 either

Re: tax for self employment

Posted: Thu Jul 09, 2020 10:05 am
by arcticpineapplecorp.
viewer0 wrote: Thu Jul 09, 2020 8:27 am Hi

My daughter earned ~5K on W2 and also earned ~$600 selling art , which resulted in a 1099-K from PayPal. While filling out the tax forms, I was surprised to see a federal self employment tax of $82 on the $600 ( and no tax on the W2 income). Is that expected ? I thought that if you earn less than a threshold, you do not pay any tax. I have claimed her as my dependent, if that matters, and filed my taxes separately.

Thanks
I just ran taxcaster with the imputs you stated (source: https://turbotax.intuit.com/tax-tools/c ... taxcaster/)
1. marital status : single
2. head of household : no
3. age? I put 18 (actual unknown)
4. can someone claim you as a dependent: yes
5. what were your 2019 taxable wages : $5000
6. what were your federal withholdings : $0 (you didn't state, she probably had some withheld...tell you why in a sec)
7. Any state withholdings : answered no (not sure)
8. select all that applied to you in 2019 : choose "own a business/self employed"
9. net income loss : $600 (this would be less if she claims expenses)

result: estaimated taxes owed $85

So if she only owes $82, did she have some withholdings ($3)???

Re: tax for self employment

Posted: Thu Jul 09, 2020 10:30 am
by viewer0
That's perfect, I also have the same number. I just said $82 as I deducted some expenses from the income. So, yours match mine. Thanks for doing that, @ arcticpineapplecorp

Now in this relatively simple scenario, what software should I use, so that I do not get charged for the software and the filling fee. Turbo tax is charging me about $80 with upgrades.

Re: tax for self employment

Posted: Thu Jul 09, 2020 10:52 am
by muddgirl
I used FreeTaxUSA for my combined W2 and 1099 income. Not entirely as user friendly as TurboTax but pretty close. Federal is completely free and state is usually $10-12.

Re: tax for self employment

Posted: Thu Jul 09, 2020 11:44 am
by FiveK
viewer0 wrote: Thu Jul 09, 2020 10:30 am Now in this relatively simple scenario, what software should I use, so that I do not get charged for the software and the filling fee. Turbo tax is charging me about $80 with upgrades.
Consider you not using anything, but instead have your daughter fill the forms by hand. She should learn sometime, and now may be as good a time as any....

Re: tax for self employment

Posted: Thu Jul 09, 2020 12:35 pm
by OAG
Suggest Schedule C and Schedule C instructions downloaded from IRS Site as starting point.

https://www.irs.gov/forms-pubs/about-sc ... -form-1040

Re: tax for self employment

Posted: Thu Jul 09, 2020 12:57 pm
by trueblueky
jjface wrote: Thu Jul 09, 2020 9:54 am
jebmke wrote: Thu Jul 09, 2020 9:45 am
jjface wrote: Thu Jul 09, 2020 9:06 am
jebmke wrote: Thu Jul 09, 2020 8:47 am
jjface wrote: Thu Jul 09, 2020 8:44 am It is expected unfortunately. Welcome to self employment.
W2 income is subject to the same taxes on first dollar. It just comes out differently.
True but you pay double as self employed since the employer doesn't pay half. It is a big chunk.
yes; but that is just a framing issue and a pricing issue. If you are self-employed, you are the employer.
Sure but doesn't change the fact that you personally pay double and so it will seem like a big chunk taken out.

But for the op they aren't escaping the employee portion from their w2 either
It's not double; more like 14% than 14.7%. If you go thru the SE form, you can see that 1/2 of the SS is deducted in figuring the SS (you effectively subtract the "employer" part in figuring how much is subject to the tax) .

Then, on the W2, 1/2 of the SE amount is an adjustment to income, so the income tax is less.

If the income qualifies for QBI, the next $100 of income yields a little less than $75 of taxable income until you hit $137,700 in 2020, after which only Medicare applies.

If you are in the 22% bracket, you pay 16.5% marginal rate on next dollar of QBI income.

Re: tax for self employment

Posted: Thu Jul 09, 2020 1:16 pm
by arcticpineapplecorp.
viewer0 wrote: Thu Jul 09, 2020 10:30 am That's perfect, I also have the same number. I just said $82 as I deducted some expenses from the income. So, yours match mine. Thanks for doing that, @ arcticpineapplecorp

Now in this relatively simple scenario, what software should I use, so that I do not get charged for the software and the filling fee. Turbo tax is charging me about $80 with upgrades.
there's a program through the IRS called VITA (volunteer income tax assistance), source: https://www.irs.gov/individuals/find-a- ... e-tax-prep. I volunteer for this in my town. They may be closed now due to covid-19 (and it's getting close to the deadline of 7/15/20), but in the future, this may be a valuable resource for her for the following reasons:
1. it's free if her income is under the limits
2. she can ask someone who's been certified by the IRS as a volunteer tax preparer as many questions as she wants and learn about the process.
3. she can see that volunteers are needed in lots of different ways not just at breadlines/soup kitchens.

short of that, you could do free file or fillable forms with the IRS:
https://www.irs.gov/filing/free-file-do ... s-for-free

you would pick one of the IRS partners but it should be free for Fed and State only (before I got certified for VITA I used this for my own and my girlfriend's tax return and she has schedule C/self employment income, like your daughter).

let us know how it goes.

Re: tax for self employment

Posted: Thu Jul 09, 2020 4:00 pm
by boomer_techie
OAG wrote: Thu Jul 09, 2020 12:35 pm Suggest Schedule C and Schedule C instructions downloaded from IRS Site as starting point.
If it is still offered, see if C-EZ can be used instead.

Either way, she'll also need Form SE.

Re: tax for self employment

Posted: Thu Jul 09, 2020 8:50 pm
by viewer0
Thanks all. Going via one of the free filers listed ( Turbo tax)

She got a 1099-K from Paypal. Let's say the buyer paid $100 but she got $95 in hand as a result of a $5 PayPal fee. Can this $5 be deducted as an expense and hence only $95 will be taxable. This is pertaining to the self employment income.

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:00 pm
by sailaway
viewer0 wrote: Thu Jul 09, 2020 8:50 pm Thanks all. Going via one of the free filers listed ( Turbo tax)

She got a 1099-K from Paypal. Let's say the buyer paid $100 but she got $95 in hand as a result of a $5 PayPal fee. Can this $5 be deducted as an expense and hence only $95 will be taxable. This is pertaining to the self employment income.
That fee, plus anything she spent creating or obtaining the art that she sold can be deducted. If she paid shipping without being reimbursed by the seller, then that is deductible, as well.

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:25 pm
by viewer0
sailaway wrote: Thu Jul 09, 2020 9:00 pm
viewer0 wrote: Thu Jul 09, 2020 8:50 pm Thanks all. Going via one of the free filers listed ( Turbo tax)

She got a 1099-K from Paypal. Let's say the buyer paid $100 but she got $95 in hand as a result of a $5 PayPal fee. Can this $5 be deducted as an expense and hence only $95 will be taxable. This is pertaining to the self employment income.
That fee, plus anything she spent creating or obtaining the art that she sold can be deducted. If she paid shipping without being reimbursed by the seller, then that is deductible, as well.
Got it, thanks

Re: tax for self employment

Posted: Thu Jul 09, 2020 9:27 pm
by FiveK
She should have records that match the 1099-K. See Understanding Your Form 1099-K | Internal Revenue Service for some information.

If the 1099-K amount is the gross total (e.g., all the $100 buyer amounts) then as sailaway said your daughter may deduct all her business expenses. That happens when she fills out Schedule C.

Re: tax for self employment

Posted: Fri Jul 10, 2020 8:53 am
by viewer0
FiveK wrote: Thu Jul 09, 2020 9:27 pm She should have records that match the 1099-K. See Understanding Your Form 1099-K | Internal Revenue Service for some information.

If the 1099-K amount is the gross total (e.g., all the $100 buyer amounts) then as sailaway said your daughter may deduct all her business expenses. That happens when she fills out Schedule C.
Thanks

Re: tax for self employment

Posted: Fri Jul 10, 2020 9:07 am
by sled777
FreeTaxUsa.com works good