All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Valued Pioneer
Posts: 4
Registered: ‎03-15-2018
Accepted Solution

Self Employment Question - Do I have to pay for Quarterly Taxes

[ Edited ]

Hello,

 

In 2017 I started freelancing part time, but didn't really make that much money from it. I didn't pay my SE taxes quarterly that year, so I paid what I felt like I owed through my annual return (federal) just this past January (I only owed a couple hundred dollars). I believed I didn't have to pay federal and state income taxes because I didn't make enough to pay. I am a student and I am very new to this.

 

This year, I am freelancing full-time (started a little after I filed my federal return) and have made more money this quarter than I did through the entire 2017 year. I also believe I will have a livable income throughout 2018 - 2019 based on my job contract and possible side jobs.

 

With that being said, I wanted to know if I am required to file for quarterly taxes this April. I know that if you expect to owe more than $1,000 in taxes within the year, you are required to pay quarterly taxes, but I am not entirely sure how that works. If I multiply my current earnings for this quarter by 15.3%, that's lower than $1,000; if I multiply it by the 15.3% and the 22% (the bracket in which I believe I will fall in for federal income taxes this year), I get more than $1,000. This is the part I am confused about. The amount I owed last year is very little, so I don't think there is any point of referencing that for this year's taxes. I know SE taxes are federal, but do I pay it separately from federal income taxes? If I only need to pay quarterly taxes based upon the 15.3% condition, am I required to pay quarterly taxes this April? It's all jumbled to me.

 

Just to clear any confusion and save time, here are things that I do know:

-Employed people only pay half of their FICA while their employers pay the other half

-I assume FICA and SE are essentially the same things

-I use Schedule SE to figure out how much I owe quarterly

-I report earnings and make quarterly payments using Form 1040-ES

-I report profits/losses and file federal returns with Schedule-C and Form 1040

-I have to withhold a portion of my earnings for State Income, Fed Income, and SE Taxes (28% according to W9s?)

-I am a Sole Proprietor

-I have filled out W9s, I don't need to consider W2s and W4s

-I have received 1099-Misc papers, so I've made more than $400 or $600 from clients

-I don't think I qualify for any tax credits at the moment

-Self Employed people are allowed to have standard and business deductions

 

Things that I want clarification on:

-Federal Income Taxes: Pay Quarterly or Annually?

-How do I know for sure which federal income bracket I fall in if last year's earnings is little?

-Do I pay my federal income taxes--as I earn--after my income passes a certain amount or do I pay as I go like SE taxes?

-Is it true that I can only deduct up to 20% of my earnings off of my taxes?

-Would hiring a bookkeeper deal with future tax responsibilities for me?

 

I apologize if my list of questions are hefty, but I feel like I can't get and remember enough information sitting down with a tax professional for an hour. I am also not a tax professional, so don't take my information as advice for anyone that reads this.

 

-Orion

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Council Member
Posts: 548
Registered: ‎04-06-2016

Re: Self Employment Question - Do I have to pay for Quarterly Taxes

Orion, I'm going to answer your questions in blue text below...

Karen 


@orionvang

 wrote:

Hello,

 

In 2017 I started freelancing part time, but didn't really make that much money from it. I didn't pay my SE taxes quarterly that year, so I paid what I felt like I owed through my annual return (federal) just this past January (I only owed a couple hundred dollars). I believed I didn't have to pay federal and state income taxes because I didn't make enough to pay. I am a student and I am very new to this. (Yes all of this is correct for last year.)

 

This year, I am freelancing full-time (started a little after I filed my federal return) and have made more money this quarter than I did through the entire 2017 year. I also believe I will have a livable income throughout 2018 - 2019 based on my job contract and possible side jobs.

 

With that being said, I wanted to know if I am required to file for quarterly taxes this April. I know that if you expect to owe more than $1,000 in taxes within the year (this is for the entire year, not by quarter), you are required to pay quarterly taxes, but I am not entirely sure how that works. If I multiply my current earnings for this quarter by 15.3%, that's lower than $1,000 ; if I multiply it by the 15.3% and the 22% (the bracket in which I believe I will fall in for federal income taxes this year), I get more than $1,000. This is the part I am confused about. The amount I owed last year is very little, so I don't think there is any point of referencing that for this year's taxes. I know SE taxes are federal, but do I pay it separately from federal income taxes? You're on the right track so far.  I'll answer your question first and then clarify a few things that you're a little off on.  You'll pay your SE taxes and estimated income taxes all together when you make your estimated tax payment.  There is no distinction for someone who will report their income on a Schedule C with their 1040 income tax return. Since you expect to owe over $1000 total for the year, you should make estimated tax payments in order to avoid having to pay the penalty for underpayment of tax.  A couple other things to note-- when figuring the taxes you'll owe on your income each quarter, you'll always use 15.3% for the SE tax, but if you use 22% for all of your income, you'll WAY over pay for the year, because even if your total taxable income falls in the 22% tax bracket, much of your income will be taxed in the lower brackets. 

Here's a little bit more info about how you're income tax is calculated using the tax brackets, and how they work:

First, these are the tax brackets for 2018.

RateIndividualsMarried Filing Jointly
10%Up to $9,525Up to $19,050
12%$9,526 to $38,700$19,051 to $77,400
 22%38,701 to $82,500$77,401 to $165,000
24%$82,501 to $157,500$165,001 to $315,000

When going to use the tables, you need to first realize that the income in the tables is taxable income, not AGI.  Taxable income is basically AGI-your standard deduction (which is $12,000 for someone filing single in 2018). For tax years 2017 and earlier there was also a deduction for your exemption, but that was eliminated in the December tax law change.

 

For the purpose of my example I'm going to assume you'll be filing Single. I'm going to assume you're income is going to be $52,000/yr or $13,000/qtr, that this is your only source of income, and that you'll be claiming the standard deduction.  I'm also going to assume that you're not paying for your own health insurance. Your taxable income will be $52,000-12,000= $40,000. To figure your tax on this amount, you'll go to the table and calculate your tax as follows:

  • The first 9525 of your taxable income will be taxed at 10%, so the tax on that part will be 10%*9525= $952.50.
  • Next, the amount of your income >= $9526 and < $38700, will be taxed at 12%, so 12%*(38700-9525)= 12%*29175=$3501.
  • Finally, the amount of your income >= 38701 will be taxed at 22%, so 22%*(40000-38700)=22%*1300= $286.
  • To get your total income tax liability you'd add those three numbers together= 952.50+3501+286= $4739.50.  Which is MUCH less than 22% of $40,000= $8,800 or even 22% of $52,000= $11,440.

You'll also see tax tables formatted like this:

2018-2025 Tax Brackets for Single Filing Individuals

If taxable income is:Then the income tax equals:
Not over $9,52510% of taxable income
Over $9,525 but not over $38,700$952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500$4,453.50 plus 22% of the excess over $38,700

These are set to make it a little easier for you to figure your tax amount without having to calculate the amount in each individual tax bracket.  You'll notice in the table that the $952.50 we calculated earlier shows up in the second line as the amount to start with and then add 12% of the amount over $9525. This is because if you're in the 12% bracket you'll start with the 952.50 that we calculated and then figure the amount of tax you'll owe on the income that falls in the 12% bracket. If you add the amounts we calculated for "filling" the 10% and 12% brackets, 952.50+3501=$4453.50, you'll recognize the "starting" number for the third line (the 22% tax bracket).  To calculate your tax using a chart like this, you'd basically take the $4453.50 that we calculated for the first two brackets and add 22% of the excess over $38,700 (40,000-38700) and get the same number we got earlier: $4739.50.

 

Now that you understand that a little better, you may be wondering how you use this to figure your estimated tax payments.  Here's what I suggest:

Each quarter do the following:

  1. Take your income for the quarter and multiply it by 15.3% to get the SE tax for that quarter.
  2. Take your income and subtract $3000 (1/4 of the standard deduction) and figure the income tax you'd owe using the first table above on that amount of income. This can get tricky for the 2nd-4th quarters because you'll have to remember how your income is "stacking"-- going up the tax brackets.  For example, if you subtract the $3000 from your income to get $10,000 of taxable income in the first quarter, the top part of that would be in the 12% bracket. ($1009.50) That means if you earned the same amount-- $10,000 of taxable income in the second quarter, that income will basically be the amount from 10,000-20,000 in the table and will all be taxed at 12%. Likewise for the third and fourth quarters.  The other way of figuring the income tax for the 2nd-4th quarters would be to figure out the total income tax that would be due so far and then subtract what you've already paid for previous quarters.  For example, if at the end of the 2nd quarter, you had earned a total of $26000, you'd subtract $6000 (2 quarters of the quarterly amount of the standard deduction) and get $20,000 of taxable income. You could use either table above to figure the tax on that amount. (2209.50) and then subtract the amount you paid in the first quarter (1009.50) to get the amount you'd have to pay in the second quarter= $2209.50-1009.50=$1200.
  3. Add the amounts you got in Step 1 (SE tax) and the amount you got in Step 2 (income tax) and add them together. This would be the amount of your estimated tax payment for the quarter.

Now that you know the basic process and what's happening, you can look at Form 1040-ES and the instructions here: https://www.irs.gov/pub/irs-pdf/f1040es.pdf .  There are worksheets in that publication that will help walk you through the process of calculating the amount you should pay in estimated tax each quarter that I outlined above (plus a few intricacies I didn't cover because they're not exactly necessary for getting an estimate).

 

One more thing to consider, Estimated tax payments aren't due every three months-- I'm not exactly sure why.  They're due 4/15, 6/15, 9/15 and 1/15 (of the following year). So you can estimate the income amount for the full quarter or you can just use the amount since the last time you made a quarterly payment.  

 

 If I only need to pay quarterly taxes based upon the 15.3% condition, am I required to pay quarterly taxes this April? (You should file quarterly taxes in April, not because you're having to pay both SE and income tax, but because you expect to owe over $1000 for the year.) It's all jumbled to me.

 

Just to clear any confusion and save time, here are things that I do know:

-Employed people only pay half of their FICA while their employers pay the other half (yes, as a self-employed person, you get to pay both halves)

-I assume FICA and SE are essentially the same things (yes)

-I use Schedule SE to figure out how much I owe quarterly (not really)

-I report earnings and make quarterly payments using Form 1040-ES (you'll report only the amount of tax you're paying, not your earnings)

-I report profits/losses and file federal returns with Schedule-C and Form 1040 (yes)

-I have to withhold a portion of my earnings for State Income, Fed Income, and SE Taxes (28% according to W9s?<-- not sure what you mean by this.) You will need to withhold and make state estimated tax payments as well if your state has an income tax.  You can calculate them similar to the federal taxes, but it's likely that your state will also have a similar form to help you figure out how much you should pay.

-I am a Sole Proprietor

-I have filled out W9s, I don't need to consider W2s and W4s (Correct. You'll give a copy of your W-9 to anyone who's going to pay you money, so they can report the amount they pay you to the IRS. The W-9 will also give them the information they need to provide you with a 1099-Misc in January reporting the amount they paid you the previous year.)

-I have received 1099-Misc papers, so I've made more than $400 or $600 from clients (A client is only required to give you a 1099-Misc if they've paid you over $600. You're still required to report income from clients even if they don't give you a 1099-Misc.  Likewise, if you pay anyone else over $600 you'll need to give them a 1099-Misc and file copies with the IRS w/Form 1096 by the end of January each year.)

-I don't think I qualify for any tax credits at the moment

-Self Employed people are allowed to have standard and business deductions (Yes. You can take the standard deduction just like anyone else-- I talked about that above. And yes, you can deduct any usual and customary business expenses. In fact, you can deduct these expenses from your income on a quarterly basis when you go to figure your net income for your quarterly estimated tax payments.)

 

Things that I want clarification on:

-Federal Income Taxes: Pay Quarterly or Annually? Quarterly

-How do I know for sure which federal income bracket I fall in if last year's earnings is little? I think I this is probably no longer after my explanation above.

-Do I pay my federal income taxes--as I earn--after my income passes a certain amount or do I pay as I go like SE taxes? As you go, like SE taxes

-Is it true that I can only deduct up to 20% of my earnings off of my taxes? I'm not sure about this one yet since this is a new tax law change for 2018 as a result of the Dec tax law change.  It's my understanding that this will not affect your SE taxes, and that it won't change your AGI because it will be "handled" on page 2 of your 1040 return.  How exactly, I haven't seen enough reliable information to say.

-Would hiring a bookkeeper deal with future tax responsibilities for me? You could probably request a bookkeeper handle this for you as part of their responsibilities, but there's a good chance you could handle it yourself and save yourself some $$.  I think it's always a good idea, as a small business owner, to have a good understanding of the finances/tax responsibilities of your business and there's no better way than to do it yourself.  It might not be a bad idea to get someone who knows more than you periodically check your work over, but I'd suggest trying it yourself.

 

I apologize if my list of questions are hefty, but I feel like I can't get and remember enough information sitting down with a tax professional for an hour. I am also not a tax professional, so don't take my information as advice for anyone that reads this.

 

The IRS offers a publication for small business owners that you might find useful: https://www.irs.gov/pub/irs-pdf/p334.pdf . Also, I've found Nolo has good reliable information about small businesses and taxes-- they publish books and have a website with a lot of good info. https://www.nolo.com/legal-encyclopedia/sole-proprietor .

 

-Orion


 

Council Member
Posts: 548
Registered: ‎04-06-2016

Re: Self Employment Question - Do I have to pay for Quarterly Taxes

One other thing to consider if you've purchased your health insurance from the Marketplace.  Be aware that Self Employed Health Insurance (SEHI) premiums can be taken as an adjustment to income on page 1 of your return (this is true for any SEHI) assuming you have enough net profit from your business to cover them.  This will reduce your AGI and ultimately the tax you will owe. 

 

Iff yo purchase your SEHI from the marketplace the calculations for the amount you can take as an SEHI adjustment is an iterative process with the calculation for the amount of APTC (advance premium tax credit) you'll be eligible for.  If your income is going to be close to 400% FPL (federal poverty line) = $48,240 (4*$12060 (100%FPL)) you could run into a case where the iterative calculation could put you in a situation where you have to pay back any APTC you received during the year.  Just be careful and keep an eye on this when you get close to the end of the year.  There may be things you can do like push income into the next year or make self-employed retirement contributions for the year to bring yourself below the 400% FPL subsidy cliff.

 

Karen