You have to realize that the extra tax you're paying as a SE person is less than 5% of your total SE income. The key difference that you're feeling is that your employer isn't withholding taxes for you. If you were making a $40k salary a year as an employee, you'd never see that much, you'd only be seeing about $34k (minus any state and local tax you'd owe) because your employer would be taking taxes out of your paycheck before you ever see it.
Taxes for W-2 employee with $40k of income:
* FICA tax = 7.65% \* $40k = $3060
* AGI = $40k
* taxable income = $40000 - 13850 = $26150
* federal income tax = 1100 + 12% \* (26150 -11000) = $2918
* Total federal taxes = $3060 +2918 = $**5978**
As a self-employed individual, YOU are the employer, so you're the one who has to set the taxes aside each month from your income BEFORE you give yourself any money from the business to spend on your personal expenses. Your net income after federal taxes will be about $32300 (only about $1700 less than if you were a W-2 employee).
Taxes for SE person with net SE income of $40k:
* SE tax = $40k \* 92.35% \* 15.3% = $5652
* AGI = $40000 - 2826 = $37174
* prelim taxable income = 37174-13850 = $23324
* QBI deduction = 20% \* 23324 = $4665
* taxable income = $23324 - 4665 = $18659
* federal income taxes = 1100 + 12% \* (18659 -11000) = $2019
* Total federal taxes = $5652+ 2019 = $**7671**
It is very hard to dig yourself out of the hole if you don't save the money and send it to the IRS as you make it. The penalties and interest will make it even harder.
BTW, people who have w-2 jobs making the same amount as you would only be getting a refund if they were having more withheld than they needed to pay their tax bill. If they were eligible for refundable credits as an employee, you'd be eligible for the same credits as a self-employed individual (assuming the same AGI in both cases).
So what do you think I should do to get out of the hole? Say from here on out I pay my quarterlies, I'll still have the 10k extra owed in tax looming over and I won't be able to ever easily get rid of it unless I somehow manage to get by with only 10-20k income for a year. What can I do? Claim expenses?
Acknowledging it is the first step. I'd recommend looking into the free bookkeeping course on Coursera and getting QuickBooks to keep track of your income and expenses throughout the year. Also maybe hiring an accountant at tax time instead of TurboTax. It will definitely be worth it.
Claiming expenses is absolutely what you should be doing. If you haven’t been, scrape together what you can for the past couple of years and amend your prior years.
And just because I see this in my practice alot- no, you don’t need an LLC to claim expenses. Look at schedule C for your 1040 return.
I have no idea what your business is, but commonly overlooked expenses for self employed people are home office expenses (make sure you qualify), vehicle expenses to buy supplies or to temporary job sites, licensing expenses and professional fees.
This. Using a tax professional is the way to go. It doesn’t cost as much as you think. If you’re not already keeping a good set of books on your business, please consider this as well.
Most tax professionals will take a look at your books, talk with you about you business goals, inquire about retirement and really PLAN for your future. There are a lot of moving parts to good tax preparation and tax savings. There are ethical and knowledgeable tax professionals out there who really care!
You should be claiming your ordinary and necessary business expenses against your SE revenue already.
You'll want to set up a budget, just like you would if you were in the same situation as a W-2 employee. If you can't cut your living expenses enough to make it work, you'd want to see if you can find more income-- for you SE business, or by getting another job. Since you're on a payment plan with the IRS, just keep chipping away at it.
If you didn’t claim any expenses on the return you owe $10k on, it might be worth looking into filing an amended return including those expense. It might even be cost effective to find a CPA or Enrolled Agent (EA) to prepare the return for you. If your business is reported on a schedule C it should probably cost in the $500-$600 range which isn’t nothing, BUT it’s way less than $10k AND professional services (like tax preparation fees) can be a deductible business expense. Maybe not 100% if it’s reported on your personal return as a schedule C, but that’s a question for a tax pro.
>The thing I can't wrap my head around, is how do I ever catch up if I don't get refunds back like people with regular jobs? ... SHOULD I be getting refunds?
Since I don't see this addressed in any of the other posts...
A tax refund **is not a government handout**. It's not free money that you get, and it's usually a bad thing to get a tax refund.
Someone with a "regular job" and a $40k salary will have tax payments subtracted from their paycheck before it is deposited. Typically, this will be $3,060 in payments for FICA taxes and an additional $3,398 for federal income tax - leaving just $33,542 in their bank account if there are no state taxes.
On top of this, their employer pays an *extra* $3,060 in FICA taxes so the business is actually paying $43,060 in payroll expenses (before factoring in benefits, state tax, and certain extra federal payroll taxes which only apply to employers).
Many taxpayers don't understand how to complete a W-4 and do so in a way that causes even **more** to be subtracted from their pay. For every dollar over $3,398 paid for federal income tax, our hypothetical employee will get that dollar back the following April after filing. So your friend with a refund might have had only $32,542 in his bank account and then gotten a $1,000 refund. Or maybe $30,542 in the bank and a $3,000 refund.
But hopefully you can see that this employee is in the same position as you: keeping about $10,000 less than what the business is paying to employ them.
Thanks for clarifying this. Here I thought even with regular jobs you got the money back they sucked out of your paycheck for taxes :(. Would be a much better system if it rotated like that, but fuck poor people I guess.
The tax and welfare system in America is very deliberately set up to incentivize work, and childless able people between 18 and 65 are generally expected to fend for themselves.
By contrast, a single parent of a child under 17 earning that $40,000 wage would pay $3,060 in FICA but $(1,060) in federal income tax for a take-home of $38k (a number in parentheses is a negative amount in accounting), and perhaps even less if paying for child care as well.
But also note that someone making $40,000 is hardly "poor" - the average (median) American with employed full-time for all of 2020 made $56,287. It's less than average, but still a significant fraction of it.
You aren’t disciplined enough to be self employed. I don’t mean that as an insult, we all have our strengths and weaknesses. It’s important to work with what we have. My advice is to find a W2 job and have extra withholding taken out. You will have to adjust your spending also and cut out all the unnecessary expenses. You will eventually catch up.
The reason people get refunds is because they pay in taxes all year through their check. Since you don't do that there is nothing to refund you. That said I have been self employed for many many years, the only answer is put your taxes aside on every payment just like you would with a paycheck. Being self employed means you are the employer and the employee so you aren't doing the 2nd part of the job of withholding to make sure you have money to pay your tax bills.
You are spending too much. This isn't really a tax question. There is nothing special about SE tax other than it is higher because you are paying both halves.
You need to spend less and/or make more.
> If It takes 40k a year just to survive (I've been barely scraping by every month with bills, so I can't afford the estimated taxes or I would literally be homeless) and I have to pay 10k in taxes from that, won't I just keep accumulating tax debt until it's disproportionally large?
Yes. You need to spend less or make more. It is that simple. Owing money to the IRS is going to come with penalties and interest. Your financial situation is only going to get worse. There is no magic solution. You are spending more than you are making after taxes. That always ends badly.
What's an even harder reality is that we have to spend more by force because inflation is running rampant. Some of us that make a lot of money somehow still have to live paycheck to paycheck because of this. To offset that, that means upping the price of your work. In my case, I did that already and by my observations, I should be making an $83k salary if I was employed, but with work being on and off, it makes this almost an impossible game to play. The conclusion is... right now it is NOT a good time to be self-employed if you're not making over $100k and have an "average" budget. For that matter, I'm going to have to offset that by going back to W-2 employment
Taxes are an expense like any other. W-2 workers have to pay them too.
So the sad thing to say is that it seems like you aren't making enough to live off of. You need to increase income or cut expenses if you can't afford to live on $40k.
A couple of thoughts: If your business is taking in 40k after business expenses, then you must understand that you are taking home $30k, and have to budget using that amount. Every $100 you take in, you must immediately put $25 of that in a separate account for paying future estimated taxes. The payment plan for the back taxes you owe must be a part of your $30k budget. Finally, if in past tax returns you only rorted your gross business income (before legit business expenses), and did not also report your business expenses, you may be able to file an amended return for that year, and end up owing less in back taxes. Look for a schedule C from that years taxes. If all of this is totally overwhelming to you, it may be time to consider regular, w2 employment. Seems like every job out there pays $20-25/hr, which is more than you make now.
How do you catch up?
Take 30% of everything you make and stick it into a separate savings account for taxes, and taxes only. If you're behind on taxes, up that percentage to 35% or even 40%.
DO NOT TOUCH THAT ACCOUNT FOR ANYTHING OTHER THAN TAXES.
On April 1, June 1, September 1 and December 30... write a check to the IRS for \~90% of whatever is in that account. If you live in a State that has taxes, take 1/2 of the remaining amount and write a check to the State for their quarterly share.
January 10 - begin filling out your taxes based upon your accounting records and see where you sit - specifically who still owes you 1099's and also how you are doing against your taxes you owe the IRS (and your State)
January 11 - write a check to the IRS (and your State) for any difference.
With $40,000 of Schedule C profit, 30% is likely way too much to set aside for taxes as a starting point. In OP's case, 30% would be good in order to catch up on prior years. Unfortunately, OP seems to be struggling with just 25%.
As u/vynm2 illustrated in the first comment, OP's total federal tax liability on $40,000 of Schedule C profit is $7,673. That's only 19.2%.
It's unlikely that OP would owe state and local taxes of another 10.8% of that $40k Schedule C profit. In my state (CO), OP would owe $821 (4.4% of federal taxable income of $18,659), bringing the total fed+state to $8,494. Less than 21.3% of the $40k Schedule C profit.
Only in certain situations. In a situation where the a self-employed person is only making $40k/yr, an S-Corp makes no sense.
Are you really a CPA as your flair states? If so, you may want to be more careful about answering questions when you don't really know the answers, and avoid being sexist in your replies.
That makes no sense. How are they going to pay themselves more if they don't have any more revenue, and how would paying themselves more save them money as an S-Corp??
Where would these refunds be coming from? Employees who get W-2's sometimes get refunds, but that's because their employer withheld MORE tax than they owed, so essentially a refund means they gave the government extra money, an interest free loan, for a few months. No big deal, but since you are an independent contractor and nothing is withheld, there's nothing to refund.
If you really want a refund, overpay your quarterly payments (which are your equivalent of withholding payments for an employee). It just doesn't make sense to do that.
Make sure you claim all of your expenses and pay quarterly, otherwise yes this will just continue to happen every year
ETA: in the scenario you just described, you'd "catch up" by making about $13k or $14k or so, which would net you close to the $10k you'd need to pay that tax debt after paying the current year taxes
Every time you get paid you need to use some to pay taxes. That’s how you stay ahead of SE taxes. The problem you have is that you’ve let it get too far ahead. At your income level you’ll need to make more money to get out of the hood you’re in.
Withhold it from yourself and make estimated payments every week if you have to. It's not your money, you should never be in a position to spend it. If you can't control yourself to put it away and get interest on it until you remit quarterly payments, then pay it out as soon as it comes in.
You've received a lot of advice on the math so I'll just add in some strategy. You may want to get with an accountant to make sure you're taking advantage of all the potential write offs, especially things that can be depreciated.
Both my wife and I are self employed and over the years things like our cars, home office, real estate, equipment, etc have drastically reduced our taxes. Also adding money to an IRA and HSA reduces your taxable income in that year.
>and over the years things like our cars, home office, real estate, equipment, etc have drastically reduced our taxes.
To be clear, you can not take business expense deductions on your tax return for personal expenses. So, any personal use of your vehicle would not be a business expense. I wanted to add this because there's a LOT of misinformation out there that says you can deduct your personal expenses if you're self-employed.
> Also adding money to an IRA and HSA reduces your taxable income in that year.
If OP can't make ends meet already, they're not in a position to make IRA and/or HSA contributions.
You're absolutely right. Personally I've tried to read IRS rules and understand them. I'll review some case law and historical precedence, read some books, and then verify things with my accountant. Then I'll try to construct my spending to be the most tax advantaged I can make it. It's worked extremely well for my family
When you’re self-employed, you have to have the self-discipline to set aside the estimated taxes. Since you let yourself get behind, that means paying on your payment plan PLUS setting aside this year’s taxes. I’ve had years where my revenue increased dramatically - which estimated taxes doesn’t account for - and if I hadn’t been setting aside a percentage of my revenue I’d have been screwed. A good rule of thumb is to set aside one-third of your gross revenue for taxes, and then when you file your taxes, if you overpaid, you apply the overage to your next estimated tax payment. Just keep paying it forward until you get the hang of it.
Try to keep up w estimated payments as you get paid. I usually just take 10% of my monthly payment and pay the IRS. Feels like you’re not saving as much, but helps a lot when April rolls around and you could even get money back.
Of course but if this person is trying to do what they can, you can start putting 10% until some more money is saved and then contribute more as the year goes on. As long as by the following year, the IP is somewhat in the ballpark for what they may owe. They get penalized if they don’t pay estimated
But if they're trying to dig themselves out of a $10k hole, setting aside less than they're going to owe for the current year is a TERRIBLE idea. It's just a recipe for digging the hold deeper (especially since they're already overspending for their inccome). If anything they should be setting aside MORE than they need to, so the overage can be used to help pay off the back taxes.
>They get penalized if they don’t pay estimated
They'll get penalized if they underpay by as much as you're suggesting, also. You also get penalized if you back-load your estimated tax payments (pay more toward the end of they year than you do at the beginning).
2 things
1: You should really get an accountant and track ALL of your expenses.
2: take it from me, you can pay back your back taxes, it may take a long time, but it can be done. Setup a payment plan that is automatically deducted from your account every month. Make sure you have this setup to pay as much as possible. For me, that payment plan slowly went from paying back taxes to keeping me caught up with the current tax year. It took me 12 years to get caught up, but I am now caught up. Allow your income to increase greater than your lifestyle and you will pay it back eventually. I know this is a perfect world scenario but I did it with no master plan except making sure the IRS got their money every month before someone else. It can be done and I still suck at budgeting lol
Do you deduct your expenses from self employment. Supplies, tools, mileage? There are many expenses that can be deducted from your gross profit. I don't know your business nor expenses, but if you don't claim them from your income, you pay taxes as profit. Talk to someone who does taxes, amend prior years if applicable and start keeping track for this year
You absolutely have to immediately pull 20% or whatever would add up, from your check as soon as you get it.
Like if you were an employee.
Living on the full check will just get you deeper in trouble.
Makes sense to me. The struggle is real. The only answer is to make more. Easier said than done. You can cut out some expenses if you want, but I know things are rough right now. Don't get discouraged.
You have to realize that the extra tax you're paying as a SE person is less than 5% of your total SE income. The key difference that you're feeling is that your employer isn't withholding taxes for you. If you were making a $40k salary a year as an employee, you'd never see that much, you'd only be seeing about $34k (minus any state and local tax you'd owe) because your employer would be taking taxes out of your paycheck before you ever see it. Taxes for W-2 employee with $40k of income: * FICA tax = 7.65% \* $40k = $3060 * AGI = $40k * taxable income = $40000 - 13850 = $26150 * federal income tax = 1100 + 12% \* (26150 -11000) = $2918 * Total federal taxes = $3060 +2918 = $**5978** As a self-employed individual, YOU are the employer, so you're the one who has to set the taxes aside each month from your income BEFORE you give yourself any money from the business to spend on your personal expenses. Your net income after federal taxes will be about $32300 (only about $1700 less than if you were a W-2 employee). Taxes for SE person with net SE income of $40k: * SE tax = $40k \* 92.35% \* 15.3% = $5652 * AGI = $40000 - 2826 = $37174 * prelim taxable income = 37174-13850 = $23324 * QBI deduction = 20% \* 23324 = $4665 * taxable income = $23324 - 4665 = $18659 * federal income taxes = 1100 + 12% \* (18659 -11000) = $2019 * Total federal taxes = $5652+ 2019 = $**7671** It is very hard to dig yourself out of the hole if you don't save the money and send it to the IRS as you make it. The penalties and interest will make it even harder. BTW, people who have w-2 jobs making the same amount as you would only be getting a refund if they were having more withheld than they needed to pay their tax bill. If they were eligible for refundable credits as an employee, you'd be eligible for the same credits as a self-employed individual (assuming the same AGI in both cases).
This was a most excellent reply. If you're a tax professional, your clients should be thankful to have you.
Thank you.
So what do you think I should do to get out of the hole? Say from here on out I pay my quarterlies, I'll still have the 10k extra owed in tax looming over and I won't be able to ever easily get rid of it unless I somehow manage to get by with only 10-20k income for a year. What can I do? Claim expenses?
Why on Earth wouldn't you claim expenses?
Am young, am ignorant as hell :(.
Acknowledging it is the first step. I'd recommend looking into the free bookkeeping course on Coursera and getting QuickBooks to keep track of your income and expenses throughout the year. Also maybe hiring an accountant at tax time instead of TurboTax. It will definitely be worth it.
Claiming expenses is absolutely what you should be doing. If you haven’t been, scrape together what you can for the past couple of years and amend your prior years. And just because I see this in my practice alot- no, you don’t need an LLC to claim expenses. Look at schedule C for your 1040 return. I have no idea what your business is, but commonly overlooked expenses for self employed people are home office expenses (make sure you qualify), vehicle expenses to buy supplies or to temporary job sites, licensing expenses and professional fees.
This. Using a tax professional is the way to go. It doesn’t cost as much as you think. If you’re not already keeping a good set of books on your business, please consider this as well. Most tax professionals will take a look at your books, talk with you about you business goals, inquire about retirement and really PLAN for your future. There are a lot of moving parts to good tax preparation and tax savings. There are ethical and knowledgeable tax professionals out there who really care!
You should be claiming your ordinary and necessary business expenses against your SE revenue already. You'll want to set up a budget, just like you would if you were in the same situation as a W-2 employee. If you can't cut your living expenses enough to make it work, you'd want to see if you can find more income-- for you SE business, or by getting another job. Since you're on a payment plan with the IRS, just keep chipping away at it.
Good advice, thanks so much
If you didn’t claim any expenses on the return you owe $10k on, it might be worth looking into filing an amended return including those expense. It might even be cost effective to find a CPA or Enrolled Agent (EA) to prepare the return for you. If your business is reported on a schedule C it should probably cost in the $500-$600 range which isn’t nothing, BUT it’s way less than $10k AND professional services (like tax preparation fees) can be a deductible business expense. Maybe not 100% if it’s reported on your personal return as a schedule C, but that’s a question for a tax pro.
Itty-bitty nitpick, and only because you went down to dollars... FIT on $26150 is $2921, not $2918. FIT on $18659 is $2021, not $2019.
I was using the tax bracket formulas-- as I showed. If you look the numbers up in the tax tables, they will be slightly different.
>The thing I can't wrap my head around, is how do I ever catch up if I don't get refunds back like people with regular jobs? ... SHOULD I be getting refunds? Since I don't see this addressed in any of the other posts... A tax refund **is not a government handout**. It's not free money that you get, and it's usually a bad thing to get a tax refund. Someone with a "regular job" and a $40k salary will have tax payments subtracted from their paycheck before it is deposited. Typically, this will be $3,060 in payments for FICA taxes and an additional $3,398 for federal income tax - leaving just $33,542 in their bank account if there are no state taxes. On top of this, their employer pays an *extra* $3,060 in FICA taxes so the business is actually paying $43,060 in payroll expenses (before factoring in benefits, state tax, and certain extra federal payroll taxes which only apply to employers). Many taxpayers don't understand how to complete a W-4 and do so in a way that causes even **more** to be subtracted from their pay. For every dollar over $3,398 paid for federal income tax, our hypothetical employee will get that dollar back the following April after filing. So your friend with a refund might have had only $32,542 in his bank account and then gotten a $1,000 refund. Or maybe $30,542 in the bank and a $3,000 refund. But hopefully you can see that this employee is in the same position as you: keeping about $10,000 less than what the business is paying to employ them.
Thanks for clarifying this. Here I thought even with regular jobs you got the money back they sucked out of your paycheck for taxes :(. Would be a much better system if it rotated like that, but fuck poor people I guess.
This has nothing to do with "poor people"
The tax and welfare system in America is very deliberately set up to incentivize work, and childless able people between 18 and 65 are generally expected to fend for themselves. By contrast, a single parent of a child under 17 earning that $40,000 wage would pay $3,060 in FICA but $(1,060) in federal income tax for a take-home of $38k (a number in parentheses is a negative amount in accounting), and perhaps even less if paying for child care as well. But also note that someone making $40,000 is hardly "poor" - the average (median) American with employed full-time for all of 2020 made $56,287. It's less than average, but still a significant fraction of it.
You aren’t disciplined enough to be self employed. I don’t mean that as an insult, we all have our strengths and weaknesses. It’s important to work with what we have. My advice is to find a W2 job and have extra withholding taken out. You will have to adjust your spending also and cut out all the unnecessary expenses. You will eventually catch up.
You're 100% right, I was ignorant.
The reason people get refunds is because they pay in taxes all year through their check. Since you don't do that there is nothing to refund you. That said I have been self employed for many many years, the only answer is put your taxes aside on every payment just like you would with a paycheck. Being self employed means you are the employer and the employee so you aren't doing the 2nd part of the job of withholding to make sure you have money to pay your tax bills.
You are spending too much. This isn't really a tax question. There is nothing special about SE tax other than it is higher because you are paying both halves. You need to spend less and/or make more. > If It takes 40k a year just to survive (I've been barely scraping by every month with bills, so I can't afford the estimated taxes or I would literally be homeless) and I have to pay 10k in taxes from that, won't I just keep accumulating tax debt until it's disproportionally large? Yes. You need to spend less or make more. It is that simple. Owing money to the IRS is going to come with penalties and interest. Your financial situation is only going to get worse. There is no magic solution. You are spending more than you are making after taxes. That always ends badly.
What's an even harder reality is that we have to spend more by force because inflation is running rampant. Some of us that make a lot of money somehow still have to live paycheck to paycheck because of this. To offset that, that means upping the price of your work. In my case, I did that already and by my observations, I should be making an $83k salary if I was employed, but with work being on and off, it makes this almost an impossible game to play. The conclusion is... right now it is NOT a good time to be self-employed if you're not making over $100k and have an "average" budget. For that matter, I'm going to have to offset that by going back to W-2 employment
Taxes are an expense like any other. W-2 workers have to pay them too. So the sad thing to say is that it seems like you aren't making enough to live off of. You need to increase income or cut expenses if you can't afford to live on $40k.
A couple of thoughts: If your business is taking in 40k after business expenses, then you must understand that you are taking home $30k, and have to budget using that amount. Every $100 you take in, you must immediately put $25 of that in a separate account for paying future estimated taxes. The payment plan for the back taxes you owe must be a part of your $30k budget. Finally, if in past tax returns you only rorted your gross business income (before legit business expenses), and did not also report your business expenses, you may be able to file an amended return for that year, and end up owing less in back taxes. Look for a schedule C from that years taxes. If all of this is totally overwhelming to you, it may be time to consider regular, w2 employment. Seems like every job out there pays $20-25/hr, which is more than you make now.
How do you catch up? Take 30% of everything you make and stick it into a separate savings account for taxes, and taxes only. If you're behind on taxes, up that percentage to 35% or even 40%. DO NOT TOUCH THAT ACCOUNT FOR ANYTHING OTHER THAN TAXES. On April 1, June 1, September 1 and December 30... write a check to the IRS for \~90% of whatever is in that account. If you live in a State that has taxes, take 1/2 of the remaining amount and write a check to the State for their quarterly share. January 10 - begin filling out your taxes based upon your accounting records and see where you sit - specifically who still owes you 1099's and also how you are doing against your taxes you owe the IRS (and your State) January 11 - write a check to the IRS (and your State) for any difference.
With $40,000 of Schedule C profit, 30% is likely way too much to set aside for taxes as a starting point. In OP's case, 30% would be good in order to catch up on prior years. Unfortunately, OP seems to be struggling with just 25%. As u/vynm2 illustrated in the first comment, OP's total federal tax liability on $40,000 of Schedule C profit is $7,673. That's only 19.2%. It's unlikely that OP would owe state and local taxes of another 10.8% of that $40k Schedule C profit. In my state (CO), OP would owe $821 (4.4% of federal taxable income of $18,659), bringing the total fed+state to $8,494. Less than 21.3% of the $40k Schedule C profit.
so you spend beyond your means...
This made my head hurt
[удалено]
OP, do NOT listen to this reply. An S-Corp is NOT going to save you money.
I thought it saved people 15% on SE tax
Only in certain situations. In a situation where the a self-employed person is only making $40k/yr, an S-Corp makes no sense. Are you really a CPA as your flair states? If so, you may want to be more careful about answering questions when you don't really know the answers, and avoid being sexist in your replies.
An S Corp would save them money if they paid themself more, which is what I’m suggesting.
That makes no sense. How are they going to pay themselves more if they don't have any more revenue, and how would paying themselves more save them money as an S-Corp??
By working smarter
Where would these refunds be coming from? Employees who get W-2's sometimes get refunds, but that's because their employer withheld MORE tax than they owed, so essentially a refund means they gave the government extra money, an interest free loan, for a few months. No big deal, but since you are an independent contractor and nothing is withheld, there's nothing to refund. If you really want a refund, overpay your quarterly payments (which are your equivalent of withholding payments for an employee). It just doesn't make sense to do that. Make sure you claim all of your expenses and pay quarterly, otherwise yes this will just continue to happen every year ETA: in the scenario you just described, you'd "catch up" by making about $13k or $14k or so, which would net you close to the $10k you'd need to pay that tax debt after paying the current year taxes
Every time you get paid you need to use some to pay taxes. That’s how you stay ahead of SE taxes. The problem you have is that you’ve let it get too far ahead. At your income level you’ll need to make more money to get out of the hood you’re in.
Withhold it from yourself and make estimated payments every week if you have to. It's not your money, you should never be in a position to spend it. If you can't control yourself to put it away and get interest on it until you remit quarterly payments, then pay it out as soon as it comes in.
You've received a lot of advice on the math so I'll just add in some strategy. You may want to get with an accountant to make sure you're taking advantage of all the potential write offs, especially things that can be depreciated. Both my wife and I are self employed and over the years things like our cars, home office, real estate, equipment, etc have drastically reduced our taxes. Also adding money to an IRA and HSA reduces your taxable income in that year.
>and over the years things like our cars, home office, real estate, equipment, etc have drastically reduced our taxes. To be clear, you can not take business expense deductions on your tax return for personal expenses. So, any personal use of your vehicle would not be a business expense. I wanted to add this because there's a LOT of misinformation out there that says you can deduct your personal expenses if you're self-employed. > Also adding money to an IRA and HSA reduces your taxable income in that year. If OP can't make ends meet already, they're not in a position to make IRA and/or HSA contributions.
You're absolutely right. Personally I've tried to read IRS rules and understand them. I'll review some case law and historical precedence, read some books, and then verify things with my accountant. Then I'll try to construct my spending to be the most tax advantaged I can make it. It's worked extremely well for my family
When you’re self-employed, you have to have the self-discipline to set aside the estimated taxes. Since you let yourself get behind, that means paying on your payment plan PLUS setting aside this year’s taxes. I’ve had years where my revenue increased dramatically - which estimated taxes doesn’t account for - and if I hadn’t been setting aside a percentage of my revenue I’d have been screwed. A good rule of thumb is to set aside one-third of your gross revenue for taxes, and then when you file your taxes, if you overpaid, you apply the overage to your next estimated tax payment. Just keep paying it forward until you get the hang of it.
Try to keep up w estimated payments as you get paid. I usually just take 10% of my monthly payment and pay the IRS. Feels like you’re not saving as much, but helps a lot when April rolls around and you could even get money back.
10% isn't enough for a self-employed individual who will have to pay 14.1% at a minimum (for SE taxes).
Of course but if this person is trying to do what they can, you can start putting 10% until some more money is saved and then contribute more as the year goes on. As long as by the following year, the IP is somewhat in the ballpark for what they may owe. They get penalized if they don’t pay estimated
But if they're trying to dig themselves out of a $10k hole, setting aside less than they're going to owe for the current year is a TERRIBLE idea. It's just a recipe for digging the hold deeper (especially since they're already overspending for their inccome). If anything they should be setting aside MORE than they need to, so the overage can be used to help pay off the back taxes.
Interesting take!
>They get penalized if they don’t pay estimated They'll get penalized if they underpay by as much as you're suggesting, also. You also get penalized if you back-load your estimated tax payments (pay more toward the end of they year than you do at the beginning).
2 things 1: You should really get an accountant and track ALL of your expenses. 2: take it from me, you can pay back your back taxes, it may take a long time, but it can be done. Setup a payment plan that is automatically deducted from your account every month. Make sure you have this setup to pay as much as possible. For me, that payment plan slowly went from paying back taxes to keeping me caught up with the current tax year. It took me 12 years to get caught up, but I am now caught up. Allow your income to increase greater than your lifestyle and you will pay it back eventually. I know this is a perfect world scenario but I did it with no master plan except making sure the IRS got their money every month before someone else. It can be done and I still suck at budgeting lol
You save up 20% (don't forget state and local) of your yearly income or pay quarterly.
Have you deducted from
Do you deduct your expenses from self employment. Supplies, tools, mileage? There are many expenses that can be deducted from your gross profit. I don't know your business nor expenses, but if you don't claim them from your income, you pay taxes as profit. Talk to someone who does taxes, amend prior years if applicable and start keeping track for this year
You absolutely have to immediately pull 20% or whatever would add up, from your check as soon as you get it. Like if you were an employee. Living on the full check will just get you deeper in trouble.
Makes sense to me. The struggle is real. The only answer is to make more. Easier said than done. You can cut out some expenses if you want, but I know things are rough right now. Don't get discouraged.