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Thread: Estimated Taxes For Lower Income

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    Default Estimated Taxes For Lower Income

    Hi, sorry if this has been answered elsewhere, but I think I searched pretty decently for it to no avail?

    I feel a little dumb, but estimated taxes confuse me a bit, as in, am I required to pay them in the coming year? This was my first year doing taxes and, due to focusing on school over work(gonna get that diploma), my taxes were under $1000. The IRS site says that you aren't required to pay estimated taxes if you expect to owe tax of less than $1000 when you file your return. So, normally I would just go with...no, estimated taxes aren't required this coming year.

    However, while I owed less than $1000 for 2013, I'm planning on working much more in the coming year and will likely owe more than $1000.
    So, am I required to pay them? Is it more of a personal call? Would it be wiser to pay them?

    Thanks in advance~~~
    Normally, I'd go with my gut, but in cases involving the government and money, I'd rather look a little dumb on a forum than get audited.

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    Default Re: Estimated Taxes For Lower Income

    My understanding (and please correct me if I'm wrong ladies) comes from my father. He has an accounting degree and we have a CPA for our taxes, so I look to them for advice. I'm also a full-time student and I cam to pay the bills (plus a private PT vanilla job). Last year, I ended up having a refund of over $1,000, but this years income means I'll definitely owe come 2015. From what I found on the IRS website and what I was told by my father/his CPA, I don't have to make quarterly payments this year. The IRS says that if your reported taxes were $0 for last year (meaning no taxes/refund came to you this year), then you aren't required to make quarterly payments even if you'll end up owing taxes for next year (this year's pay). I believe you're also correct for under $1,000 taxes, as you mentioned, though I'd have to check as this didn't apply to me specifically. You can also pay lump sum each year (skip quarterly payments), but you risk being hit with an underpayment penalty if you underpay on your return. I need to find out more about how this part works, but my understanding from talking to the people in the know is that I'll be fine and the IRS will not be sending their Flying Audit & Fine Monkeys after me.

    Yay for being a student! Take that student tax credit and run with it, as I added 1k to my refund with that baby.


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    Default Re: Estimated Taxes For Lower Income

    ^^^ indeed there is a 'first year in business' exemption where newly formed businesses (i.e. independent contractor camgirls and dancers ) won't be penalized for failing to make quarterly estimated tax filings / payments. However, this does not exempt these businesses from actually paying the taxes due when the April 2015 deadline for 2014 tax returns arrives. All unincorporated businesses are essentially forced to pay a 15.3 % Social Security tax on every dollar of business income even if their income level, exemptions and deductions etc. reduce the level of income tax liability to zero. So in the absence of refundable tax credits this means that some amount of taxes will be due even on comparatively low levels of business income.

    The point of course is that even for very 'part time' dancers and camgirls who may only earn $200 a week = $10,000 per year, when next April 15th rolls around they may find themselves having to cough up $1000+ to pay the IRS. This is much less 'shocking' from a financial standpoint if it had been spread over four $250 estimated tax payments made once every 3 months.

    Being a college student under the age of 24 further increases the amount of taxes owed on an equal amount of income, because ( with a few exceptions ) the student is still considered to be a dependent of her parents and is thus unable to claim an exemption for herself on her own tax return ... which effectively lowers the income level at which point income taxes must be paid on top of Social Security taxes. And if you are a college student but still a dependent of your parents, it is your parents who get to claim the tuition tax credit not you !

    This FAFSA / IRS 'emancipation' issue for college students under age 24 is important, since it affects not only the student's taxes but also the parents' taxes, as well as the amount of student grant money FAFSA will approve based on 'total household income' ( i.e. the parents' income plus the student's income ). Messing up in regard to a 'dependent' student claiming a personal exemption on her own tax return, claiming a tuition tax credit on her own tax return, failing to report her income to her parents when the FAFSA student grant form is filled out, etc. is almost guaranteed to set the IRS monkeys flying ... toward both the student and the parents.
    Last edited by Melonie; 03-28-2014 at 03:46 AM.

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    Default Re: Estimated Taxes For Lower Income

    In nearly 25 years in business I have never been religious about quarterlies, I think one year I paid 4 quarterlies, but I kind of doubt it. Yes, paying the taxes in April is a drag, be prepared.

    Yes they fine you. They fined me this year. About 40 percent of the taxes were paid 'on time' , and partly because there was a spike in taxable income last year, the fine was 100 bucks, and shall we say it was a fractional percentage of the taxes owed. So provided you can pay the taxes on april 15th, I would not stress over quarterlies.

    I would rather have the money in the bank to be used [possibly in a way that reduces taxable income] than give it to the IRS

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    Default Re: Estimated Taxes For Lower Income

    Not to thread jack, but can you clarify the rules regarding college student 'emancipation' for me please? My understanding has been that I can file as single because I pay more than 50% of my own bills (virtually all of my bills, as a matter of fact). My father has covered my car insurance (bulk discount) and some tuition, but I have everything else under my control and live in a separate city. Talking to him, we decided that I would claim both my own exemption and my tuition tax credit on my tax return and he did not claim me or my tuition on his (no double dipping, basically). As an aside, I'm not using FAFSA/government funding for my tuition (I wouldn't have qualified under my father and on my own it was all loans I didn't need). So, yes, I'm curious about the exact rules for emancipation of a college student. I'm 21, for what that's worth, and filed separately from my parents for the first time last year.

    I'm personally all for doing a lump sum tax payment next year under the first year exemption. It's just less complicated for my math-illiterate brain to compute. After this year, I suspect I'll do quarterly payments based off of this year's income, but I'd rather do those estimates after I have a fair idea of what I'll actually make.

    Taxes are baffling. Me thinks I'll just keep my CPA very, very close.

    P.S. Add on question. Could some please explain to me the exact difference between doing quarterly payments versus lump sum? I keep hearing about the underpayment penalty, but I don't understand how that works if I correctly pay all of my 2014 taxes by the 2015 deadline or whatever year it happens to be. Thanks!


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    Default Re: Estimated Taxes For Lower Income

    Talking to him, we decided that I would claim both my own exemption and my tuition tax credit on my tax return and he did not claim me or my tuition on his (no double dipping, basically). As an aside, I'm not using FAFSA/government funding for my tuition (I wouldn't have qualified under my father and on my own it was all loans I didn't need). So, yes, I'm curious about the exact rules for emancipation of a college student. I'm 21, for what that's worth, and filed separately from my parents for the first time last year.
    If you have already successfully filed an 'independent' tax return claiming an exemption for yourself last year, and if you haven't utilized FAFSA in regard to student grant / gov't guaranteed student loan money, then you're probably OK to use the same filing status this year.

    The bit about FAFSA and official 'emancipation' goes as follows ...

    (snip)Being considered an independent student is not merely a matter of being responsible for your own educational expenses. You must meet at least one of the following seven criteria to be declared an independent student for the purposes of the FAFSA:

    Be 24 years of age or older by December 31 of the award year;
    Be an orphan (both parents deceased), ward of the court, or was a ward of the court until the age of 18;
    Be a veteran of the Armed Forces of the United States;
    Be a graduate or professional student;
    Be a married individual;
    Have legal dependents other than a spouse;
    Be a student for whom a financial aid administrator makes a documented determination of independence by reason of other unusual circumstances. (snip)

    the 'other unusual' circumstances typically requires something like ...

    - student's official income level ( as previously reported to the IRS ) is sufficiently high to explain how the student was able to pay for tuition + books and related + food / housing / costs of living without receiving major financial help from parents

    - parents have 'disowned' the student child

    - a court order legally granting 'emancipation' for other reasons

    While the IRS doesn't follow in lockstep to FAFSA, they are still going to apply a 51% 'support' test to determine eligibility for claiming yourself as an exemption, thus claiming tuition tax credits etc. Agreement between parent and child to use co-ordinating filing status avoids setting off IRS alarm bells based on duplications, but is not authoritative in regard to the IRS 51% support test. For that, IRS computers are going to look at the student's officially reported income, the amount of college tuition payments automatically reported to the IRS by the college Bursar's office, the standardized 'cost of living' in the student's zip code area of residence ( which factors in local rent prices, local utility rates, local food prices etc. ), and calculate whether the student's officially reported income was actually capable of covering 51%.


    Could some please explain to me the exact difference between doing quarterly payments versus lump sum? I keep hearing about the underpayment penalty, but I don't understand how that works if I correctly pay all of my 2014 taxes by the 2015 deadline or whatever year it happens to be.
    This essentially boils down to an IRS interpretation that Americans owe taxes as soon as they actually earn the taxable income. For 'employees', this means having 'estimated' taxes withheld from every paycheck thus 12-26-52 de-facto estimated tax payments per year ( which is obviously done behind the scenes by the employer's payroll service ). For businesses, the IRS allows for 4 estimated tax payments per year ... with each needing to cover the income earned is the preceding few months. Stated another way, the IRS takes the position that ( example ) the $5,000 in taxes on $15,000 worth of business income earned between Jan 1 2014 and April 1 2014 is actually due on April 15th 2014. Thus failure to pay that $5,000 as quarterly estimated taxes in a timely manner is interpreted by the IRS to comprise a de-facto 'loan' from the IRS to the taxpayer beyond the due date ... which also results in interest charges that begin to accrue immediately ( which I think run 7% at the moment ). Thus failure to pay estimated taxes due on April 15th of this year will accrue a full 7% annual interest charge by the time these taxes are actually paid by April 15th of next year.

    Additionally, IRS code sets a negative 10% threshold regarding the minimum amount of estimated taxes which must be paid versus the amount of actual taxes due. If the amount of estimated taxes paid are 11% or more below the actual taxes due, the IRS can assess an under-withholding penalty ( in addition to the interest charges ). I believe that the under-withholding penalty now runs 1/2% of the taxes owed per MONTH, which turns out to be something like 7% annualized.

    As Oldster points out, depending on the amount of money involved, the IRS interest charges and under-withholding penalty may be an 'acceptable' dollar amount versus avoiding the accounting / payments etc. And as Oldster also points out, if there are other opportunities available to invest the money ( at a rate of return exceeding the IRS 7% interest rate plus 7% annualized under-withholding penalty ), it may make a great deal of sense to 'borrow' estimated tax money from the IRS while leaving your own money invested in something else. Also, as Oldster implies, sometimes these penalties are 'negotiable'.
    Last edited by Melonie; 03-28-2014 at 03:52 PM.

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    Default Re: Estimated Taxes For Lower Income

    Melonie, you're amazing. One more question for you that came up a few days back talking to my dad. He was self-employed for years (recently retired) working as a contract manager for a large company. The specific details are lost on me, but he filed Schedule C and paid self-employment taxes because the company he was contracted with didn't withhold for him. Anyway, question itself now that background is done: he says he wrote off half of his social security taxes as an expense, saying something about 'employer as employee,' which makes absolutely zero sense to me. He did it for years with our CPA and intends to ask our CPA in the next few weeks if I could do it too, but I'd love some insight as to what on earth he meant in the first place? Writing off half of the tax I'm supposed to pay anyway just seems wayyyy too good to be true.


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    Default Re: Estimated Taxes For Lower Income

    ^^^ what you're referring to is a rather confusing provision of Social Security taxes. In a normal 'employee' scenario, the 'employee' must pay 6.75% SSI tax which is not deductible. However, what isn't immediately seen in a normal 'employee' scenario is that the 'employer' must also pay another 6.75% SSI tax on the employee's behalf, which the 'employer' is able to deduct as a business expense. The confusion starts when an 'independent contractor' sole proprietor business entity is concerned, since the same person ( business owner ) fills the role of both 'employee' and 'employer'.

    In an 'independent contractor' sole proprietor business scenario, the business owner must still pay the 6.75% 'employee' SSI tax which is not deductible, and must ALSO pay another 6.75% SSI 'employer equivalent' SSI tax. Taken together, the 6.75% 'employee' plus 6.75% 'employer equivalent' SSI tax levels form a 15.3% so-called 'Self-Employment Tax'. However, the 6.75% 'employer equivalent' SSI tax portion is still considered to be a 'necessary' cost of doing business, and as such is still deductible. Specifically, it is deducted as an 'above the line' adjustment to the personal income level ( i.e. the so called AGI adjusted gross income ) upon which income taxes are then calculated.

    As an 'independent contractor' sole proprietor business entity, dancers and camgirls can definitely apply the 50% ( i.e. 6.75% versus total 15.3% ) of total 'Self Employment Tax' deduction from their personal AGI level, with a resulting decrease in the amount of calculated income taxes due.

    However, in the grand scheme of things, for a 'typical' independent contractor dancer or camgirl earning say $50k per year this SE tax deduction ( reducing taxable AGI from $50k to $47k ) is actually only 'worth' $500 to $750 in tax savings. Obviously this is better than nothing, but still a relatively small factor compared to the probable $8k-12k+ total tax bill that will still have to be paid.
    Last edited by Melonie; 03-30-2014 at 08:41 PM.

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    Default Re: Estimated Taxes For Lower Income

    Thanks again for being so awesome girl! So, what I'm reading is that it is deductible. I guess this makes me wonder why exactly it is that they even make the independent contractor pay that portion of SE tax if it's just deductible. Taxes man, taxes. Mind blowing weird.

    So, if I'm understanding you right, the deduction is done before taxes are 'figured.' For 50k a year, 6.75% is $3,375. Take that off, and the remainder is left to be taxed. Does the 15.3% SE tax then apply to the remaining balance? Or just the 6.75% remaining?

    What crack pot, stoned monkey even wrote the festering crap that is our tax code...?


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    Default Re: Estimated Taxes For Lower Income

    ^^^ the 15.3% SE tax applies to the remaining $46,600 of AGI, yes ... so the 'effective' SE tax rate relative to the $50k in gross earnings is actually something like 13%. On top of that comes another ~9% in federal income taxes. And if your state levees its own income tax, yet another ~3% will get piled on. This results in an overall 'effective' tax rate of ~25% !

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    Default Re: Estimated Taxes For Lower Income

    Ladies, I'm just catching up with the thread and wanted to add a couple points. Melonie, you have done a terrific job explaining estimates and the SE tax.

    Regarding quarterly estimated payments, you are "required" to pay estimates if you expect to owe more than $1,000 in total tax next year, this includes income tax and SE tax. Getting your "tax years" straight can be confusing, it even confuses me sometimes. So while right now, your 2013 taxes are due on April 15th, you will be paying estimated tax on your 2014 taxes. There is what is called a "safe harbor" for your estimates, this is where you pay in enough in estimated taxes to avoid being hit with an underpayment penalty. The IRS considers that you meet the safe harbor if you pay in 100% of your tax from 2013 (if your AGI last year was more than $150,000 then you have to pay 110% of last year's tax) or you are covered if you pay in 90% of your 2014 tax. Since it's so hard to predict your 2014 tax now, I usually encourage my clients to pay 100% (or 110% if applicable) of last year's total tax.

    As for the SE tax, this is 15.3% of your net income from Schedule C. The tax is on your gross income as an independent contractor, less any applicable expenses. You then get a deduction of 50% of the SE tax against your income for income tax. The main thing to note is that income tax and SE tax are two separate calculations. The SE tax affects your income tax, but your income tax has no effect on your SE tax.

    If any of that is confusing, you want clarification, or have any other questions, please let me know.

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    Default Re: Estimated Taxes For Lower Income

    ^^^ if there is a gray area regarding filing / paying estimated taxes, it probably stems from the so called 'first year in business' exemption. My understanding is that if the person files using calendar year ( versus an oddball fiscal year ), and if they filed a tax return for income earned during 2013, the 'first year in business' exemption expires on Jan 1 2014 thus they must file and pay estimated taxes on income earned between Jan 1 and March 31 2014 by the April 15 2014 due date.

    Unfortunately, the same April 15th 2014 due date also applies for the payment of any taxes due on income earned during 2013 ( against which no previous estimated tax filings or payments had been made via the 'first year in business' exemption ) when the 2013 tax return is filed. Thus two weeks from now, the person will effectively be required to pay 15 months worth of taxes !?!?

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    Default Re: Estimated Taxes For Lower Income

    Quote Originally Posted by Melonie View Post
    ^^^ the 15.3% SE tax applies to the remaining $46,600 of AGI, yes ... so the 'effective' SE tax rate relative to the $50k in gross earnings is actually something like 13%. On top of that comes another ~9% in federal income taxes. And if your state levees its own income tax, yet another ~3% will get piled on. This results in an overall 'effective' tax rate of ~25% !
    Thank god I live in Washington. No state tax and I think I'm free from the business tax as well. Hopefully. But still worth it overall given that I make a hell of a lot more for less work than I did in healthcare.


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    Default Re: Estimated Taxes For Lower Income

    ^^^ technically speaking, if you are working as an 'independent contractor' dancer or camgirl, you will owe Washington State Business & Occupation tax. It's not much though ... 1.5% of your 'gross' business income ... which is much lower than the personal income tax rates in effect in many other states. But, technically speaking, unlike most other states, the state of Washington also requires you to register your business even if it is unincorporated ... which creates an additional 'paper trail'.

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    Default Re: Estimated Taxes For Lower Income

    Quote Originally Posted by Melonie View Post
    ^^^ technically speaking, if you are working as an 'independent contractor' dancer or camgirl, you will owe Washington State Business & Occupation tax. It's not much though ... 1.5% of your 'gross' business income ... which is much lower than the personal income tax rates in effect in many other states. But, technically speaking, unlike most other states, the state of Washington also requires you to register your business even if it is unincorporated ... which creates an additional 'paper trail'.
    I was wondering about that! My father mentioned it (oh, the joys of him being self-employed for decades) and said I might need to register as a business. Now, I don't know about you, but I'm rather uncomfortable marching to city hall in the tiniest, most conservative town in the damned state to announce that I'm a camgirl and (as of today) adult texting. I dug around on the state L&I page, but it's just about useless for this info. How important is this business registration thing?


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    Default Re: Estimated Taxes For Lower Income

    ^^^ The bad news is that, in Washington State, to comply with the state Business & Occupation tax filing requirements, your business must be registered.

    The good news is that you can register online ... ... and you can also be fairly ambiguous in regard to listing the activities the business will engage in.

    Also, a word of advice if I may. Since the Washington state tax is based on 'gross receipts' of the business, as soon as your business is registered I would highly recommend setting up a separate dedicated business bank account to which all of your business income checks and/or direct deposits can be routed. This creates a 3rd party paper trail to document how much in the way of 'gross receipts' your business actually received and thus owes Business & Occupation taxes on. From this dedicated business account, you can then 'pay yourself' via a weekly transfers to your personal bank account. You can also leave 25% of your 'gross receipts' to accumulate in the dedicated business bank account to eventually be used for making quarterly estimated tax payments.
    Last edited by Melonie; 04-02-2014 at 09:56 AM.

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    Default Re: Estimated Taxes For Lower Income

    Good to know. I'll go over it more with my father and CPA, but mostly I just wanna avoid more paperwork for the time being. Would a dedicated savings account I use for nothing but business deposits work? I have zero intention of trying to 'write off' business expenses because I really don't have any legitimate ones, so I feel like the only thing the account needs to be able to do is hold money. I was gonna automatically tuck about 25-30% of each check into a savings account anyway to make sure taxes are covered. So would a savings account work okay?

    I've already taken to printing out the digital earnings report from SM at the end of the week (with the details of each customer/tip) in screen shot form and I'm starting it with Arousr (takes forever since every text is $.25 and I'm at almost $200 for 2 days of work) this afternoon. I figure it's easier to prove where money comes from with canceled checks and transactions history than, say, real-world dancing might be, so I was hoping to get away with just using my personal account.


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    Default Re: Estimated Taxes For Lower Income

    ^^^ the account really needs to be in the name of your business ... using your business EIN rather than your personal SS# . Without this you risk 1099 adult webcam host reports of your camming earnings showing up on your credit report, during background checks etc. Since your state essentially forces you to register a business, obtaining an EIN and opening a business bank account really aren't much of an additional effort.

    Also, from an IRS standpoint, they take a somewhat dim view of 'co-mingling' business finances and personal finances if and when an audit is conducted. Talk to your family CPA about this !

    And every camgirl has business expenses which can be claimed as tax deductions under the right circumstances ... from computer to high speed ISP to costumes.

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    Default Re: Estimated Taxes For Lower Income

    Fair enough and all very good to know. Guess this girl is gonna have to submit that application tonight and open an account as soon as I get my EIN number. I'd really rather not have SM or Telepass ever show up as my employers or anywhere in my credit history. How exactly is that prevented by the business account though? Won't the business account come up on my credit check since I'm the owner?

    Also, when applying, the description of business is limited to 150 characters, so do you think 'sale/creation of online entertainment and media' would be sufficient? My first SM check comes next week, so hopefully I can set all of this up before then as I really hate holding onto checks when I don't have to.


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    Default Re: Estimated Taxes For Lower Income

    Won't the business account come up on my credit check since I'm the owner?
    It probably will show up on your credit report ... with the name of your own business appearing as your 'employer'.

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    Default Re: Estimated Taxes For Lower Income

    Awesome! Thank you SO much for all your help thus far Melonie. I've applied for the license and will set up the bank account once I have my EIN. The email said 2 business days, so hopefully by Wednesday when my check comes so I can put everything into the account from day one.

    You mentioned deductions cam girls can make. I know that costumes, computers, and cams used solely for the business would count, but I use my laptop and desktop for other work and my internal cam on that laptop only (I'll upgrade eventually, but not right now). Costumes...eh, I don't use 'em. What else would fly? I hear about the housewife test from you girls a lot (you especially), but I guess it just confuses me and I'd rather keep only deductions that would definitely work. I won't touch dubious ones with a 10 foot pole.


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    Default Re: Estimated Taxes For Lower Income

    ^^^ well, in the way of examples - ISP bills for high speed internet access - potentially a 'home office' tax deduction for a dedicated cam room -

    also, you can safely 'work some angles' by buying a new computer for dedicated cam use and relegating your old computer to personal use, etc.


    I've applied for the license and will set up the bank account once I have my EIN.
    As soon as your new business bank account is 'ready', make sure to change your webcam host info to reflect your business name, business EIN and your business bank account. This will 'break' the 1099 paper trail link between an adult business payer and your personal SS#

    And don't worry about your first 'paycheck' being in your own name and SS#. As long as you change to the business name and EIN before you earn $600 total, the webcam host won't be required to issue a 1099 for the first 'paycheck'
    Last edited by Melonie; 04-05-2014 at 09:51 AM.

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