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Thread: Taxes for 1st year earnings

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    Member JuliaChild's Avatar
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    Default Taxes for 1st year earnings

    I began dancing in 2005 and have not been paying quarterly taxes. I read that I may pay my 2005 taxes in one lump sum at the end of the year without penalty because this is my first year dancing. Is this true?

    2006 and beyond, I know that I must pay quarterly.

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    Banned Melonie's Avatar
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    Default Re: Taxes for 1st year earnings

    yes it's true, assuming that you had no income whatsoever in 2004. IRS code contains a first year loophole which states that a person need not pay more in estimated taxes this year than they actually owed in income taxes in the previous year.

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    Member JuliaChild's Avatar
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    Default Re: Taxes for 1st year earnings

    Quote Originally Posted by Melonie
    yes it's true, assuming that you had no income whatsoever in 2004. IRS code contains a first year loophole which states that a person need not pay more in estimated taxes this year than they actually owed in income taxes in the previous year.
    Awesome! I earned $0 in 2004. Thank you!

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    Senior Member DanMorris95156's Avatar
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    Default Re: Taxes for 1st year earnings

    I believe the "loophole" relates to once you paid tax. Example - if you had a $10 tax for year 1, then then next year you must pay $10 through either quarterly payments or withholdings to avoid an underpayment penalty. When the tax in year 1 is "0" - then the 90% of current year liabilty (year 2) must be paid either through quarterly payments or withholdings. It doesn't matter that you started dancing this year - what matters is if you had any taxable income and hence paid tax last year.

    Your state may have a different interpretation depending upon where you live. The underpayment penalty can be abated due to reasonable cause along with adjustments for when you earned your money in 2005.

    Regards,

    Dan
    Daniel D. Morris, CPA
    [email protected]

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    Default Re: Taxes for 1st year earnings

    I believe that for each year, you can elect to follow one of the three ways of estimating taxes. So you are not obligated to pay what you paid least year; there are other choices, sometimes better for you. But you need to do the math.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Senior Member DanMorris95156's Avatar
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    Default Re: Taxes for 1st year earnings

    Please allow me to explain the basic estimated tax rules for federal purposes:

    * - You are required to pay in "timely" fashion estimated taxes equal to 90% of your actual tax liability on an annualized basis (e.g. 1/4 in April; 5/12th in June; 8/12th in September and 12/12ths in January). You may substitute withholdings for quarterly estimates as withholdings are assumed to have been paid 1/52nd per week so hence "timely" regardless of when the actual withholdings occured.

    * - There is a "safe harbor" exception that changes slightly from year to year but in essence says that if you pay 100% (up to 110% depending upon a number of factors so be conservative and go with 110%) of your prior tax (assuming you had a tax) then you will be consider "timely" of your required minimum estimated tax benefits regardless of any balance due April 15th of the following year.

    There are penalty abatement opportunities for unequal earnings that can reduce any underpayment penalty (call it interest for that is what it is and at about a 8% rate +/- depending upon the current federal reserve/prime rates).

    There are requests for abatement due to reasonable cause (health, disability, etc.)

    If you fail either test 1 or the safe harbor, your risk is the interest on what was required to be paid - so if your tax liability in 04 was $10k the your most at risk for the interest on not paying $2,500 per quarter which is like $500 +/-. I actually have many clients that accept the interest penalty as part of their strategy and use the tax money as long as possible as working capital. It may be against the "rules" but they don't complain about the interest cost because it is frequently cheaper then their bank rates.

    Regards,

    Dan
    Daniel D. Morris, CPA
    [email protected]

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    God/dess threlayer's Avatar
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    Default Re: Taxes for 1st year earnings

    Dan, I was hoping you'd post that one.

    I had considered the annualized method to be the third one. The annualized method was always bad for me because my fees were often paid early in the year. Annualizing that amount made the projected year income very unrealistic. Anothrer tough part for me was projecting my cost of business expenses over the entire year. Since I had to do it anyway, I tended to use the 'actual' method, making up any difference by Jan 15 of the following year. This was an onerous, time-consuming task for me even in a simple consulting business (having to figure out my tax liability 4-5 times a year). And I see why people tend to use the 'safe harbor' method. Still if a person has low net income in the first quarter, the 'annualized' one is not a bad method.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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