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Thread: contractor tax calculation question

  1. #1
    God/dess Bunny's Avatar
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    Default contractor tax calculation question

    I'm hoping someone can explain this to me. I am trying to figure out how bad off I might be tax wise this year and I don't understand a few things about taxes as a self employed individual and the more I try to read about it the more confused I get. So I'll use some round numbers and maybe somebody (hopefully) can explain how this works and my idiot brain can understand it.

    Let's say I made a gross income of $60,000 for the year 2005 and had business related expenses of $10,000. So my net income would be $50,000. Now let's say I paid $8,000 in estimated taxes for the year. What do I owe? I know there is a self employment tax that is deductible and there is a formula to get what the self employment tax is. That's about where I get lost. Do I then deduct the self employment tax from the net and get a new net income and then calculate taxes on that? I am single with no kids/dependants. I have a major headache right now trying to figure this out. I have a CPA to do my taxes but I'm just trying to get an idea how bad off I'm going to be. These figures in the post aren't true numbers but just to give me an idea of how to calculate it. They are close though so I should be in the 25% tax bracket.

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    God/dess Deogol's Avatar
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    Default Re: contractor tax calculation question

    I am no CPA, but as I understand it, you would calculate the tax owed on the 50,000. From that subtract the tax you already paid in the estimated taxes. Ship a check to the IRS for the rest. If it is large, you will probably need to increase your estimated tax payments for they should balance out to zero (but they never do.)

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    Default Re: contractor tax calculation question

    Real generally speaking, $50k of net business income is subject to a 14% self-employment tax plus whatever federal tax rate applies based on your filing status, less exemptions and deductions and adjustments (including 1/2 of your SE tax). If you are single, and don't have home mortgage interest or other large deductions, you're probably in the correct overall ballpark at a 25% federal tax rate, meaning that you're potentially $4-5k short. The January 15th estimated tax filing date is still do-able though, so sending in another $4-5k would help to reduce any IRS interest or penalties due.

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    Default Re: contractor tax calculation question

    I undersand that I have to pay the difference between what I paid and what I owe, but I guess my question is more of how do I figure what I really owe? Where do I put the SE tax deduction? I have no mortgage, just me, myself, and my dog. If I had more I'd send it to them but the only ways I could come up with $4-5k by Jan. 15 wouldn't be legal.

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    God/dess Deogol's Avatar
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    Default Re: contractor tax calculation question

    Quote Originally Posted by Bunny
    I undersand that I have to pay the difference between what I paid and what I owe, but I guess my question is more of how do I figure what I really owe? Where do I put the SE tax deduction? I have no mortgage, just me, myself, and my dog. If I had more I'd send it to them but the only ways I could come up with $4-5k by Jan. 15 wouldn't be legal.
    To get to the real nitty gritty you should get an accountant. We can say generally but we don't have all the details. If it is as simple as you say, I don't see this being more than $200 bucks in fees (which you can also write off as a deduction.)

    After you get an accountant, find organizations who want to simplfy the tax code and support them.

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    Banned Melonie's Avatar
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    Default Re: contractor tax calculation question

    I undersand that I have to pay the difference between what I paid and what I owe, but I guess my question is more of how do I figure what I really owe? Where do I put the SE tax deduction?
    Since you have all of the info to actually complete your 2005 tax return by now, I would recommend at the very least grabbing a copy of TurboTax for Home and Business and start filling in the blanks. Only a completed tax return will actually tell you the precise amount of income tax you owe. But spending the extra money for an accountant to do your 2005 taxes and help you get set up properly would be of benefit both right now and in future years when you may choose to file your own tax returns.

    In regard to SE tax, the tax owed is a calculation stemming from Schedule C. After that calculation, an adjustment to income for 1/2 of the calculated SE tax is 'subtracted' on the first page of the 1040 form.

    In regard to Jan 15th estimated tax payments, keep in mind that any underpayment/lack of payment is going to carry IRS interest and penalties which when combined typically exceed credit card interest rates. As such, even a partial payment on Jan 15th will save you money compared to skipping the Jan 15 payment altogether and waiting until the April 15th tax return filing date to pay everything you owe.

    Also keep in mind that by April 15th you'll also owe estimated taxes on your earnings from Jan 1st to Mar 30th 2006 ! There is a line on the 1040 form which allows you to pay these estimated taxes as an integral part of your tax return filing, if you choose to wait until early April to file.

    Personally speaking, I would highly recommend that dancers in general do NOT file their tax returns before late March or early April in order to allow time for clubs to send 'surprise' 1099 forms out. If you file in January, and if a 1099 form arrives in March which shows a different amount of income than the amount you declared on your tax return (or your tax return did not specifically list this source of income by name such that IRS computers can find a match between the club's 1099 and your Schedule C), you're virtually guaranteed to be audited by the IRS.
    ~
    Last edited by Melonie; 01-07-2006 at 05:01 AM.

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    Default Re: contractor tax calculation question

    oh, goodness. What I thought was going to be a simple question has gotten so complicated. I do have a CPA. I just was trying to give myself an idea. I know the SE tax is calculated by taking the net and multiplying it by 95% or something and then you can deduct that. I just get all confused about where to deduct it and all that. My CPA will figure it all out. I'm just impatient and want to know how bad it's going to be!

    And actually I'm not a dancer and everything I earn is on a 1099. From what I understand they are required to have your 1099 mailed by Jan. 31. I am in contact with my employers anyway so that is not an issue. We talk before it goes out to make sure it all matches up.

    There is a little tax calculator here http://www.dinkytown.net/taxes.html but the main thing I don't understand is how exactly you get the deduction for the SE taxes. Like if I pay $7500 in SE tax how does that translate into real $ it saves me from owing?

    I freaking hate taxes. I barely passed tax accounting in college. I got a C and was happy as could be with a C!

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    Default Re: contractor tax calculation question

    "How Do I Report the Self-Employment Tax?

    When you start a small business and you do not incorporate or form a partnership, you report the results of your operations on Schedule C and file that with your Form 1040. The result of netting your revenues and expenses is a net profit or loss.

    You calculate your self-employment tax on Schedule SE and report the total tax calculated on Schedule SE in the "Other Taxes" section of Form 1040. In this way, the IRS differentiates the SE tax from the income tax.

    Good news: you can take one half of your self-employment tax amount as a deduction against total income on your Form 1040.

    Example

    Assume after all expenses are recorded, your Schedule C business earns $35,000. Net earnings as calculated on Form SE would be $32,323 ($35,000 x .9235). Your self-employment tax would be $4,945 (32,323 x .153) and would be reported on Form 1040 in the "Other Taxes" section. Then one half of the self-employment tax, $2,473, ($4,945 X .50) is reported on Form 1040 as an adjustment to income, which reduces the income tax that is calculated on your self-employment net income reported on Form 1040."

    from

    thus 1/2 of the self-employment tax qualifies as an Adjustment to Income, which decreases the total amount of taxable income upon which your income tax is calculated. Thus if you calculate your SE tax to be $7,500, and take the adjustment of $3,750, the amount of total income upon which your income tax is calculated drops from say $50,000 to $46,250. Again with wild guesswork involved, your income tax might be somewhere in the $10,000 ballpark instead of the $11,500 ballpark after the AGI, and your SE tax would still be $7,500, for a guesstimated total tax liability of perhaps $17,500.

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