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Thread: Tax questions

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    Senior Member destiny2980's Avatar
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    Default Tax questions

    This year is the first year since Ive been dancing that I will be filing taxes. So where do I begin? I knew a girl that only claimed that she maid $500 dollars a week. But of course she made much more than that. So do I not claim that I made as much as I do. Also Im married do I file with my husband or seperatly? And one more question what all is tax deductable for dancers?

    I know I sound totally nieve about this stuff but I could really use somebodys help with this issue.

    Thanks

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    Banned Melonie's Avatar
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    Default Re: Tax questions

    there are lots of previous threads discussing the issue of dancer taxes. Definitely try using the SEARCH function with keywords taxes, independent contractor, estimated taxes etc.

    If you are married, you have the choice of filing a joint tax return or filing separately. In most cases, filing joint results in a lesser total tax burden - however because of the 'marriage penalty' in US tax law when the two married people earn very similar amounts sometimes filing separately results in a lower tax burden. The best way to tell is to spring for a tax program like Intuit's Turbo Tax Home & Business, and run the numbers both ways. Intuit has just released the 2006 version at , so you could conceivably buy the program now to do rough calculations and then use the same program in January (with online updates) to prepare your actual tax return. Whatever tax program you choose needs to be able to do Schedule C 'profit or loss from a business' to handle independent contractor dancer earnings and business expense tax deductions. Obviously, you and your husband could also approach a tax accountant to do these things FOR you ... and given that this is a 'first time' situation going to an accountant to help you set things up might be a very worthwhile investment even though it will involve significant expense.

    Obviously, the IRS requires that you declare all of the income that you earned. Just as ovbiously, many dancers choose to employ 'creative bookkeeping' in this area. I won't elaborate on this point other than to state that the IRS has recently received a special appropriation from the US congress to establish a tax enforcement special unit for 'adult businesses' (which includes exotic dancers and strip clubs), and that the IRS now has an unprecedented amount of automatic financial transaction reporting arrangements in place with banks, investment houses, state motor vehicle agencies, state property title agencies, even the US post office that can keep track of how much money a person is actually saving / investing / spending. Thus the probability that a dancer who chooses not to report (or significantly under-report) her dancing income will be 'caught via the back door' when she spends / saves / invests money that no tax return showed that she earned in the first place has never been higher.

    If you file jointly, basically you and your husband share declared income tax rate and share tax withholding. Thus you may have estimated tax underpayment problems if the amount of money withheld from your husband's 'straight' job paycheck doesn't qualify for the 'year over year' withholding loophole. If you were single and just started dancing, the IRS would compare your personal tax liability this year to your tax liability last year (which was zero) and you could cruise through this loophole. However, since you are not single, the tax liability last year will be the sum total of both your husband's earnings and your own earnings, so even if your earnings were zero the sum total is not ! Also, because the sum total of your income plus your husband's income determines the effective tax rate for both of you, if your husband has not been factoring your dancer earnings into his own paycheck withholding he may be underwithheld on the taxes due on his income for 2006. To avoid the possibility of having to pay estimated tax penalties, you may want to calculate and send in an estimated tax payment prior to the end of 2006. Following is a fast and loose 'what-if' example of what I'm talking about.

    Say that your husband earns perhaps $800 a week = $40k 'gross', and claims withholding as if he is the only person working in the 'family'. Under these circumstances his effective IRS tax rate might be 15%, his employer might withhold $ 150 a week in taxes, and he would get back a small refund when filing a tax return this coming April. However, lets also assume that this year you are also earning perhaps $800 a week = $40k 'gross' = $80k 'gross' in family income. At this earning level, the IRS tax rate which applies to your husband's income is more likely to be 25% than 15%, meaning that just to cover his own income tax liabilities your husband should have had $250 a week withheld from his paychecks rather than $150 a week. Thus when tax returns get filed in April, your husband is going to wind up having to pay in approx $5,200 extra in taxes. In addition to this, the effective tax rate on your own $40k in dancing income is likely to be in the 33% ballpark (because the tax rate for self-employed persons is higher), meaning that on top of the $5,200 which will have to be paid in to cover your husband's income taxes another $ 13,200 will have to be paid in to cover YOUR income taxes.

    You probably need to run through all of your tax calculations so that you can file your tax return in January and send in the taxes due. If you wait longer than that, the IRS can start charging you penalties and interest on the $18,400 in unpaid tax money that you 'borrowed' from them. Also, the next estimated tax payment date will be April 15th 2007 - at which point you need to be prepared to send in an estimated tax payment of $18,400 / 4 = $4600 ... with yet another $4600 estimated tax check being due in June and again in September. Of course you also have the option of having your husband INCREASE his weekly employer paycheck tax withholding by an extra $100 a week to 'cover' the actual taxes due on his own earnings, meaning that estimated tax payments would only have to be made to cover your own tax liability (i.e. $3,300 or so every quarter instead of $4,600).

    You also have the option to have your husband increase is paycheck tax withholding by $18,400/52 = $354 + $150 current or about $500 a week total in order to cover the taxes due on both his own and your dancing earnings (meaning that you woundn't have to save up for or send in estimated tax checks quarterly at all). Of course, having hubby pick up 100% of your combined tax liability out of his paycheck is only going to leave a take-home weekly paycheck of $200-$300 or so depending on what sort of other expenses (like health insurance) are also withheld from his paycheck.

    Of course, if you actually earned more than $800 a week dancing, then the tax rates applicable to both your own dancing income and your husband's 'straight job' income will be even higher - as will be the tax withholding shortfall on your husband's weekly paycheck - as will be the amount of money you'll owe to the IRS in January.
    ~
    Last edited by Melonie; 10-20-2006 at 04:08 PM.

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    God/dess Embyr's Avatar
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    Default Re: Tax questions

    Melonie- a question... I missed the sept. deadline.... last year was the first time I filed my own taxes, and that was a w-2 through an employer.... i've been dancing since july and now i'll be doing a 1099, and i suppose i could do both jan. and april, but i thought that there was just one deadline (april) for everyone! where did all these dates come from?? now i'm panicking about penalties... the cost of living is really high in CA so it makes saving a little harder, but i'm trying.... i'm also trying to establish a Roth IRA (do you recommend a traditional instead??) to help shield some of the $$... I have kept all of my receipts, made some deductions (a comp. and printer to goodwill should help a bit) but I tend just to get freaked out in the realms of things I know little about..

    I need a good CPA or accountant... my econ. professor was great but the course is over. . I just really don't want to think about taxes and financial stress right now....eeek... i do alright at my club, rent &car/motorcycle insurance (my main bills) are made in the first weekend or two and the rest is pure savings.

    tell me that I don't sound in horrible shape... or what your advice would be?? thank you so much.
    -embyr

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    Default Re: Tax questions

    The estimated tax dates come from the IRS. Fortunately, you won't have to worry too much about estimated taxes not being paid last September 15th because this is your first year of dancing income thus you will probably be covered against IRS penalties and interest on underpayment of estimated taxes by the 'first year loophole'. However, if you miss the January 15th estimated tax payment, odds are that the IRS will start racking up interest and penalties. This is not a big deal though if you actually file your 1040 + Schedule C tax return in January, since the IRS allows the January estimated tax payment to be 'rolled into' the tax return itself as long as it is filed by January 30th. However, when April, June and September roll around, be prepared to send in a 1040ES with a check for estimated taxes due.

    As far as establishing a retirement account, a Roth IRA does not 'reduce' taxable income thus does not 'reduce' income taxes due. The main virtue of a Roth IRA is that it allows the EARNINGS on Roth account money to accumulate tax free. As a trade-off, when you eventually retire, money withdrawn from a Roth account is not considered to be taxable income (since you paid income taxes on the money you contributed before it went into the Roth acccount each year).

    A Conventional IRA does 'reduce' income taxes due ... because any money that you contribute is subtracted from earnings thus lowering your taxable income in the current year. However, this does not mean that this money is tax-exempt or tax-free, only that is tax-deferred. At the point when you retire and start withdrawing money from a Conventional IRA, the amount of money withdrawn is considered to be taxable income at that time. Thus what's really happening is that you're gambling that this year's effective income tax rate is higher than the effective tax rate will be when you reach age 62 or 65 or whatever. The kicker of course is that the US gov't can change the tax laws at any time, such that you really can't accurately forecast what sort of effective tax rates will be in effect 30 years from now, or what sort of other gov't retirement benefits might be made conditional (i.e. if a future retiree has lots of money in a Conventional IRA, this may prevent them from being eligible for future gov't SSI and medicare benefits until all of their own money has been spent first). My personal opinion is that, except for cases of 401k IRA's where an employeer makes a 'matching' contribution i.e. 'free money', a Roth IRA involves significantly less future risk than a Conventional IRA.

    A CPA or self-employed specialist accountant is probably a very good idea to get you set up properly. You can forget about H&R Block, Jackson Hewitt et.al. because the vast majority of their agents don't have the knowledge or the training to properly deal with independent contractor self-employed persons. However, with a tax calculation program like TurboTax for Home and Business it really isn't all that bad to do your own taxes.

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    Member Jon_CPA's Avatar
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    Default Re: Tax questions

    Correction:
    Estimated tax payments are due quarterly. For most individual taxpayers, the due dates are:


    For the Period: Due date:

    January 1 through March 31 ........................................April 15

    April 1 through May 31 ........................................June 15

    June 1 through August 31 ........................................September 15

    September 1 through December 31............................................ January 15 next year

    The IRS generally assumes that your earnings are not seasonal and that the earnings and taxes are due on a straight quarterly basis. This means that the IRS generally assumes your earning from Jan to June are earned evenly over the period of Jan to Dec and earning from July to Dec are earned evenly over the period of Jan to Dec. The IRS also applies all withholdings and credits on a straight quarterly basis. The IRS requires you to pay the difference between the taxes due each quarter and the withholding and credit amounts applied to each quarter, on the 15th day after the end of the quarter. The IRS applies an underpayment penalty (interest) on any amounts not paid at the end of each quarter to the date that the payments are made. Payments are applied to the oldest outstanding amounts first.



    The IRS has a few exceptions that will allow you to avoid the underpayment penalties on the quarterly taxes due:



    1) The total tax due for the year less the total amounts withheld and the credits results in a net liability due of less than $1,000.

    2) The total amounts withheld plus the credits are greater than 90% of the total taxes due for the year.

    3) If in the prior year you had 12 months of earning that totaled less then or equal to $150k and your withholdings and credits equals 100% of the prior years total tax liability.

    4) If in the prior year you had 12 months of earnings that are greater than $150k and your withholdings and credits equal 110% of the prior years total tax liability.



    A strategy to help lessen any penalty situation is to take a part time holiday season job with a major retailer (in addition to your dancing) and have them apply as much of your earnings to withholdings as you can afford. Many of the major retailers give some pretty nice deep employee discounts in order to attract the additional sales help, and the withholdings in excess of what would normally withheld will be applied equally over each of the prior quarters.



    I recommend that you consult with a local tax advisor.
    Last edited by Jon_CPA; 10-26-2006 at 06:12 AM.

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    God/dess Emily's Avatar
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    Default Re: Tax questions

    Quote Originally Posted by Jon_CPA
    Estimated tax payments are due on the 15th day after the end of the quarter (1stQt=4/15, 2ndQt=7/15, 3rdQt=10/15, 4thQt=1/15).
    I thought it was 6/15, not 7/15 and 9/15, not 10/15

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    Default Re: Tax questions

    Quote Originally Posted by Emily
    I thought it was 6/15, not 7/15 and 9/15, not 10/15

    I agree. That's what the payment vouchers that I got from my CPA say.
    Take the road less traveled- just make sure you have a map.

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    Default Re: Tax questions

    1040-ES instructions say so too

    http://www.irs.gov/pub/irs-pdf/f1040es.pdf

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    Default Re: Tax questions

    ^^^ according to IRS document 1040ES, this years due dates are (were) 4/17/2006 - 6/15/2006 - 9/15/2006 - 1/16/2007 from The document also states that you do not have to make the 1/16/2007 estimated tax payment if you file your full tax return (with embedded estimated tax payment for 1/16) by 1/31/2007.

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    Default Re: Tax questions

    Thank you everyone for your advice... yes, my next step is to hire a trustworthy, personal CPA for January. Melonie, thank you for your astuteness and insight regarding IRA's.

    John_CPA - I can understand why you would recommend a retail job to offset penalties, but dancing (for me) is to allow time for school- no time for extra work. I'm a pretty frugal person- after I'd bought my motorcycle (big incentive to start this job, as well as time allowance to go to school), all savings go towards building up tax payment, Roth, etc.

    Retail taught me excellent sales techniques and communication- I'd rather use them in a job where I have more say in who I am and what I do.

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