Tag Archives: self employment tax

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2008 Taxes, Part 1: Did my 50% of income strategy work?

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In 2008, I tried a financial strategy meant to keep me both “in-the-know” and “out-of-the-know” at the same time. This simple strategy was to save 50% of my income for taxes in a high-interest savings account. As a self-employed person this was legal, as long as I paid 90% of my previous years’ tax along the way. Being as in 2007 I made less than $30k and my income shot up to $58k in 2008, this made a whole lot of sense.

The outcome of my 2008 plan seemed to have worked decently. I just tallied up my tax figures for the year, not counting any deductions I or Turbo Tax may take, and my total tax owed for 2008 is $22876. This includes my 25% tax bracket federally, $15.3% self employment tax, and $9.3% tax bracket in California (why is California one of the highest tax states to live in yet we’re also the deepest in debt???)

I saved $26,000 for taxes after paying $4315 in estimated taxes over the year (I still owe my Jan 15 estimated tax for federal, need to send that out, but I hear it’s not late as long as you get your return in by Feb 2.)

So, number crunching that means sans deductions, I still owe $18,562, leaving me with $7438.17. I’m sure with deductions it will be a little less then that and then with my various interest income from different accounts it will be a little more. I’m guessing I’ll end up with at least $7200 to save.

So the good news is I start 2009 off with $7,200, or thereabout, to spread about in my various accounts as a “cushion” for the year. Sweet. Still deciding on whether to get a tax accountant for my 2008 returns, though I figure even if I don’t take any deductions I’ll get

In 2009, my tax situation is an entirely different story. My income may go up a bit, but I’m now a full-time employee, so I can’t shelter as much money from taxes over the year… nor do I really want the headache. In my next post, I’ll describe how I’m planning to take a more active approach to budgeting in 2009.

Investing

Should I Hire an Accountant To Do My Tax Returns?

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Read the Her Every Cent Counts Taxes Series

Since tax season is right around the corner, I’m trying to figure out if I should hire an accountant to prepare my tax returns, which one to hire, and how much it should cost me. I’ve pretty much decided I need to hire someone to handle my taxes for me this year, as I’m going to be taxed heavily as an independent contractor and need help finding all the deductions I can take.

Then again, it looks like hiring a tax accountant will cost me $350 – $450. Ouch. That’s a lot of money. I’m sure the work they do is worth that, but it feels like I should be able to do all the work myself. An online tax software would cost me $100, so even if I missed out on $300 in deductions I’d still end up breaking even. And how much money in deductions am I really going to get? I can’t take a housing deduction, I’ve never lived in a space big enough to qualify for that. My “business” expenses are minimal – maybe I could deduct hosting costs for my promotional website, and mileage for the route to and from the office. Other than that, I don’t know what I can deduct.

The complicated parts of my return are going to be from my various investment incomes. God, that’s going to be a nightmare. I’m not sure how to handle Prosper (luckily I only have 10 investments out… but it sounds like the earnings on each one will have to be taxed), and then there’s Sharebuilder and those pesky dividends that count as income even though they’re long gone now, and my Vanguard dividends (most are in my Roth but I also have a small regular brokerage account through them, which is supposed to be my grad school or house money), and then there’s my CD from bank of america and various other places I’ve earned income throughout the year. Yea, that’s where it gets complicated.

But I worry that because it does get complicated a tax accountant will have to take longer than his minimum 2 hours to complete my returns. They’ll end up costing more like $500 or something, which is a pretty big chunk of my income considering so much of it’s going to taxes (15% self employment tax on top of everything else, yuck.)

I’ve reached out to 3 local CPAs, and found that their rates range from about $300 for a return (the cheapest) to $400/$500. I wonder if the more expensive ones will save me more money, or if it ultimately doesn’t matter because any extra money they’d save would be eaten up in their fees.

Here are my 3 options thus far:

  • CPA #1 My fees for income tax preparation fees are at $175 per hour. Most returns I prepare are in the $400 to $600 range. The tax preparation fee is all inclusive as it includes meetings and follow up questions and other assistance you may need. Also, I don’t charge any additional fees for questions during the year. Of course, if you need assistance that involves significant time, it will involve additional fees, and I will let you know this in advance.

  • CPA #2 I charge $160 per hour plus out-of-pocket costs and there is a two hour minimum for tax preparation. 2-hours covers a basic return for an itemizer typical family. I can get you an appointment. (I followed up and inquired what out-of-pocket costs would be…) Tax software license access fee, copies & supplies, postage & misc. runs around $65 per individual tax return.

  • CPA #3 I’d be happy to help you with your 2008 taxes. It would cost around 300 for a schedule C. That includes preparation & the initial meeting. We should meet before the year end to maximize deductions.

If any of you are 1099 out there, or have been in the past, do you use an accountant to do your taxes? How much income merits hiring a tax accountant to deal with your returns?

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How much will my taxes really be this year?

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It’s my first year as a 1099 worker. I’m still unclear on what my tax rate is, and how much I will owe in taxes this year. I just hope that I’ve saved enough.

It looks like my overall earnings this year will be $60k.

That puts me in the 25% federal tax bracket.
So I owe the feds $15,000.

Then state taxes are 9.3%
I owe the state $5580.

Self employment tax is 15.3%
I owe an additional $9180

Totaling $29,760 in taxes for 2008.

Then I have minimal “income” from dividends, interest and such, which I will owe tax on.

I assume that means I will owe $30,000 in taxes, or 50% of my income.

That seems rather high, am I doing my math wrong?

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Estimated Tax Worksheet – could it be any more complicated? (Don’t Answer That)

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Ok, going by the estimated tax worksheet, perhaps I owe a different amount for this quarter.

1. Adjusted gross income you expect in 2008:

(Adjusted gross income. Use your 2007 tax return and instructions as a guide to figuring out the adjusted gross income you expect in 2008. see Expected AGI — Line 1 in chapter 2 of Pub. 505 — “Your expected AGI for 2008 (line 1) is your expected total income minus your expected adjustments to income”)

Let’s just say $66,000 and forget any adjustments I might take.

2. Estimated total of itemized deductions: no idea

3. Subtract Line 2 from Line 1: $66,000

4. Exceptions: Multiply $3,500 by the number of personal exceptions = $0?

5. Subtract line 4 from line 3 = $66,000

6. Tax =
Figure your tax on amount on line 5 by using the 2008 Tax Rate Schedules on page 5. *If you have qualified dividends or a net capital gain, or expect to claim the foreign earned income exclusion or housing exlucsion, see “pub 505” to figure the tax.

  • 10% on income between $0 and $8,025
  • 15% on the income between $8,025 and $32,550; plus $802.50
  • 25% on the income between $32,550 and $78,850; plus $4,481.25 = $12843.755
  • 28% on the income between $78,850 and $164,550; plus $16,056.25
  • 33% on the income between $164,550 and $357,700; plus $40,052.25
  • 35% on the income over $357,700; plus $103,791.75

7. Alternative minimum tax from Form 6251: (this AMT confuses me to no end so for now I’m going to pretend it doesn’t exist and hope it doesn’t effect me.

What is the AMT? The AMT came into being with the Tax Reform Act of 1969. Its purpose was to target a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax. A growing number of middle-income taxpayers are discovering they are subject to the AMT.

8. Add lines 6 & 7. Add to this amount any other taxes you expect to include in the total on Form 1040, line 44, or Form 1040A, line 28 = $12843.755

9. Credits (not not include any income tax withholding on this line): huh?

10. Subtract line 9 from line 8. If zero or less, enter 0 = $12843.755.

11. Self employment tax. Estimate of 2008 net earnings from self employment. (if $102,00 or less, multiply the amount by 15.3% — Caution: If you also have wages subject to
social security tax, see Pub. 505 to figure the amount to enter) = $10,098

12. Other taxes (see instructions below): let’s just say none.

13a. Add lines 10 through 12: $10,098
b. earned income credit (forms 4136, 8801 (line 27) and 8885) – None (you have to earn less than $17k for this.)
c. total 2008 estimated tax. Subtract line 13b from line 13a. If zero or less, enter 0 = $22,941.755

14a. multiply line 13c by 90% (unless you’re a farmer or a fisherman, then it’s 66.5%) = $20,647.58
b. enter the tax shown on your 2007 tax return (110% of that amount if you are not a farmer or a fisherman, and the adjusted gross income shown on that return is $150k or more) = no idea yet
c. required annual payment ot avoid a penalty. Enter the smaller of line 14a or 14b = $20,647.58

15. Income tax withheld and estimated to be withheld during 2008: none.

16a. subtract line 15 from line 14c:
Is the result zero or less?
Yes — stop here. you don’t have to pay anything.
No – go to line 16b…

16b: subtract line 15 from line 13c
is the result less than $1000
yes – stop. no money needed.
no – go to line 17 to figure your required payment

17. if the first payment you are required to make is due april 15, enter 1/4 of line 16a:
$20,647.58 / 4 = $5161.89

(but this doesn’t at all include state taxes. I wonder if there is a separate quarterly estimated tax payment for that.)

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Freelance Life: Estimated Quarterly Taxes

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I may be way off on this… but my calculations amount to an:

Estimated Quarterly Tax: $6,706

Without the help of a CPA, I’m trying to figure out my estimated quarterly tax payment. My calculations, while likely closer to accurate than I’d like to believe, are definitely more than I have in my “for taxes” saving account.

The good news is that for this year at least, I’m allowed to put 90% of my previous year’s taxes into my estimated tax payments each quarter. And last year, since I was working full time and making much less money, my tax payments for the year were not that huge. I think… and please correct me if I’m wrong… that as long as I pay 90% of last year’s taxes (divided by four) then at the very least the government won’t be charging me any penalty fees.

Regardless, I probably should try to just pay 100% of my estimated tax to avoid a really awful April 2009.

That said… I’m trying to understand these calculations, without figuring out my deductions (since any deductions I can take will just mean that I can get a refund. And I’d rather just get a refund than deal with sorting out deductions each quarter. It’s hard enough to do it once a year!)

—-

Tax Guestimates

Assuming I make $5500 a month for the entire year (I’m overestimating given that I’m making about $5000-$5300 now in any given month… some months I make more.)

TOTAL TAXES = $26,821.362 (or 40.6% of $66k yearly income)

FEDERAL
[$8025 at 10%] $0 – $8025 = $802.50
[$24524 at 15%] $8026-$32550 = $3678.50
[$33,449 at 25%] $32,551 – ($78,850) $66,000 = $8,362.25

Total Federal Tax: $12,843.25

STATE

0% $0 – $6828 = $0
[$9357 at 2% ] $6829 – $16186 = $187.14
[$9358 at 4%] $16187 – 25545 = $374.32
[$10,005 at 6%] $25456 – 35461 = $600.30
[$9353 at 8%] $35462 – 44,815 = $748.24
[$21,184 at 9.3%] $44816 – 66,000 = $1970.112

Total State Tax: $3880.112

SELF EMPLOYMENT TAX

[$66,000 at 15.3%] = $10,098

Total Self Employment Tax: $10,098

—

Estimated Quarterly Tax: $6706

—

Eeks!!! $6,706?

I’ve only saved about $4,500 for this quarter’s taxes. Well, I’ll really be saving more like $6,500, but I don’t get paid until the end of the month, so the next $2,000 I’d put away, which would be for my March-April “month” of work ending April 20, will not be paid until the end of the month. So how am I supposed to pay that in advance?

I’m so, so, so confused.