Income tax question...

[bettymae1121]

Yes, it's July and I have an income tax question! I'm hoping some of the tax experts are lurking here...

I'm going to start geting income this month as an independent contractor, and I will almost certainly earn enough that I'll need to start paying estimated quarterly payments for the self employment tax and for income tax. The forms say I should have started paying earlier in the year begining with the 1st quarter, but at the time I didn't know I was going to be doing this. How do I start making quarterly payments halfway through the year?

I know I have the option of upping my withholding from my employer to help cover the taxes from my side income, is that my best bet for the rest of this year and then start quarterly payments in '11? That's what I'm leaning towards, but I figured I'd check with the DIS experts first.

(I posted this in the Community Board this morning and only got one reply, I hope to get a few more answers here)

 

[Jaklackus]

1.) talk to an accountant...absolutely worth the expense.

-DH didn't have to start paying quarterly taxes until 3rd quarter 2008....the IRS was looking for money for the 1st and 2nd quarters of 2008 even though he didn't owe them anything(they just assume that he does because he sent in money for 3rd and 4th qtrs)...it has been about 4 months worth of IRS nasty grams and response letters in return very clearly explaining why they are not getting anything...I called(having no authority over DH's business or tax situation) and explained to them while they typed it into his file and they finally backed off of the business side of things...so they moved onto attacking our personal taxes...but we did mess those up....apparently a company I worked for for 5 short months split up my income into two W-2s and I assumed the 2nd one replaced the first without double checking.

 

[Janet Hill]

1.) ...so they moved onto attacking our personal taxes...but we did mess those up....apparently a company I worked for for 5 short months split up my income into two W-2s and I assumed the 2nd one replaced the first without double checking.

Did you make sure that the two w-2 do add up to your income and the company didn't think they were amending the 1st set of w-2s and did so incorrectly and therefore overreporting your income. This happened to me once.

 

[Taja]

I agree with finding a good CPA. Technically, you are a sole proprietor now, not an employee.

At the very least, keep a photocopy of every payment you receive as an independent contractor in 2010. That way, when you begin paying estimated taxes, you will have proof of when income was received. If the check was dated July, 2010, you could not have known to file estimated taxes in April for the first quarter. But you will need to be able to prove it to the IRS if/when they question it.

Self-employment tax in 2010 is 15.3% (7.65% employee + 7.65% employer) of your taxable earned income (excluding wages). That doesn't include income tax--you would need to calculate your approximate taxable income (from all sources) and pay--can't remember if it's 80% or 90% at the moment--of the estimated amount due.

That's why a good CPA or knowledgable tax preparer is invaluable. They will know all of that fun stuff. I'm a good accountant, but no tax expert!

If you don't expect to work as an independent contractor in the future, it might be easier to have additional amounts withheld through your employer. That way, Uncle Sam won't expect you to continue filing estimated taxes every quarter. But whether it's better to do it that way or not is a question for a tax expert!

 

[Sadie22]

You do not have to file quarterly estimated taxes on your self-employment income if you also have an employee job and have enough taxes withheld from that to cover your employee income and your self-employment income. The trick is to have enough withheld. If you do not have enough withheld and/or do not pay quarterly estimated taxes you may owe penalties and interest on the underpayment at the time you file your income tax return. Since your income is not equally distributed over the course of the year, you may be able to show when the income was received and thereby reduce or eliminate penalties and interest. Consult a tax advisor for more information.

 

[yoopermom]

We go through this every year since DH owns a one man masonry business, and business often doesn't start up until 2nd or even 3rd quarter, and we have NO idea how much $$ he'll make ahead of time.

The easiest way, as others have said, is to up his withholdings at his "regular" job (if he has one). If you had *no* tax liability last year, that's also an exception http://www.irs.gov/publications/p505/ch04.html#en_US_publink1000207499. We use the annualized income installment method (from the same link as above).

None of it's easy, but, at least for us, the penalty isn't too big, since he doesn't make very much.

Terri

 

[Cheshire Figment]

As long as you have a regular job and withholdings are taken out there is a major exception to penalties for underpayment of estimated.

Make sure that the total amount withheld is at least equal to your 2009 tax (Line 60 on Form 1040). If that happens then no matter the amount of the underpayment there is no penalty.

Several years ago I had a client sell the movie rights to a book and got a check well into six figures. The additional income tax was about $70,000 but their was no penalty due to the witholding was greater than the prior year's tax.

But once you have had the income for this year work with an accountant to assist you in setting up your quarterlies in the future.

I would also suggest going to www.irs.gov and order the following publications which will probably help a lot.

334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
463 - Travel, Entertainment, Gift, and Car Expenses
535 - Business Expenses
551 - Basis of Assets
552 - Recordkeeping for Individuals
560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
583 - Starting a Business and Keeping Records
587 - Business Use of Your Home
946 - How to Depreciate Property

And also, if the time can be spared and at and minimal cost take a first semester Principles of Accounting course at a local Community College. Not necessarily to keep the books, but to get an understanding of what the business is doing.

Note that most small business fail within the first few years not because the owner did not know his subject but because they did not understand the accounting.

Mike (CPA Retired)

 

[Zoesmama03]

If you are over 25 and will drive more than 100 miles a day then you can break even and have no tax and or get unearned income credit(if you don't have other employment). Is this going to be your only employment( I see not so it will be wise to increase your withholding from your job). Do you have someone else you file with? If you make more than unearned income with the two combined you probably will need additional withholdings though.

So many factors will play into it. Self employed or independent contractors can access a lot of tax cuts depending on if they use their home, car etc.

You can always pay quarterly though if you are really worried and just end up with a interest free loan to the government.

 

[bettymae1121]

Thank you, everyone! It's a work-at-home gig doing call center work for infomercials, so I'm not runing a buisness so much as I'm an independent contractor. So not much in the way of deductions. All I need to do is pay the self employment tax and income tax on my earnings. We've gotten a refund every year since getting married so I know that more than enough is being withheld to cover last years tax, but I'm going to work on the w-4 work sheet to make sure, and then up our withholding to cover the anticipated tax on the income from my new gig. All the extra money from the new income is going straight into savings so even if we do owe in April, we'll have the money to cover it. Once January '11 comes around I'll start sending in quarterly payments.

So that's my plan, if anyone thinks this is NOT the way to go, please let me know. My brother owns his own business so I'll ask him who his tax guy (or gal) is, but from everything I've read so far, my plan should work out fine.

Thanks again!

 

[powelweb]

You might want to review the classification to ensure you are an independent contractor and not a work at home employee. It involves assessing whether the company has control over how the work is performed, and other factors.

this can also be found on the irs website.

 

[bettymae1121]

You might want to review the classification to ensure you are an independent contractor and not a work at home employee. It involves assessing whether the company has control over how the work is performed, and other factors.

this can also be found on the irs website.

Yep, checked it out, I'm an IC.