I’m curious about that too… The tax schedule seems pretty simple - you make X, you owe Y. You factor in various deductions that apply, but overall that seems the formula.
But then again, my taxes are pretty simple (I think) - mostly just home interest deduction and some investment stuff.
So I guess the question (for me) isn’t as much what mistake they made - but whether their tax situation was more complicated than someone who has to itemize (ie, not 1040EZ) only because they have mortgage interest deductions to account for.
Their biggest mistake was assuming that lower income always meant lower taxes. They added all kinds of non-business expenses* so that they could show a loss every year, using the loss to offset some small amount of investment and other income. They thought they’d be clever by leaving some income off the tax return (under the philosophy that if the IRS doesn’t know about, it you shouldn’t claim it).
What they didn’t know is that you can’t get Earned Income Credit unless you show earned income. Child tax credit was also a factor. So, taking out the expenses that weren’t business expenses in the first place did increase their tax, but it increased their tax credits faster. At the “sweet spot” of about $20,000 in earned income, you’re paying an extra $3,000 in self-employment tax, but you’re getting $4400 from EIC and $2000 from additional Child Tax Credit.
Many of these non-business expenses were still deductible elsewhere on the return, including student loan tuition, education costs and health insurance. So there wasn’t a big change in total AGI, but a large change in the amount of AGI attributed to earned income.
Thanks for the explanation. I have to admit, it doesn’t sound at all like a mistake I would make. But I’ll bet there are more arcane traps one might fall into without an accountant.
My daughter is working this summer as an independent contractor. She will probably gross about $2000. Does she have to file quarterly taxes? She also has other income and is confused about what she had been told.
Because the guy is going to be really busy trying to run the business, from drumming up customers to handling employee disputes to dealing with other government agencies besides the IRS, like OSHA and DOT, or whatever agencies apply. I don’t know what kind of business he has, but let’s say it’s a landscaping service. Then he has to work up quotes and estimates. He has to purchase equipment, and figure out himself how to amortize it. He might have to charge sales tax, keep up with local ordinances and codes, and attend classes to be certified in things like irrigation systems. (Yes, you have to be certified in some locations to install irrigation.) He’ll have to work with local authorities from the water company to the city council to the local homeowner’s association. He’s going to be working 16-20 hours a day if he is going to succeed. He won’t have time to run his business if he has to learn accounting on top of it all.
Okay, for some reason I was picturing the OP just working for himself by himself, not with employees and all that. But you’re right the OP doesn’t specify.
By the way, I have an acquaintance who has been running a pizza place for about a year now. She told me that she has to pay a tax on every item used on the property–there’s a specific tax assessed for each stool, for example.
I’ve paid an accountant $200 a year for a couple decades, both when my husband was self-employed and now that I’m self-employed. Because we went to him BEFORE we started self-employment he kept us out of trouble from the start. WORTH EVERY PENNY.
GET AN ACCOUNTANT!
Don’t try to do this with TurboTax type software. A live person will not only do your taxes, he/she can tell you have to keep records, avoid problems, and so on.
At times it may be well worth it to go in for extra consultation, for which you should pay (ours charges hourly) but WORTH EVERY PENNY if it keeps you out of trouble.
I make HALF what the OP does and I still go to an accountant for tax matters.
Oh, good lord - yes, she probably should. The total taxes on $2k isn’t going to be huge, but if she doesn’t pay them the IRS can impose fines, with interest, even on 2k. She also needs to be aware of potential business expense deductions, and the fact that she WILL need to pay self-employment tax. Once you get a 1099 (and she will, if she’s earning over 2k as an independent contractor) you can’t file 1040EZ anymore, even if that’s all you earn in a year.
Going to see a live accountant to go over things BEFORE tax liabilities come up is a very, very good idea.
My apologies, it is late and I didn’t read the entire thread. Maybe you already have an answer…
I have been running my own business since the beginning of the year. I have found Quickbooks to be pretty easy to set up and use and it tells me exactly how much I owe and when to pay and what other forms to fill out. I don’t recall exactly what I paid for Quickbooks, but it was less than 120 dollars and was worth every single penny.
Not enough information to know for sure. Every locality is different.
In Washington, businesses do pay property tax on durable assets. It’s assessed based on the total value of the property you have, but you have to list the number, type and value for the assessor.
Washington also has a use tax so that if she acquired the stools out of state, she might have to pay an amount equal to her local sales tax rate.
The entire thread? It’s only about 30 brief posts. Anyway, even if you skimmed it, you must have seen in practically every other post: GET AN ACCOUNTANT. You should too. God only knows how much you’ve overpaid or underpaid.
I’ve never run my own business, so I don’t have a figure. (But I have no idea why you mention $40,000 a year. )
To me it’s essential that before you set up your own business, you make a business plan and find an accountant.
It’s like putting on a seat belt before driving, taking out insurance on your house and looking before you cross the road.
People who don’t take these precautions tend to suffer. :eek:
Just as nearly everyone else has said get an accountant.
I’m English and so our taxation system is somewhat different however consider this,
Along with two other people I own a small engineering company which we bought three years ago, our first years personal tax bill was £22000 EACH. Enter the Accountant who managed to get this reduced to £8000 each. In the last two years our personal tax bill has been £0.
We do however pay other forms of taxation but a good accountant will save you money.
Running your own business can be a steep learning curve and mistakes will be made but you learn from them as we did and hopefully don’t repeat them .
I’ve never used an accountant either. OTOH I didn’t know they were so cheap - I would have figured a couple of thousand dollars rather than a couple of hundred.
I don’t think there’s any way to get my tax bill any lower, accountant or no accountant. I just don’t have that many deductions I can take.
It depends on what you use an accountant for. I don’t use one for my daily book keeping, I do that. I use him for my tax preparation and for additional consultation as needed.
One very helpful thing he did was tell me how to properly document business expenses so as to make everyone’s life easier and, in the event of an audit, have less trouble with the IRS.
But I’ll bet there are more arcane traps one might fall into without an accountant.
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