According to my accountant, neither is yours
You accountant takes calls at 5:00 am? Wow!
More to the point…
Reduce, not eliminate, at least not in all cases.
But you still have to write that check for $125.
Things get further complicated if you had a good year last year but this year you’re having a terrible year and the various tax agencies (Federal and state) are expecting quarterly payments in line with your prior year’s income… trust me on this, it can get ugly. The government doesn’t want to hear “my sales tanked for two quarters, I’m not making as much as last year”. The problem is something you can solve/deal with but it’s a headache. The system is heavily weighted to the idea you’re making as much as you did last year.
But you still have to pay your SE at some point, if not quarterly then at the end of the tax year. Which was the real question of the OP - “do poor self-employed people still have to pay self-employment tax?” - not “do they pay quarterly or annually?”
But they are expecting your taxes to be at least as much as last year’s. Of course, at the end of the year if you haven’t made as much adjustments are made accordingly but that’s at the end of the year. You can make lower quarterly payments but if you guess your income wrong you can wind up penalized - which is why most people err on the side of caution.
That’s great if you know how much you’re going to make in a year. Not everyone does.
So? This has no relevance to what the OP asked.
Yes, but… so?
Again, not relevant to what the OP actually asked.
The point is that what you’re saying contradicts some of what my accountant has told me over the past 20 years. Apparently, you’re not a CPA either.
First, let me remind you of the post that I was responding to.
Ok…
Your claim was “If you’re self-employed you pay self-employment tax regardless of what else you may or may not qualify to get.” Not true. You may take the benefits into account,
Many people base their payments on their previous year’s taxes. This is fast and easy. But you are not required to. If your income goes down you may try to forecast this year’s income if you are able, or you may use the Annualized Installments method to pay tax on exactly what you earned. These are the rules. The tax agency isn’t going to get mad at you if you follow them.
And now you claim you base your payments on your priors year’s taxes, which differs from your claim “so you’re still writing a check for 15% of your income for the quarter and mailing it.”
Of course you do. But you made a specific claim about the EIC while berating another poster. I refuted this claim.
No, they are not expecting anything of the sort. The tax code allows you to use any of three methods for calculating your payments. Using your prior year’s taxes is one of them and perhaps the simplest. The tax authorities will be perfectly happy no matter which method you choose.
But if you make a mistake, it will reduce the amount of your penalty. And you can always use the Annualized Installments method.
So I can only post replies directly to the OP and not point out factual inaccuracies in claims that others make?
By the way, if your accountant is still up, why don’t you send him a copy of my post (any or all of them) and ask if I’ve said anything wrong and post his reply here.
I’m sure what your accountant has said to you is entirely appropriate for you financial situation. You should listen to him.
But you yourself admit that you don’t understand how estimated taxes work:
“The fact that this IS complicated is the primary reason I seek professional tax advice because guessing wrong as an amateur can result in substantial penalties far in excess of an accountant’s fees for helping you do this correctly the first time around.”
The tax plan that your accountant has laid out specifically for you is not of general applicability. There are rules you don’t know and don’t understand that could benefit others. Please don’t represent your unique situation as being the hard and fast rule for everyone.
And, please, do show my posts to your accountant. Ask him if I’m wrong.
No, you only have to pay quarterly taxes if you expect your total tax due at the end of the year will be more than $1,000.
The OP gave the example of earning $7,000. Let’s use that. Assuming the $7,000 was net profit, after subtracting expenses, then your Self Employment Tax is 92.35% of 7,000 times 15.3% which is $989.07. So if you believe at the beginning of the year that you will be making $7,000 (or less), you do NOT need to make quarterly estimated tax payments. You can just pay the tax in a lump sum on April 15th of the following year.
It gets even better if you qualify for the Earned Income Credit. If you’re single, you might get a credit of up to $496, in which case your actual tax owed is only $493.07 and you aren’t even close to the $1,000 tipping point.
I think the point that **Broomstick **is making is that you will always pay self employment tax on net self employment income regardless if you are in poverty or not, and your tax liability must be paid quarterly unless you fall into one of the safe harbor exceptions that Alley Dweller described. These quarterly payment requirements are not limited to those self employed - it’s just that W2 earners typically cover this through withholdings.
You guys aren’t really saying things all that far apart. What really bugs me is that the number used in this thread has been 7.5% or 15% for both portions. It’s really 7.65% and 15.3% underneath the cap. And only a portion of that rate is subject to the cap.
You can take them into account all you want, but if you net more than a set amount you will be required to pay SE tax.
No sir, that is NOT what I said. I did not say that >I< base my payments on my prior year’s taxes, I base them on what my accountant advises (that sort of thing is, after all, what I pay him for). I said “based on prior year” is pretty typical/common/etc.
Oh, really? Is that why my state automatically mails you a packet that contains pre-printed “payment” coupons and envelopes? That should seems like an expectation to me. Yes, you CAN make other arrangements (they even tell you that in the information that everything comes with) but not everyone does, or reads the information carefully.
As long as you do them correctly. That’s the big stumbling block for many, and where many people get into trouble. I’ve seen too many artists/musicians/writers/other freelance types get into serious, serious fines and penalties by trying to navigate these waters without good and legit advice.
Reduce your penalty, NOT eliminate it. When you’re already poor you can’t afford even a reduced penalty.
Sure - as soon as you agree to pay for his time. Because he doesn’t work for free. I’ve agreed on the amount for him to prepare this year’s taxes, but answering posts on internet message boards will be extra.
^ This.
Which is why I always, always tell people who are working in circumstances that result in things like 1099’s or significant side income to hire an accountant. You may not need one every year but you really DO need sound advice tailored to your situation.
If all I had was one W2 I’d be happy to use a 1040EZ and maybe something like TurboTax, but I’ve been earning side income since the 1980’s. Using a professional accountant both for tax preparation and advice on record keeping has been worth every penny for me. I can’t recommend it enough for folks with a complicated income situation.
For purposes of this thread I’m will to accept some rounding. Others are not.
As pointed out elsewhere, the figure of 15.3% is for FICA (Social Security and Medicare payroll contribution); if you’re your own employer, you’re paying the employer’s 7.65% share and your own 7.65% that would come out of your check if you were an employee.
Truly poor folks generally do not pay federal income tax (though they may wind up in effect giving the federal government an interest-free loan, through wage-related withholding, in part due to the lack of proper W-4 exemptions but also because there are tax credits and exemptions they can take advantage of when filing tax for a given year).
OK, once again: Poor people DO pay taxes.
That doesn’t mean they pay ALL taxes that, say, Warren Buffet does, but they do pay taxes.
Again, the objection is to the statement "poor people don’t pay taxes". Not that they don’t pay a particular tax, the problem is the statement that implies they pay NO taxes. Yes, they DO pay taxes.
At a minimum, they pay sales taxes, state taxes, and FICA. Those are all real taxes. Hence my statement “poor people do pay taxes”.
I hope this clears up any lingering confusion. If you are not in the group making the objectionable statement then chill out, my ire is not directed at you.
I find it difficult to recommend to anyone that is in the lower income brackets that they pay for tax advice. It really isn’t necessary unless there are unusual circumstances. Even then, the IRS is actually quite helpful if you have questions.
“Pay for tax advice” is not putting someone on thousands of dollars of retainer. It’s paying for some advice, like “which forms should I use and what should I look out for?”.
Nor did I say they always needed such advice, but if you are getting 1099’s and you haven’t before then yes, you really should get some sound, professional advice. The IRS is helpful if you know which question to ask - sometimes you don’t know what you don’t know.
Most really poor people I know wind up with W2’s, but some don’t, and the latter can get into hot water. You are correct, it’s not a typical situation but it does happen.
I think the most unusual year I had involved three W2’s, seven 1099’s, and sufficient other income from sources that weren’t required to give me a 1099 but added up to enough total I still had to report it. Lots of receipts, some transportation could be deducted some couldn’t, could or couldn’t I use depreciation on my truck? Is that typical? No. But I’m proof it does happen, and the folks at Public Aid said that while my paperwork was more orderly than usual I certainly wasn’t the first such case they had seen. I had my guy, but the Public Aid people also had a list of folks willing to give tax advice on a sliding scale to help people in such situations.
These days, with on-line resources, yes, you probably could do it all on your own… if you can distinguish between good advice and bad on your own. Again, that can be a problem if you don’t know what you don’t know.
As an example of how people get into trouble: the thing about deducting part of your home as office space. You can’t just say “oh, this room/desk/file cabinet is for business” and calculate a percentage of mortgage/rent/utilities. There are some pretty strict rules about what is and isn’t a “home office” and you have to follow them diligently. Because I’ve never been able to satisfy certain of those requirements I’ve never made such a claim. It’s not that I don’t have a home office, it’s just that it doesn’t meet IRS requirements and definitions. Sure, it’s not a problem unless you’re audited… but if you are audited and your home office doesn’t meet requirements you are looking at lots of penalties and they’ll take back as far in the past as they can.
OK, I’ll bite. I trust you. Tell me ALL about this ugliness you experienced.
I’ve been self-employed for the past 20 years straight and before that I had years when I had an employer and years where I worked for myself. And I make estimated tax payments each quarter based on what I made that quarter.
And I consistently make over half my annual income in the last quarter, so I pay over half of my estimated taxes in the last quarter. I’ve never had a problem.
And I have bad years and good years. In fact, I have a pattern of bad years and good years … simply because of the nature of my business, which consists of a relatively small number of relatively large sales. The timing of one invoice payment can make or break a year.
I’ve certainly never had to explain to any tax agency that I was having a bad year and I’ve certainly never had to “explain that my sales tanked the last two quarters.” I’m sure I might get into trouble if I didn’t make enough payments total for the year but that’s not what you are claiming.
So how did this get ugly for you? Did someone from the IRS call you and confront you about not sending in enough estimated tax? Did they ask why and proceed to disbelieve you when you said your sales were down? Did he accuse you of lying or call you nasty names? Sounds like a good story here, I want to hear more.
The worst it ever got for me and mine was an official letter or phone asking a question, whereupon we supplied the request information and no further problem. However, that was dependent on us having adequate records. With you being self-employed I’m sure I don’t have to tell you that proper record-keeping is important, right?
I’ve seen other people get into heaps of trouble, thousands of dollars in fines, and multi-year payment requirements due to simple ignorance. This is most problematic when you have sporadic income, which it sounds like you have some experience with. There’s also some difference between being self-employed as a second job (which sounds like your situation) and claiming it as your sole income.
Since both of our freelance/self-employed incomes have been of that sort it has complicated things for us. Not intolerably, but sometimes you have to explain the situation to bureaucrats, and sometimes they want more documentation than they would otherwise ask for. That’s not a problem if you have your records in order. It is a problem if you don’t.
Watching fellow artists/musicians/writers get put on the hook for tens of thousands of dollars when they’re barely above poverty line has made me rather cautious in handling my own affairs. Which is why I say people engaging in such endeavors really should get some solid, professional tax advice to make sure they’re complying with everything they need to comply with. As I said, that doesn’t mean thousands of dollars every year. It might mean paying an accountant to help you set up a record-keeping system to track everything and then some assistance with taxes at the end of the year. After a couple of years of that you might feel confident going it on your own… or maybe not.
If you, personally, don’t feel a need for that and can keep up with everything on your own good for you. It’s been my observation that a lot of people can’t do that.
Having been self-employed for seven years, with wildly varying income from year to year throughout that time, I have to ask: specifically, what “ugly” problems did you have arising from this situation? In my experience, the penalties are negligible even if you fail to make the quarterly payments at all, and nobody hassled me for them ever. Even in years when I made very good money, the penalties I paid were so low that they were worth it to me in the time and hassle (and CPA fees) I saved by not making quarterly payments. Then, when I tapered off and closed my business, my income dropped radically, and the government didn’t bother me then, either.
My CPA says my experience is typical.
EDIT: I see you answered this. Doesn’t sound ugly at all.
Not for me, no - I am quite capable of learning from the mistakes of others.
Other than working at a sandwich shop in college, I’ve never been a W2 employee. Essentially all of my income is now capital gains distributions and reported through a Form K1. I didn’t pay a penny in tax this year through estimated payments. The only consequence is that I will owe some interest when I right a fat check tomorrow to the IRS and state.
I very much disagree that it is the same exact thing. With regular W2 income, you can rightly receive a tax deduction for children and a significant part of the tax will be returned. Not possible with the self employment tax. I am a mother and the sole earner in my family, and earning well below the poverty level. All my income is under the “self-employed” category. Within the earned income tax realm, it is recognized as inhumane that I would contribute 15% of my below poverty line income when I have a child to care and provide for. Not so in the self-employment tax realm. It is completely unjust and squeezes poor families into subservient roles in society. It is a big problem of inequity and equal access to opportunity. I hope we can shift the dialogue!
Moderating
ezeder, welcome to the boards. Our General Questions forum is for factual information. If you wish to “shift the dialogue” and discuss whether the self employment tax is fair or not, it would be best to start a new thread in the Great Debates forum.
Colibri
General Questions Moderator