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Question: $2,000 tax on $8,000 income?!?

I recently became a self-employed Pilates instructor (because there is no other kind), and am preparing my self-employment tax forms. I have estimated that I will make $8,000 for the second half of this year. And after calculating the honest way, my taxes owed on this $8,000 will be $2,000! I’m a full time student, so I can’t build up more hours or a business proper at this point. So, what the heck? Is this an egregious mistake on my part or does the IRS expect independent contractors to lie out to wazoo about their business expenses?

Answer: That will depend upon any other income that you have.

You’ll owe about $1,128 in Self-Employment taxes on $8,000 profit. If that’s your only income for the year you won’t owe any income tax unless you can be claimed as a dependent. (If you can be, tack on about $260 for Federal income tax.) If you have other income for the year, the $8,000 will be added to it to figure your income tax so it is entirely possible that you will owe a total of around $2k on it.

Forget about “lying out the wazoo” on your expenses. Small businesses are the MOST likely to be audited. Anything you claim that you don’t have proof of payment for will be disallowed. You’ll owe the tax, plus whatever penalties and interest are due on top of it.

Since you’re going to owe more than $1,000 on it, you do need to make estimated tax payments to avoid penalties and interest for underpayment of estimated taxes. Today was the due date for the 3rd quarterly payment so unless you’ve already been earning money at it for the past couple of months you don’t need to make any payments until Jan 15, 2009. So set aside enough to cover your tax bill and either make the Jan 15th payment, or file and pay in full by Jan 31st to avoid any extra penalties and interest.

Recapping final months of ‘09 news

The Enterprise today completes its annual week-by-week look back at the most significant news stories of 2009 with capsule summaries from every issue in September, October, November and December. The first eight months of 2009 were recapped in the final t read more

Bookkeeping for the Self Employed Tracks Income & Expenses Automatically and Free

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Question: My husband and I forgot to report earned income when we filled..advice?

My husband and I filed our taxes at HR block last week. We received a earned income credit, plus deductions for both our children. In Feb. of last year my husband did a webpage for a company for $1200. Today we received a 1099 in the mail from the company. We have also received our refund already. Obviously the IRS will know about this income, but will they catch it? Will it only apply if we are chosen for audit? Not sure what to do?

Thanks

Answer: It will be picked up automatically when IRS does document matching and will recompute tax based on that much additional income. You should file an amended return to report the income AND claim any expenses your husband had.

My Tax Account New Features -Part 2

Question: Would you switch from a W-2 job to become a 1099 contractor?

I’m thinking about switching from being paid 70-72k/year + benefits at a w-2 job in one setting to a 1099 contractor job at about $65/hr. How much of a pay increase is that? I’m in Minnesota, if that matters. I can switch to my wife’s insurance at minimal cost too so I’m not too worried about benefits.

Answer: If it’s the same job, you and they can’t just switch. A given job is one or the other, an employee or a contractor, and that’s defined by the terms of the job.

What the new job would pay you depends on how many hours you work. You’ll pay almost twice as high a % for social security and medicare as a 1099 contractor. And then there’s the value of the benefits you lose…. not just insurance, but paid vacation, sick days, eligiblity for unemployment comp if you are laid off or workers comp if you get hurt on the job, and any other benefits you might have as an employee.

Only you can evaluate what the loss of benefits is worth to you.

You say … Letter to the editor

The time is now. The tax revolution starts with our receipt of W-2 or 1099 forms. I refuse to pay any taxes on what my company spends on my health insurance. I worked my tail off for years to get security in retirement.

10 Reasons to Switch from W2 to 1099 Free Agent Entrepreneur by Mike Farrell with aspenIbiz

Question: We did a subcontracting job for a company, and now that we are finished, they want us to fill out an I-9?

They never mentioned anything about it before the work was completed, and now that money is due, they say that it has to be filled out, and it takes three days to go through, before we can be paid, ofcourse. Ive read the form, and it has that it has to be done within three days of beginning work. Are they allowed to ask for it now, when the work is completed? Some of my guys only have tax ids’ and wont be able to fill out the forms. Basically, in the years we have been doing this, not one company required it, because when i go to file taxes, they claim as their own subs, using 1099s’ so therefore, they are not my employees. Help please! No rude comments.

Answer: Tell the company that it was your understanding that you were working as contractors (selfemployed) I-9 is for employees, if the company files this, they will have to pay employers share of SS and Medicare (6.53%) in addition to what they pay you. The correct form for you to fill out and give them is W-9, they can use that to report your job to the IRS. I think the company just made a mistake here.

October 15 IRS Tax Extension Deadline Looming TaxMasters Prepares Small Business Owners With 6-Week Tax Plan

Understanding many sole proprietors are under the gun to follow up on the extensions they filed this past April 15, TaxMasters, Inc. , the IRS tax relief company and a leading provider of tax representation services, is sharing the ultimate 6-week plan designed to walk small businesses through the steps they need to meet the IRS’ October 15 deadline.

How to Organize Your Tax Papers