Allocating Taxes to a Pass-Through Small Business

[Michael in ABQ]

I have a sole proprietor business reselling products online. I am trying to determine how much from the business account I should allocate to paying taxes since this is a pass-through entity.

I just finished filing my taxes and my net profit on my Schedule C was about $2,200 on revenue of around $9,000. Because I have six kids I ended up with an overall negative tax rate and a healthy refund for both state and federal taxes. However, I've been setting aside money from the business income in a separate sub-account for taxes and there's several hundred dollars in there.

I would be in the 12% tax bracket based on my AGI. So should I simply allocate 12% of $2,200? There's also self-employment tax I'm paying on this income so should I include that 7.35% as well? Or the full 15.3%? Then with the 20% Qualified Business Deduction that reduced my AGI by about $500 which at 12% is $60 in tax savings.

[terran]

This is just a mental accounting thing, right? I can't think of any legal/official reason for this, so I'm assuming this just needs to be a reasonable approximation.

It sounds like you're paying the full amount of self employment taxes (meaning your total individual income is under the ~$130k social security wage base limit) and your total household income is under the QBI limit or this isn't a specified service business. In that case this income is costing you 92.35% x 15.3% = 14.12955% in self employment taxes, you'll get a deduction for 1/2 of your self employment tax worth 7.064775% of your marginal bracket and the QBI deduction worth 20% of your marginal bracket. Add that all together and you get a total marginal tax rate of 14.12955%+12%-(7.064775%+20%)x12% = 22.881777%, which on $2200 of income reduced your refund by $503.40, so that's what I would transfer.

[Michael in ABQ]

This is just a mental accounting thing, right? I can't think of any legal/official reason for this, so I'm assuming this just needs to be a reasonable approximation.

It sounds like you're paying the full amount of self employment taxes (meaning your total individual income is under the ~$130k social security wage base limit) and your total household income is under the QBI limit or this isn't a specified service business. In that case this income is costing you 92.35% x 15.3% = 14.12955% in self employment taxes, you'll get a deduction for 1/2 of your self employment tax worth 7.064775% of your marginal bracket and the QBI deduction worth 20% of your marginal bracket. Add that all together and you get a total marginal tax rate of 14.12955%+12%-(7.064775%+20%)x12% = 22.881777%, which on $2200 of income reduced your refund by $503.40, so that's what I would transfer.

Correct. I'm trying to look at this from the perspective of what would the difference in my income taxes be if I did not have any of this Schedule C income/expenses.