How to calculate quarterly self employment tax?

[texastumbleweed]

So I just wrapped up with a client and was paid $35k.  I used 5k of that for expenses.  Total household income this year should be between 90k and 125k depending on projects.  How do I  calculate quarterly taxes?  We don't have the vouchers from last year because we had a slow year and were owed taxes.  Do I just pay 25% of the 35K or is there a way to calculate how to deduct the 5k?

Thanks!

[SeattleCPA]

You'll pay about a 15% income tax rate and about a 15% SE tax return on the $30K of net profit... so I'd just pay 30% of the $30K, or $9K, with the next quarter's estimated tax payment.

BTW, if you can use some chunk of the $30K for a pension, that'll save you from paying the 15% income tax rate on that...

[texastumbleweed]

What do you mean a pension? We are both self employed, aren't pensions through companies? 

[terran]

I would target paying 100% of last years total taxes through withholding and/or estimated taxes as that is a safe harbor where you won't owe a penalty. Holding aside your marginal tax rate plus 15.3% self employment tax, plus your marginal state tax would probably be a good idea so you don't have a nasty surprise come tax time.

I think there are some strange self funded pension like things that some high income self employed people will get into, but you're probably better off looking into self employed retirement accounts like a SEP IRA, Simple IRA, or solo 401k.

[respond2u]

I just helped someone do this a few days ago (since the filing was due 6/15).
The instructions are here: https://www.irs.gov/pub/irs-pdf/f1040es.pdf .

The worksheets in the pdf will tell you how much to pay.

Your income for the "2017 Self-Employment Tax and Deduction Worksheet" worksheet is 30K, based on "earned income" (not passive income) and you'll owe federal income taxes on that (and possibly state income taxes, but you'll have to google your state for that) as well as "both sides" of the social security and medicare taxes.

Your income for "2017 Estimated Tax Worksheet" includes dividends and interest, royalties, etc--all of it, passive, active, earned, etc.

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One perplexing question in the worksheet is that it assumes that you can guess how much you'll make this year. I don't even try since my income is so variable. Instead, I just keep a running tally and pay as I go (it's suggested as an option under step 14 in the tax worksheet). But if you're income is fairly predictable, go the normal route and pay 1/4 of the estimate each time (making sure to pay >90% by the end of the year).

In order to avoid a fine for not paying taxes evenly, I make sure to record when I receive payments and pay liberally. It's not like I'm losing 5% interest on the IRS having the money instead of my bank account, and by overpaying, it makes the first payment of next year easier (it's an option on the 1040 on what to do with your refund).

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The "pension" remark maybe was a suggestion for you to think about opening a SEP-IRA, IRA, KEOGH, or some other tax deferral account. I have a SEP-IRA through Fidelity. It's super easy to set up, and you can put quite a bit into it. A nice trick is that you don't have to fund the account until you pay your taxes next year (april, or october if you get an extension). I think you may have to set up the account *this* year, though. I can't remember.

However, if you're making in the 90ishK range for a household, your tax rate may be low enough that you should just do a Roth IRA instead (again, I'd set the account up this year or make sure you can set it up next year and retro-fund it).

If you make enough to start an LLC, you can dodge optimize the tax burden by taking more of your money as dividends than income, but that's a risky dodge that lowers your social security payments as a side-effect (assuming you make less than the social security max). Definitely consult a tax specialist on this since you may get into trouble if the IRS thinks you're dodging paying your rightful share.

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Be prepared to possibly pay a small fine next year when you file since you're late for the second (june) payment this year.

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Finally, automation...
If you're going to keep doing this, put the worksheets in a spreadsheet so they can do the calculations for you. That will make it easier to track when you earn and what you've paid.

Sign up at www.eftps.gov so you can pay electronically. Much simpler than using physical mail.

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I guess this is the last finally. If all this is a PITA for you, hire a CPA. The price you pay them will seem insignificant compared to the fear and fines. I do it myself, but I've had the time to learn incrementally.

[texastumbleweed]

Ok, thank you!

[DavidAnnArbor]

If you're self-employed, and have no other employees except for a spouse, and maybe a very part-time person, then you should absolutely be saving money in your Solo or Self-Employed 401(K). You can take 18K as an Employee deduction into that right off the top, assuming you have enough income. Get your solo 401k plan set up post-haste at either Fidelity or Vanguard.

Caveat:  If you have another regular job with a company and you are already making payments into your company's 401k plan, then your self-employed 401k deduction won't be allowed to the point where the maximum employee deduction is 18K across all 401k, 403b plans.

[respond2u]

If you're self-employed, and have no other employees except for a spouse, and maybe a very part-time person, then you should absolutely be saving money in your Solo or Self-Employed 401(K). You can take 18K as an Employee deduction into that right off the top, assuming you have enough income. Get your solo 401k plan set up post-haste at either Fidelity or Vanguard.

Caveat:  If you have another regular job with a company and you are already making payments into your company's 401k plan, then your self-employed 401k deduction won't be allowed to the point where the maximum employee deduction is 18K across all 401k, 403b plans.

SEP-IRA allows up to 54K, IIRC (or ~20% of income, whichever is lower). If you're in the zone to contribute a lot, it's probably worthwhile to look into an HSA as well.

[texastumbleweed]

Hm. So we are both self employed (but both work freelance not with each other) and we each have a Roth IRA.  My income can range between 10 and 40k and my spouses between 50- 200k.  We usually just max out our Roth IRA accounts and put the rest into just a plain old account with the funds in an etf.  If this different from what you are saying above?  I'm not sure I've heard of a 401k solo.

[DavidAnnArbor]

A solo 401k is separate from a Roth.  It's like a 401k plan, you don't pay any federal nor state income taxes on the money you put in it, though you would still pay the Social Security/Medicare taxes on the business income, even if it goes into the 401k.

There are advantages to putting money into this 401k, you lower your AGI on your tax return. This in turn could enable you to lower your AGI to enable you to put money in a tIRA, and you don't pay any income taxes on money you put in there either.

If your self-employed income is getting fairly high you might consider becoming an S-corp, and paying yourself a salary - the bottom line here is to not have to pay the Soc.Sec/Medicare tax on business income of $200,000

[respond2u]

Hm. So we are both self employed (but both work freelance not with each other) and we each have a Roth IRA.  My income can range between 10 and 40k and my spouses between 50- 200k.  We usually just max out our Roth IRA accounts and put the rest into just a plain old account with the funds in an etf.  If this different from what you are saying above?  I'm not sure I've heard of a 401k solo.

If your spouse earns 200K, neither of you will be eligible for the Roth!
Also, I'm not sure how estimated taxes work with a spouse. Married filing separately is usually a penatly, IIRC, so it might be better for you to either (a) run through multiple scenarios in last year's turbo tax or (b) hire a CPA.

$240K is serious money and you'll pay agonizingly high taxes if you don't get y'alls finances in order.

[SeattleCPA]

What do you mean a pension? We are both self employed, aren't pensions through companies?

My suggestion stemmed from possibility you could use a pension plan (a plan for your sole proprietorship) to create a deduction to save income taxes though not self-employment taxes.

It's really hard to know for sure based on info you've provided which options make sense, but I'd be surprised if you're making high five figures or more that using a Roth account makes sense.

http://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

I'd also be surprised if the idea of setting up an LLC and electing Sub S status and then saving a bit of payroll taxes makes sense. Too much fiddling and administrative cost for too little benefit.

http://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

My guess: Max any 401(k)s available at your regular jobs... if you've maxed your 401(k)s and want save still more look at a couple of Simple-IRAs or a SEP to save some of the sole proprietorship profit and avoid income though not self-employment taxes on that money.

To get back to the original question, you'll pay maybe 15%-ish self-employment taxes on the profit... and then 15%-ish income taxes on the whatever is leftover from the profits *after* you make additional pension fund contributions.

[respond2u]

I'd also be surprised if the idea of setting up an LLC and electing Sub S status and then saving a bit of payroll taxes makes sense. Too much fiddling and administrative cost for too little benefit.

One CPA I talked with said that (in my state) it becomes worthwhile about $250K, but I suspect that depends quite a bit on how much the CPA charges to do the processing and how much of it you do.

On the counter-side, a green card working earning about $120K found it quite profitable (even with CPA fees) because he set his income really really low, thus avoiding payroll taxes (15%) and payed income taxes on dividends (0%) instead of earnings (20ish%). I believe that's not legit (you're supposed to take a reasonable salary, IIRC).

He justified it by claiming out that he plans to take his family home and not take any SS. And said that it was winked at by the IRS.