Self Employment Tax! How Do?

[Orvell]

I posted this on my journal here, but then realized it might be better suited for an actual post itself!

Can someone help me figure out how to estimate my self employment tax?
Basically if all goes according to plan, I'll be making more than $400 on art this year, my first time doing so. Since it's my understanding that $400+ is when SE tax kicks in, I want to make sure I'm doing this shit right.

How do I figure out how much of the income I'm taking in will be owed back?
I know that the self employment tax is 15% - correct? But do I also owe regular income tax on it, too, yes?

Here's an example of what might be happening soon:
A just-started art side project with have a monthly profit (after expenses are taken out, so net, not gross) = $170.85. This is split between my art partner-in-crime and I so we each receive $85.43. Since we are splitting it, I'd only be responsible for my portion, correct?
Would it be "MONEY" - 15% (Self Employment tax) - 15% of what remains (Federal) ???
Is it SE tax only that needs to be paid 'estimated quarterly' (15%) and then the same income minus the SE tax I already paid treated like "regular income" come normal tax time???

Income actually hitting us is roughly 3 weeks away (we are doing a patreon.com project, and patrons are charged on a 'per shipment' basis) but I want to basically know how much I should be earmarking as "not mine."

Also How much backup is required for the difference between gross and net? i.e. is just keeping receipts as 'business expense' proof enough?

Anyone have experience in this?
Or know of a good online guide?

........ halp!

ETA: Because there are two of us doing this venture, should we start a business?
If so, how do we do that? XD

[terran]

It's actually 15.3%, but close enough. Self employment tax is just the employee and employer portion of the FICA taxes you normally pay at your regular job (you pay 7.65% as does your employer). Here's the form where self employment tax is calculated, so you could run through that and you should get a very good idea of how it works: https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

[Orvell]

It's actually 15.3%, but close enough. Self employment tax is just the employee and employer portion of the FICA taxes you normally pay at your regular job (you pay 7.65% as does your employer). Here's the form where self employment tax is calculated, so you could run through that and you should get a very good idea of how it works: https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

Hey, thanks! :D Checking out the 1040 form now.

[seattlecyclone]

I know that the self employment tax is 15% - correct?

It's 15.3%, but close enough. :-)

But do I also owe regular income tax on it, too, yes?

Yes. To be specific, the self-employment tax is made to work pretty much exactly like payroll tax when you work for someone else. Your employer pays 7.65% behind the scenes and you have 7.65% taken out of your check. You then pay regular income tax on the full value of the paycheck. For self employment, you're the employer and the employee so you have to pay the full 15.3% yourself. When you work for someone else you don't need to pay income tax on the employer half of the tax, and the self-employment tax works the same way: half of the tax is a pre-AGI deduction so it doesn't count as income for the purpose of calculating your regular income tax.

Here's an example of what might be happening soon:
A just-started art side project with have a monthly profit (after expenses are taken out, so net, not gross) = $170.85. This is split between my art partner-in-crime and I so we each receive $85.43. Since we are splitting it, I'd only be responsible for my portion, correct?

This is something you might want to talk to a CPA about. There are various ways to set up a business and they all have their advantages and disadvantages.

Is it SE tax only that needs to be paid 'estimated quarterly' (15%) and then the same income minus the SE tax I already paid treated like "regular income" come normal tax time???

It's all one tax bill. You're responsible for paying it quarterly and/or through payroll deductions. If you have a main job you might want to just increase your withholding a bit on your paycheck so you don't need to mess around with calculating quarterly payments.

[Cpa Cat]

Hold back 15% of your profit plus your regular income tax rate. For most people, a total of 25% for both self employment tax and income tax is a good estimate for lower income individuals and 35% for middle-high.

Are you a partnership? Who is going to get the money from Patreon? If you make enough, what SSN are you going to provide to Patreon? You may need to consider forming an actual Partnership and filing a tax return for the partnership with its own EIN, depending on how this endeavor works.

Also - don't forget about sales tax if you're selling to individuals in your own state.

And don't forget state income taxes. You may not be making enough to be required to submit estimated tax payments to your state, but you'll still owe something on this income at tax time.

[Orvell]

Thanks guys!

My project partner and I are not in an official partnership, in what I assume you meant as a legal sense, Cpa Cat. But it sounds like we should be. How is this different from just being a business?
 
We have it set up to drop into her bank account and be split from there, but intend to create a separate bank account specifically for patreon purposes. Just haven't gotten around to it yet.

Re: sales tax - I'm not sure if this applies - maybe you can help me figure it out? What we're doing is this: https://www.patreon.com/CC_Otherworlds
Some people will be getting physical mailers, some will be getting emailed art/stories, and some will be getting access to process content only. Is all of it sales-tax-y?

[Cathy]

My project partner and I are not in an official partnership, in what I assume you meant as a legal sense, Cpa Cat. But it sounds like we should be. How is this different from just being a business?

Under the law of Wisconsin (and for that matter, the law of most jurisdictions), there are no formal steps required to form a partnership. In fact, Wisconsin law provides that "the association of 2 or more persons to carry on, as co-owners, a business for profit forms a partnership, whether or not the persons intend to form a partnership", unless the relationship is governed by the law of another state. WI Stat § 178.0202(1). I make no comment on how this may or may not be relevant for any purpose, including for federal or state tax purposes.

[Orvell]

My project partner and I are not in an official partnership, in what I assume you meant as a legal sense, Cpa Cat. But it sounds like we should be. How is this different from just being a business?

Under the law of Wisconsin (and for that matter, the law of most jurisdictions), there are no formal steps required to form a partnership. In fact, Wisconsin law provides that "the association of 2 or more persons to carry on, as co-owners, a business for profit forms a partnership, whether or not the persons intend to form a partnership", unless the relationship is governed by the law of another state. WI Stat § 178.0202(1). I make no comment on how this may or may not be relevant for any purpose, including for federal or state tax purposes.

Thanks Cathy.
I guess my point is, is being in a partnership with no formal whatsit enough? Seems like it won't actually have any function, if all you need to do is spit and shake hands.

[Cathy]

We cannot tell you how you should structure your business, but the choice of structure could be relevant for a variety of purposes. If you manage to avoid any disputes with your partner, the law governing the internal affairs of the business might not matter to you, but your business will also interact with the outside world and its structure could be relevant to how those interactions play out. That said, the legislators have tried their best to craft sane defaults that will match people's expectations, and those defaults might work okay for you (something on which I make no comment), but you should probably at the very least familiarise yourself with what those defaults are (e.g. by reading some material on Wisconsin's partnership laws).

[Orvell]

I should clarify, my project partner and I are upfront with the profit split, and I have 0 worries about massive disputes between us. This is a fun thing we're doing, and we worked out many details ahead of actually going through with the patreon set-up itself.
The question of partnership and or business forming is only in relation to what makes logical sense for tax reasons.

[Cathy]

The question of partnership and or business forming is only in relation to what makes logical sense for tax reasons.

As mentioned above, this is unfortunately not the case. As I noted above, "your business will also interact with the outside world". No matter how confident you are that you can avoid disputes with your partner, you cannot avoid interacting with the outside world if you are going to make any money, and, if I were you, I would want to understand the law that applies to those interactions.

Again, I express no view on any topic other than suggesting that you familiarise yourself with what the rules are.

[DavidAnnArbor]

Partnership law is separate from the tax issues. But partnership law can affect you if your business partner decides to buy something very expensive for your business, which you might not agree with. In paying for that large business purchase, you are both responsible for it, since you are both general partners. A creditor can come after your personal assets if the purchase is not paid off by the business. So some people start an LLC to shield personal assets from your business creditors. Your situation is unlikely to lead to such issues though.

[nobody123]

My wife gets a 1099 for freelance work she does, but rather than paying quarterly taxes, I just over withhold on my W-2 wages at my job to cover what her estimated taxes are.  That way I don't have to deal with quarterly filings.  If you're not making giant sums of cash, that method might work for you.

I would set up a formal agreement if you have a partner for the reasons listed by others.  I'd also look at the likelihood of being sued / worst case scenario (ex: partner kills someone while driving to deliver the artwork -- happened on company time, so the deceased's estate sues the company, and now your personal assets are at risk) and set up the business appropriately.

[Orvell]

Thanks guys!
We're doing research, and I'll post our plan in the next week to get feedback.

Re liability: I appreciate the concern, but it's SUPER LOW kids.
The art is all mailed or emailed. We don't even interact with people face to face. :)