Self-employment tax advice

[remizidae]

Hi all. I just got a part-time job as a contractor (in addition to W2 income). Hoping for help figuring out what this means for my tax situation. I'm going to list what I think I know and maybe others will fill in stuff I haven't thought of.

• I need to pay quarterly estimated federal taxes, including self-employment tax of 15.3% of 92.35% of my self-employment income. I'm estimating income tax on the self-employment income at my marginal fed tax rates of 22%
• Probably need to pay quarterly estimated state taxes too—so far I don't have a good tool helping me to estimate that.
• I will take the QBI deduction when I file taxes
• I can get a business checking account and business credit cards as a sole proprietor! That should be fun

I'm *fairly* sophisticated with taxes and usually do my own, but is this situation worth hiring an accountant for (at least the first year)? Or just set aside half of each self-employment paycheck so I have a cash reserve in case my estimated payments are so low?

Thanks in advance.

[SeattleCPA]

I think mostly right now you need to have good little accounting system so you track your income sure but also so you do a good job tracking your expenses (deductions). That's the main thing you want to take care of.

All that other stuff? I wouldn't worry about it. Except to say this: Your marginal tax rate on your profits (which you'll calculate using your accounting system) will be pretty high if you pay the 15.3% self-employment tax on your profit, your marginal federal rate, and your state marginal rate etc. It's easy to get blindsided because you're paying 30%, 40% or even more.

[remizidae]

I think mostly right now you need to have good little accounting system so you track your income sure but also so you do a good job tracking your expenses (deductions). That's the main thing you want to take care of.

All that other stuff? I wouldn't worry about it. Except to say this: Your marginal tax rate on your profits (which you'll calculate using your accounting system) will be pretty high if you pay the 15.3% self-employment tax on your profit, your marginal federal rate, and your state marginal rate etc. It's easy to get blindsided because you're paying 30%, 40% or even more.

Thanks! Yeah, I’m prepared to put aside half of my checks for taxes. Accounting should be simple since I basically have no expenses other than a laptop. Are you recommending I should buy accounting software?

[SeattleCPA]

Thanks! Yeah, I’m prepared to put aside half of my checks for taxes. Accounting should be simple since I basically have no expenses other than a laptop. Are you recommending I should buy accounting software?

@remizidae I would use (or buy) some accounting software before taking any tax or financial step.

Sure, you can use a piece of paper and a pencil to write up a summary of your income and expenses. (Some of our clients basically do this. Not many but some.)

You can also use an Excel or Google spreadsheet. (More of our clients do this.)

But what's really best is to get some piece of software to track your income transactions and their timing. And all your expense transactions and their timing. In real time as year goes by.

You don't need something very powerful if you're running a service business with a handful of monthly invoices and the occasional expense. But paper and pencil or spreadsheet and memory will mean you miss deductions and rely on others for timing transactions.

Note: If you miss one $200 expense over the year and your marginal tax rate is 50 percent, missing (forgetting) that one deduction costs you $100 obviously.

Software to look at: FreshBooks, Xero, the self-employed flavor of QuickBooks, Quicken if it's still around, any other "checkbook on a computer" program.