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Old Oct 5th 2017, 11:46 pm   #1
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Default Question about Self Employment taxes

Hi all

So now that I have my work authorisation approved, I decided to become an independent contractor for the company I worked for back in the UK.

I have an accountant over here who will be handling that stuff come tax season, but I'm unnecessarily stressing out about it. Presumably due to it being the fact that this is my first year doing it. I get the gist of it, pretty much - but I was wondering, how much of my monthly pay check should I be putting away for taxation? My accountant says about 30% is probably a good number. I fall in the 25% tax bracket currently.

I'm aware that there are certain deductions I can make, such as health insurance etc. and also half of the Social Security and Medicaid tax because I'll be paying both the employee and the employer sections. So was just wondering with these in mind, what a good finger in the air percentage would be to put away.
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Old Oct 5th 2017, 11:49 pm   #2
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Default Re: Question about Self Employment taxes

The SS payments ("payroll taxes") for employers, and therefore self employed are fairly brutal. I would guess that 30% might not be sufficient and would recommend starting at 35%, then be pleasantly surprised if it is less.
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Old Oct 5th 2017, 11:54 pm   #3
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Default Re: Question about Self Employment taxes

Quote:
Originally Posted by Pulaski View Post
The SS payments ("payroll taxes") for employers, and therefore self employed are fairly brutal. I would guess that 30% might not be sufficient and would recommend starting at 35%, then be pleasantly surprised if it is less.
Thanks for this. Do you know if there's any good online calculators to figure this stuff out? Or a good way to calculate roughly what I should be expecting when the tax bill is generated?

I think I'd be a lot more at ease with the whole process if there was some way of getting a rough idea, you know?

EDIT: Also, regarding the payroll taxes - it is true that you can deduct the employer portion of this on the return right? As per this link;

https://www.irs.gov/businesses/small...medicare-taxes
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Old Oct 6th 2017, 12:02 am   #4
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Default Re: Question about Self Employment taxes

Quote:
Originally Posted by BigBoss1984 View Post
Thanks for this. Do you know if there's any good online calculators to figure this stuff out? Or a good way to calculate roughly what I should be expecting when the tax bill is generated?

I think I'd be a lot more at ease with the whole process if there was some way of getting a rough idea, you know?

EDIT: Also, regarding the payroll taxes - it is true that you can deduct the employer portion of this on the return right? As per this link;

https://www.irs.gov/businesses/small...medicare-taxes
Not sure. .... I've tried a couple and either I am wrong (taxes are less than I suggested in #2 above) or self employed people who whine about the amount of tax self employed people pay are whining way too much, because on income of $100k the calculators say tax and SS of about $14k-$15k.
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Old Oct 6th 2017, 12:07 am   #5
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Default Re: Question about Self Employment taxes

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Originally Posted by Pulaski View Post
Not sure. .... I've tried a couple and either I am wrong (taxes are less than I suggested in #2 above) or self employed people who whine about the amount of tax self employed people pay are whining way too much, because on income of $100k the calculators say tax and SS of about $14k-$15k.
I think my understanding, and trust me - that understanding is very limited - is that on paper, it looks like you'd pay quite a large amount if you're self employed - but once you make all of the necessary deductions from the return, it's actually not so bad. That's my understanding that has been somewhat verified by the accountant I'm using. I'm gonna see how it pans out though!
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Old Oct 6th 2017, 12:10 am   #6
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Default Re: Question about Self Employment taxes

Maybe a mod can move this to main USA forum to get some more exposure.

Sorry I don't know much more about this subject than what Pulaski has said.
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Old Oct 6th 2017, 12:11 am   #7
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Default Re: Question about Self Employment taxes

Yeah I probably should have put it there to be honest
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Old Oct 6th 2017, 12:25 am   #8
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Default Re: Question about Self Employment taxes

Quote:
Originally Posted by Pulaski View Post
Not sure. .... I've tried a couple and either I am wrong (taxes are less than I suggested in #2 above) or self employed people who whine about the amount of tax self employed people pay are whining way too much, because on income of $100k the calculators say tax and SS of about $14k-$15k.
My OH has been self employed his whole working life and I’ve been since the mid-eighties. I’ve never understood the complaining. It’s swings and roundabouts—for instance it would be nice to have employer-provided HI, but we can write off so many expenses!
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Old Oct 6th 2017, 4:51 am   #9
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Default Re: Question about Self Employment taxes

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Originally Posted by tom169 View Post
Maybe a mod can move this to main USA forum to get some more exposure.

Sorry I don't know much more about this subject than what Pulaski has said.
FYI the exclamation point icon next to the karma button is for that purpose.
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Old Oct 6th 2017, 5:11 am   #10
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Default Re: Question about Self Employment taxes

Quote:
Originally Posted by Pulaski View Post
Not sure. .... I've tried a couple and either I am wrong (taxes are less than I suggested in #2 above) or self employed people who whine about the amount of tax self employed people pay are whining way too much, because on income of $100k the calculators say tax and SS of about $14k-$15k.
That can't be right. Self employment tax is 15.3% so by itself on $100k of self-employment income you'll be paying $15.3k in that tax alone. And even though the employer portion is indeed deductible from your taxable income, bear in mind:

"You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax."

Last edited by Giantaxe; Oct 6th 2017 at 5:15 am.
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Old Oct 6th 2017, 11:50 am   #11
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Default Re: Question about Self Employment taxes

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Originally Posted by Giantaxe View Post
That can't be right. Self employment tax is 15.3% so by itself on $100k of self-employment income you'll be paying $15.3k in that tax alone. And even though the employer portion is indeed deductible from your taxable income, ......
Yeah, that's what I was thinking - so $15k self employment, and around 20% income tax on the net of $85k i.e.another $17k +/- gets you into the low $30k's range I mentioned originally.
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Old Oct 6th 2017, 12:41 pm   #12
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Default Re: Question about Self Employment taxes

The OP has an accountant and surely his job is to figure this out for his specific circumstances. If he can't, then fire him.

Last edited by MidAtlantic; Oct 6th 2017 at 1:46 pm.
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Old Oct 6th 2017, 1:38 pm   #13
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Default Re: Question about Self Employment taxes

Most reasonably sized cities will also have a small business advisor or department that will at least run some classes on this very topic.

Please note OP - you have to make estimated payments to the tax office through the year, if you leave it "until tax time" and you have earned above the very low threshold you will have a penalty to pay. Can't believe your accountant hasn't told you this. Fire them.
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Old Oct 6th 2017, 6:45 pm   #14
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Default Re: Question about Self Employment taxes

Quote:
Originally Posted by Pulaski View Post
Not sure. .... I've tried a couple and either I am wrong (taxes are less than I suggested in #2 above) or self employed people who whine about the amount of tax self employed people pay are whining way too much, because on income of $100k the calculators say tax and SS of about $14k-$15k.
That's about right in my experience. Don't worry too much about it, you have plenty of time after the 1st of the year to make the final payment for the previous year. Don't forget to pay quarterly state taxes too. Also remember you can set up a solo401k and put over $50k away for retirement and reduce your income tax bill massively.....not the payroll taxes though.
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Old Oct 8th 2017, 1:22 am   #15
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Default Re: Question about Self Employment taxes

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Originally Posted by BigBoss1984 View Post
I get the gist of it, pretty much
It's not obvious.

We've had this thread on here about a gazillion times and then some, yes you can deduct half the payroll tax on schedule SE but generally speaking people don't, what they do is incorporate (in the State where you reside) and file that as an S-corporation on 1120-S.

The reason being that an S-corporation is a flow-through entity so you pay yourself using dividends from the S-corporation and the dividends are subject to income tax on your 1040. The advantage being there is no payroll tax.

It's a good idea to pay some payroll tax so you qualify for Medicare/Social Security so then you have a payroll for the corporation and report on 941 quarterly and you pay yourself whatever you want to pay yourself. Typically people pay themselves about $25,000 on payroll and the rest as dividends.

This is a huge tax loophole, no other country I'm aware of has it, certainly we don't have it here. It costs the Treasury huge amounts in tax avoidance and was the reason for the regular corporation tax rate being so high when they reformed the tax system back in 1986.

So once you get into it from a paperwork standpoint, it can be quite complex, because you've got to file a 1040 for yourself, an 1120-S for the corporation, 941 payroll statements and also the W-2 for the employee (you). And that doesn't include State paperwork.

So then accountants say they'll do it for you, and you end up spending all the savings on the accountant.

You have to be quite careful doing the calculation because it depends on the income to your business, the FICA on the S-corp payroll is the full whack obviously of 15.3%. You could just pay yourself enough to get the Medicare credits which is very little, but then you never qualify for more than a tiny amount of Social Security.

Also you've got the whole pension issue because the contribution limit is based on employment-based income. The current limit is $24,000 for a one-person 401(k) (over age 50) hence the reason people typically pay themselves $25,000 on payroll.
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