Question about Self Employment taxes
#1
BE Enthusiast
Thread Starter
Joined: Aug 2015
Posts: 398
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.
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.
#2
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.
#3
BE Enthusiast
Thread Starter
Joined: Aug 2015
Posts: 398
Re: Question about Self Employment taxes
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
#4
Re: Question about Self Employment taxes
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
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
#5
BE Enthusiast
Thread Starter
Joined: Aug 2015
Posts: 398
Re: Question about Self Employment 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.
#6
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.
Sorry I don't know much more about this subject than what Pulaski has said.
#7
BE Enthusiast
Thread Starter
Joined: Aug 2015
Posts: 398
Re: Question about Self Employment taxes
Yeah I probably should have put it there to be honest
#8
Re: Question about Self Employment 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.
#10
Lost in BE Cyberspace
Joined: Jan 2006
Location: San Francisco
Posts: 12,865
Re: Question about Self Employment 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.
"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 4:15 am.
#11
Re: Question about Self Employment taxes
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.
#12
BE Forum Addict
Joined: Aug 2013
Location: Athens GA
Posts: 2,134
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 12:46 pm.
#13
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.
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.
#14
Re: Question about Self Employment 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.
Last edited by nun; Oct 6th 2017 at 5:53 pm.
#15
Re: Question about Self Employment taxes
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.
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.