self employment tax

Rent Too Damn High? Deduct Your Home Studio.

One of the best tax breaks out there is the home office (or home studio) deduction. In tax terms, this essentially turns a portion of your nondeductible personal expenses (your home) into deductible business expenses (a workplace). A lot of people are confused about the rules, and some people are scared to take the deduction at all because they’ve heard that it can be a red flag to the IRS. As long as you are following the rules correctly, there is nothing wrong with taking the deduction. And it’s a big one! So here is some help.

First, when can you claim a home office/home studio?

You have to use it both exclusively and regularly.

Exclusive use means that the space is a dedicated workspace – no kids watching TV in there after hours, no guests staying there. There is no wiggle room on this part.  read full article

Estimated Quarterly Taxes for the New Freelancer

Last Love Song  , Silica and Pigment on Linen, 24" x 20", 2014, by   Matt Phillips

Last Love Song, Silica and Pigment on Linen, 24" x 20", 2014, by Matt Phillips

In my last post, I addressed a common dilemma for the new freelancer - an unexpectedly large tax bill in April. I explained self-employment tax, and why it catches so many people off guard. In this post, I’ll explain estimated quarterly taxes, which are the solution to that huge April tax bill.

You’ve newly struck out on your own, and you had your first profitable year as a freelancer. Congratulations! But when you prepared your taxes, you were blindsided by the enormous tax bill. You got a crash course in self-employment tax, and now you’re ready to set yourself up better for next year. It’s time for estimated quarterly taxes.

ESTIMATED QUARTERLY TAXES – WHAT THEY ARE

Our tax system is called “pay as you go.” If you’re employed, your employer withholds taxes from your paycheck each pay period, so that at the end of the tax year, you should have already paid in approximately the amount of taxes that you owe. When you overpay, you get a refund, and when you underpay, you owe some more tax on top. But the idea is that you don’t pay all of your taxes for the year at one time - for almost everyone, setting aside that much money would be difficult.

When you freelance, there’s no employer to withhold tax for you, so it becomes your job. (Yes, another burden of the gig economy). Everyone knows, and that includes the IRS, that it’s much harder to pay one big bill than several small ones. So to approximate the withholding situation of an employer, the IRS requires freelancers who owe at least $1000 in tax to make estimated quarterly payments.

It may seem yucky to have to pay taxes four times a year instead of just once, but it’s a good thing. Breaking it up into quarters makes the payments much easier to handle. And you avoid an unpleasant surprise in April.

read more...

Self-Employment Tax for the New Freelancer

Rikki and Carrie, Dining Room.   Carrie Will , 2008  From the series entitled,  I am redundant, half of a whole, a freak, identical and lucky.  Courtesy Novado Gallery, Jersey City

Rikki and Carrie, Dining Room. Carrie Will, 2008

From the series entitled, I am redundant, half of a whole, a freak, identical and lucky.
Courtesy Novado Gallery, Jersey City

SELF EMPLOYMENT TAX IS TWO IDENTICAL PIECES, EACH 7.65%, TOTALING 15.3%

You’ve dreamed of quitting your job and striking out on your own. You’ve gathered some clients, or sold some artwork, and suddenly this year, you’re making some real money. But then you hit a speedbump. You file your taxes this year and discover that you owe money - a lot of money - that you didn’t expect to owe. Uh oh. This is a rude surprise that many freelancers encounter when starting out. The good news is, you’re making money. But the bad news is that anytime you make money, the government wants its share. And for a lot of freelancers, that share is a lot bigger than they realized.

Here’s why.

SELF EMPLOYMENT TAX, EXPLAINED

Our tax system is “pay as you go.” Everyone is supposed to pay taxes all year long, as they earn income. When you work as an employee, your employer takes care of the logistics for you - they withhold 7.65% from your paycheck for Social Security and Medicare (also known as FICA). In other words, you are paying the Federal government 7.65% of your paycheck towards Social Security and Medicare, but you don’t have to think about it. In addition, your employer pays, out of their own pocket, another 7.65% towards Social Security and Medicare, on your behalf. This is called “payroll tax.” If you’ve ever wondered why so many businesses try to pay people as contractors (reported on a 1099) and not as employees (reported on a W2) - this is the reason. It automatically costs them 7.65% extra to treat you as an employee. (And it is fair and contributes to a healthy society, if I may say so).

read more...