Estimated Self-Employment Tax
September 10, 2011 6:26 AM Subscribe
I am trying to learn more/understand better my new tax situation as an independent consultant, and was hoping someone could help me with the following questions:
1. How do I compute my Net Earnings From Self-Employment (NESE)? What calculation is used?
2. Since I am excluded from Federal and State tax (my tax domicile is TX) for my foreign-earned income amount (I estimate it would be $87,500 for 2011) - can you break down how I can get the estimated tax payment amount for 2011?
I tried to figure #2 out on my own: $87,500 Foreign-Earned Income in 2011 $9,100.00 is the amount for Social Security Tax (10.4%) on the first $106,800 of net self-employment income. $2,448.23 is the amount for Medicare Tax (2.9%) on all net self-employment income. $11,548.23 is the Total Estimated Self-Employment Tax for 2011. Is this correct? 3. When I file my tax return for 2011 will I then factor in the business expenses fully deductible against income? i.e. Legal Fees, Taxe Fees, Storage Fees etc.? What about the reimbursements already paid to me in 2011, how do I handle these?
I tried to figure #2 out on my own: $87,500 Foreign-Earned Income in 2011 $9,100.00 is the amount for Social Security Tax (10.4%) on the first $106,800 of net self-employment income. $2,448.23 is the amount for Medicare Tax (2.9%) on all net self-employment income. $11,548.23 is the Total Estimated Self-Employment Tax for 2011. Is this correct? 3. When I file my tax return for 2011 will I then factor in the business expenses fully deductible against income? i.e. Legal Fees, Taxe Fees, Storage Fees etc.? What about the reimbursements already paid to me in 2011, how do I handle these?
Why do you say you're "excluded" from federal taxes?
posted by dfriedman at 7:42 AM on September 10, 2011
posted by dfriedman at 7:42 AM on September 10, 2011
You've asked a few questions about your tax situation now, which is complex. You will find a tax accountant to be worth the money.
posted by Kwine at 8:43 AM on September 10, 2011 [1 favorite]
posted by Kwine at 8:43 AM on September 10, 2011 [1 favorite]
This is worth having a tax person assist you with. They are not too busy this time of year. You could also go the halfway mode and get TurboTax to guide you through all the steps one year and then use that for the following years and do the taxes yourself. I can't even tell from your question exactly what your work situation is [you officially live in Texas, you earn a lot of money outside the country, you have to pay estimated taxes] but I'm fairly sure you need to dig through Schedule C and SE as pla says.
As soon as I'm dealing with foreign income--I'm American and sometimes get paid by Canada for work and this tosses a wrench into everything--I'm usually consulting a professional which is what I'd suggest you do. I know that for my situation, only things I've paid for in the tax year count towards that year's taxes. So if you have a storage unit that you moved into in November '10 but the first bill wasn't until January '11, you deal with that on '12's taxes. The case of what is and is not deductible is a thing that people have written entire books on, so you might want to take some time to familiarize yourself with that sort of thing. At your income level, the services of a professional to make sure you're doing things correctly would be well worth the cost.
posted by jessamyn at 9:32 AM on September 10, 2011
As soon as I'm dealing with foreign income--I'm American and sometimes get paid by Canada for work and this tosses a wrench into everything--I'm usually consulting a professional which is what I'd suggest you do. I know that for my situation, only things I've paid for in the tax year count towards that year's taxes. So if you have a storage unit that you moved into in November '10 but the first bill wasn't until January '11, you deal with that on '12's taxes. The case of what is and is not deductible is a thing that people have written entire books on, so you might want to take some time to familiarize yourself with that sort of thing. At your income level, the services of a professional to make sure you're doing things correctly would be well worth the cost.
posted by jessamyn at 9:32 AM on September 10, 2011
Response by poster: Sadly, I've hired 2 different CPAs that weren't worth the $ I paid them. I'm weary to pay a 3rd. and I am excluded from federal taxes up to $92,900 because I qualify for foreign-earned income exclusion.
posted by bbhart113 at 9:33 AM on September 10, 2011
posted by bbhart113 at 9:33 AM on September 10, 2011
I'm self-employed and live abroad. It's not clear to me why you plan to take the foreign earned income exclusion. Are you living outside the US? The test is where you live, not where your money comes from.
You have to live outside the US full time and can't return for more than 35 days in a consecutive 12-month period. The exclusion for 2011 is $92,900. This means I won't have to pay income tax on the first $92,900 of my income, but I still need to pay self-employment tax of 15.3%.
If you live abroad, see this clear description of your obligations from TaxMeLess. The IRS info is here.
If you live in the US, you will pay US taxes on your worldwide income, no matter which country it comes from. About half my income when I was still in the States came from the UK and Australia. I paid US taxes on all of it, with the blessing of my accountant. I paid nothing to the UK and Australia because my tax residence was the US.
Assuming that you're living in the US:
- You need to pay estimated income taxes each quarter. Easiest way to figure it: take the federal income tax you owed the previous year, divide it by 4, and pay that amount each quarter unless you know you'll be making significantly less money this year. To figure it manually and not base it on the previous year, I ask my accounting software how much I grossed this quarter and send about 30% of it to the feds. That percentage is based on my past years of paying taxes and could vary dramatically for other people who have, for example, higher expenses than me. Mine are very low.
- Re figuring deductibles and everything else, I recommend the books from Nolo Press.
posted by ceiba at 10:25 AM on September 10, 2011
You have to live outside the US full time and can't return for more than 35 days in a consecutive 12-month period. The exclusion for 2011 is $92,900. This means I won't have to pay income tax on the first $92,900 of my income, but I still need to pay self-employment tax of 15.3%.
If you live abroad, see this clear description of your obligations from TaxMeLess. The IRS info is here.
If you live in the US, you will pay US taxes on your worldwide income, no matter which country it comes from. About half my income when I was still in the States came from the UK and Australia. I paid US taxes on all of it, with the blessing of my accountant. I paid nothing to the UK and Australia because my tax residence was the US.
Assuming that you're living in the US:
- You need to pay estimated income taxes each quarter. Easiest way to figure it: take the federal income tax you owed the previous year, divide it by 4, and pay that amount each quarter unless you know you'll be making significantly less money this year. To figure it manually and not base it on the previous year, I ask my accounting software how much I grossed this quarter and send about 30% of it to the feds. That percentage is based on my past years of paying taxes and could vary dramatically for other people who have, for example, higher expenses than me. Mine are very low.
- Re figuring deductibles and everything else, I recommend the books from Nolo Press.
posted by ceiba at 10:25 AM on September 10, 2011
Response by poster: Yes I live in Iraq, my home state is TX, but I rarely go back to the US.
posted by bbhart113 at 1:48 AM on September 11, 2011
posted by bbhart113 at 1:48 AM on September 11, 2011
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I think, though, as much as I like trying to do things myself, in your situation I might give in and pay for a few hours of time with a tax accountant. :)
posted by pla at 7:34 AM on September 10, 2011