Navigating my wild thicket of taxes
December 31, 2015 10:24 AM Subscribe
You are not my accountant, but I'm trying to figure out whether I need a tax preparer, or whether software based services like turbo tax can help me navigate the rough and choppy seas of my tax nightmare.
This year (2015) I had three employment situations: grad stipend, adjunct professor income, and now, after a summer of unemployment, I've been working as a independent contractor (software dev) since mid-november.
My question is: how do I work out this mixed tax situation? Do I calculate all my self-employment taxes separately and pay the estimate on January 15th, but calculate the income taxes as a whole? And how does the money that's already been withheld from my paychecks in my first two normal employment situations figure in to the 1040-ES income tax payments I have to make per quarter?
I don't plan on being multiply-employed next year, since I think this contractor situation I've got now will be stable, but for this year, should I just go to a place like H&R Block and throw myself at the mercy of their tax preparers? The issue there is that I expect that to cost $250-350, but my total income this year comes out to less than $25,000, so $300 is a significant percentage, and feels like a real additional tax burden on top of all of this mess. Will TurboTax save me?
Help a poor boy out. (In good news, the streaming release of the Beatles discography means I can jam out to Taxman while covered in piles of IRS forms).
This year (2015) I had three employment situations: grad stipend, adjunct professor income, and now, after a summer of unemployment, I've been working as a independent contractor (software dev) since mid-november.
My question is: how do I work out this mixed tax situation? Do I calculate all my self-employment taxes separately and pay the estimate on January 15th, but calculate the income taxes as a whole? And how does the money that's already been withheld from my paychecks in my first two normal employment situations figure in to the 1040-ES income tax payments I have to make per quarter?
I don't plan on being multiply-employed next year, since I think this contractor situation I've got now will be stable, but for this year, should I just go to a place like H&R Block and throw myself at the mercy of their tax preparers? The issue there is that I expect that to cost $250-350, but my total income this year comes out to less than $25,000, so $300 is a significant percentage, and feels like a real additional tax burden on top of all of this mess. Will TurboTax save me?
Help a poor boy out. (In good news, the streaming release of the Beatles discography means I can jam out to Taxman while covered in piles of IRS forms).
This is a nearly trivial tax situation which can be handled either via IRS VITA free services (thank you to stowaway for correctly linking this before I got here) or by any software-based preparation services (including TurboTax). There is absolutely no reason to go to H&R Block for your tax situation.
As a general note, self-employment tax doesn't really exist in the United States - it is all income tax. At a high level, your tax return will simply add up all income (from all three sources), calculate the required tax based on that income, then subtract all the tax that has been withheld so far (solely from your employment jobs, not from your independent contractor job). The residual amount left will be what you pay. From the IRS's perspective, it doesn't really matter to them how they get your income tax, just that you pay it. So, it's equivalent to the IRS to pay for the income tax you incur as an independent contractor from withholding from an employment position or from payments you make when you file your income taxes.
posted by saeculorum at 10:41 AM on December 31, 2015 [2 favorites]
As a general note, self-employment tax doesn't really exist in the United States - it is all income tax. At a high level, your tax return will simply add up all income (from all three sources), calculate the required tax based on that income, then subtract all the tax that has been withheld so far (solely from your employment jobs, not from your independent contractor job). The residual amount left will be what you pay. From the IRS's perspective, it doesn't really matter to them how they get your income tax, just that you pay it. So, it's equivalent to the IRS to pay for the income tax you incur as an independent contractor from withholding from an employment position or from payments you make when you file your income taxes.
posted by saeculorum at 10:41 AM on December 31, 2015 [2 favorites]
You can totally do this with standard software. My situation is somewhat similar. Last year I switched from Turbo Tax to TaxAct, since Turbo Tax kept trying to push me into their $80+ plan, when by their own documentation, I was perfectly ok using a cheaper one.
Btw, self-employment tax absolutely exists, in that you have to pay all of your Social Security and Medicare taxes (as opposed to half when you have an employer). The software will take care of all of that seamlessly.
posted by ktkt at 11:40 AM on December 31, 2015
Btw, self-employment tax absolutely exists, in that you have to pay all of your Social Security and Medicare taxes (as opposed to half when you have an employer). The software will take care of all of that seamlessly.
posted by ktkt at 11:40 AM on December 31, 2015
self-employment tax absolutely exists
I should clarify my point here - there is no unique "self-employment tax" (I realize the IRS uses this term, but I find it horrendously misleading), it's just that sometimes your employer withholds some of your taxes (income tax) and sometimes pays some of your taxes for you (half of your Social Security/Medicare), which isn't applicable for independent contractors. In other words, your tax return will simply add up all the income tax, Social Security tax, and Medicare tax you owe, and then subtract what has either been withheld or paid (sometimes withheld, sometimes paid for you, and sometimes neither). At least for me, I found independent contractor taxes a lot easier to understand when I started viewing it this way.
As usual, your mileage may vary.
posted by saeculorum at 11:54 AM on December 31, 2015
I should clarify my point here - there is no unique "self-employment tax" (I realize the IRS uses this term, but I find it horrendously misleading), it's just that sometimes your employer withholds some of your taxes (income tax) and sometimes pays some of your taxes for you (half of your Social Security/Medicare), which isn't applicable for independent contractors. In other words, your tax return will simply add up all the income tax, Social Security tax, and Medicare tax you owe, and then subtract what has either been withheld or paid (sometimes withheld, sometimes paid for you, and sometimes neither). At least for me, I found independent contractor taxes a lot easier to understand when I started viewing it this way.
As usual, your mileage may vary.
posted by saeculorum at 11:54 AM on December 31, 2015
Best answer: how do I work out this mixed tax situation?
TurboTax (or whatever software) can totally deal with this. You explain to them where you got your money from, and they will mostly walk you through it, and they will split it out for you and help you figure out how to allot it properly. I have had these mixed situations a lot in the past. The only thing that is a little tricky is that if you have expenses there are sort of two places to put them.... you can take the standard deduction for your regular taxes (unless you have a lot of special exceptions) but you can also itemize deductible business expenses so if you made, say, $10000 but then you spent $2000 on business expenses (and it might be worth reading up on what is and is not deductible) you only wind up paying taxes on $8000. Rule of thumb is to assume that 25%-ish of your self-employment income will go towards taxes but it might be a bit higher or lower depending on expenses.
posted by jessamyn at 12:20 PM on December 31, 2015
TurboTax (or whatever software) can totally deal with this. You explain to them where you got your money from, and they will mostly walk you through it, and they will split it out for you and help you figure out how to allot it properly. I have had these mixed situations a lot in the past. The only thing that is a little tricky is that if you have expenses there are sort of two places to put them.... you can take the standard deduction for your regular taxes (unless you have a lot of special exceptions) but you can also itemize deductible business expenses so if you made, say, $10000 but then you spent $2000 on business expenses (and it might be worth reading up on what is and is not deductible) you only wind up paying taxes on $8000. Rule of thumb is to assume that 25%-ish of your self-employment income will go towards taxes but it might be a bit higher or lower depending on expenses.
posted by jessamyn at 12:20 PM on December 31, 2015
Best answer: Do I calculate all my self-employment taxes separately and pay the estimate on January 15th, but calculate the income taxes as a whole?
No, your tax bill is one total, which includes self-employment (FICA) tax and income tax. Your estimated tax payment is based on your total tax bill.
You should be able to handle this situation with tax preparation software like Turbotax or TaxAct. You should receive all the information you need from your employers -- W-2 from your regular job and 1099s from your grad stipend and contract job.
You should be able to use the software to make a rough estimate of your total taxes. Then subtract from that any withholding taxes already paid and that should be your estimated tax payment for January 15.
Don't worry too much about getting your estimated tax payment exactly right.
1. Check last year's tax return and see what your total tax was on line 63. If the combination of tax withholding and estimated tax you pay this year is at least equal to last year's total tax number, then you won't owe a penalty no matter what your final tax obligation or underpayment is.
2. If your withholding and estimated tax payments are at least 90% of what you eventually owe, there is no penalty.
3. If your underpayment is less than $1000, you also owe no penalty.
4. You could decide to just blow off your estimated tax payment and owe a penalty, as it will be pretty small with your income and nothing much to worry about. It is 3% of the underpayment for the duration that it is not paid, or 0.25% per month. Your tax software can compute this penalty or you can just let the IRS bill you. This is totally routine and not something the IRS gets excited about. If you let the IRS bill you, of course, there may be an extra month or two of interest because of the delay.
posted by JackFlash at 12:38 PM on December 31, 2015
No, your tax bill is one total, which includes self-employment (FICA) tax and income tax. Your estimated tax payment is based on your total tax bill.
You should be able to handle this situation with tax preparation software like Turbotax or TaxAct. You should receive all the information you need from your employers -- W-2 from your regular job and 1099s from your grad stipend and contract job.
You should be able to use the software to make a rough estimate of your total taxes. Then subtract from that any withholding taxes already paid and that should be your estimated tax payment for January 15.
Don't worry too much about getting your estimated tax payment exactly right.
1. Check last year's tax return and see what your total tax was on line 63. If the combination of tax withholding and estimated tax you pay this year is at least equal to last year's total tax number, then you won't owe a penalty no matter what your final tax obligation or underpayment is.
2. If your withholding and estimated tax payments are at least 90% of what you eventually owe, there is no penalty.
3. If your underpayment is less than $1000, you also owe no penalty.
4. You could decide to just blow off your estimated tax payment and owe a penalty, as it will be pretty small with your income and nothing much to worry about. It is 3% of the underpayment for the duration that it is not paid, or 0.25% per month. Your tax software can compute this penalty or you can just let the IRS bill you. This is totally routine and not something the IRS gets excited about. If you let the IRS bill you, of course, there may be an extra month or two of interest because of the delay.
posted by JackFlash at 12:38 PM on December 31, 2015
And here is a hint for getting started on next year's estimated tax payments, assuming you continue with your contracting job.
When you file your taxes for this year, look on line 63 for your total tax. Divide that number by 4 and pay that much each quarter starting with the first estimated payment on April 15. After four payments you will have paid 100% of the previous year's tax, which is a safe harbor for no penalty.
Keep in mind that even though your estimated tax payments next year will be low because of this year's relatively low income, in April 2017 you will likely owe a large extra payment at tax time -- although with no penalty because of the safe harbor rule. So make sure you set aside enough for that final tax bill.
posted by JackFlash at 12:46 PM on December 31, 2015
When you file your taxes for this year, look on line 63 for your total tax. Divide that number by 4 and pay that much each quarter starting with the first estimated payment on April 15. After four payments you will have paid 100% of the previous year's tax, which is a safe harbor for no penalty.
Keep in mind that even though your estimated tax payments next year will be low because of this year's relatively low income, in April 2017 you will likely owe a large extra payment at tax time -- although with no penalty because of the safe harbor rule. So make sure you set aside enough for that final tax bill.
posted by JackFlash at 12:46 PM on December 31, 2015
I use Free Tax USA for my complicated taxes (I have two small business-one tech/library consulting, one airbnb/homestay host as well as a full-time job, a ton of mortgage interest and alimony). I used to use Turbotax, but tried Free Tax USA after inputting everything into Turbotax but not paying, and Free Tax ended up getting me a bigger refund. I pay the audit insurance and it comes out to less than $30 for state, federal and insurance. It's not complicated at all.
posted by momochan at 11:48 AM on January 1, 2016
posted by momochan at 11:48 AM on January 1, 2016
This thread is closed to new comments.
https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers
I volunteer every year, it's a great program, and it seems a lot easier for most of our clients than dealing with software and so forth.
posted by stowaway at 10:36 AM on December 31, 2015 [6 favorites]