How badly have I messed up my taxes?

April 9, 2006 11:05 AM

I earned 12,100 total income this year. All 1099. Have not made any estimated payments. How bad is my tax situation?

This will be the first time I file. Based on the IRS tax estimator, reading on the IRS website, and what my parents and friends told me, I thought I would get to the end of the year and owe about $800. And I guess I do, in income tax, but there is also the self employment tax. I do not have enough money to pay that. I thought I was being smart, keeping track of, and saving more than enough to pay, what I would owe. But I guess I owe about six times that and I can't pay. I earned 12,100 dollars. All from a single company that I did contract web design work for. So how screwed am I?

posted by anonymous to work & money (18 comments total)

I made a little over that, but not much. Some 1099 and some W-2. Rule of thumb is about 25% will go to taxes which includes the amount of social security you'll have to pay for yourself which is what some people call "self-employment tax" unless I'm misunderstanding you.

This is after deductions which can be things like computers and other depreciated costs, connectivity costs, health insurance premiums and a bunch of other things. If you work it out right, you may wind up owing considerably less. On the other hand, I'd be really careful about claiming deductions that would be a stretch, such as a home office and other things that could cause IRS audit flags. If you use technology for your web design work and this is the first year that you've been using them you can include them as business assets and depreciate them over time, or even all at once. I don't know the specifics about this, and I sure as hell am not an accountant, but the short answer is "No, it is not as bad as you seem to think" but "Yes you will probably owe more than $800"

As long as you file something by April 15, you can get an extention with not much in the way of penalties, so I'd make that the first order of business and then read up on self-employment income and deductions to figure out how to maximize what you get to keep from the money you made.
posted by jessamyn at 11:17 AM on April 9, 2006

Can you pay over time? I know you can setup payment plans in some cases, and I think the IRS also now accepts credit cards with a small surcharge.
posted by reverendX at 11:17 AM on April 9, 2006

As far as the IRS, my accountant told me a while back that I should make an estimated tax payment every quarter if I made a profit. Then I got lazy and kept putting it off making payments sometimes and not at other times. I would end up owing money at the end of the year.

The tax on 12,100 is not that big for the IRS to hunt you down but I wouldn't skip paying it either. You should at the very least call them and see if you can set up a payment schedule for the amount you owe.

"I can't pay" is different than "I can't pay it all right now" so you need to make sure that you tell them that. I don't think your intention is not to pay the tax but more a concern about being able to pay it all at once.

Either call them or talk to an accountant who can tell you what for you need to fill in order to set up a payment schedule.
posted by eatcake at 11:20 AM on April 9, 2006

it also may be a bit of relief to know that you've actually got a few extra days this year -- since the 15th is a Saturday, the filing deadline is Monday the 17th for most of the country, and the 18th in some states where Monday is a holiday.
posted by scody at 11:25 AM on April 9, 2006

Legitimate business deductions are really the key here. Make sure you're getting all the deductions you can (and that your records are as complete as possible).

If you did your taxes yourself, you might consider taking them to a professional tax preparer, who would likely be able to help you identify which of your expenses qualify as deductions and help maximize them.

There are also options such as a home office deduction. Despite its reputation as a phony tax shelter, it's a legitimate deduction for many people (myself included) and you should take it if you can.

You are probably going to owe more than $800, but it may not be as bad as it seems right now. If you whittle down the amount you owe and still can't afford to pay it, then this article has a good discussion of some options.
posted by camcgee at 11:57 AM on April 9, 2006

My CPA starts @ $400; which may be prohibitive to your cause.

Write off transportation costs. Portions of your utility bills. Depreciate any office equipment? I think you can shake much of your tax burden with a bit of research.
posted by vaportrail at 12:51 PM on April 9, 2006

You probably don't owe as much as you think. I am not an accountant but here are my rough estimates.

First, I would recommend that you get a copy of TurboTax or TaxCut. Read the product specs to make sure you get a version that supports Schedule C, which covers your self-employment income. The software will lead you step by step through the process, help you find deductions, and calculate any penalties.

First off, you owe about 15% on your self-employment income for the self-employment tax. This is about $1800. But you can reduce that by deducting from your self-employment income any expenses related to your work. For example, a PC you bought for work, any software you bought, textbooks or technical manuals, technical magazine subscriptions, storage media, etc. Hopefully you will have receipts for these expenses. It is really important that you include everything because these deductions help you in two ways -- they reduce your income tax and they reduce your SE tax.

If you worked from home, you may be able to take a home office deduction and car expenses. Your tax software will provide guidance to help you here.

As for your income tax, you subtract $5000 for the standard deduction and another $3200 for your personal exemption. You also subtract one-half of your SE tax, $900.

After these deductions your $12,000 income is well below $3000 and your income tax is less than $300.

So, roughly, your total tax is about $1800 for SE and $300 for income for a total of $2100. If you come up with some of those business expenses I mentioned above, your tax will be even less.

You probably will owe a small tax penalty for failure to pay quarterly estimated taxes. This rate is 6% or 7% annually, but only applies to the income you received in each quarter of 2005. So if most of your income came early in the year you will owe more and if late in the year you will owe less. Your tax software should help you calculate the penalty.

Whatever you do, make sure that you file your return on time even if you don't have enough money to cover all of your tax. If you file on time then your on-going penalty on the shortage is only 0.5% per month. But it is 5% per month if you fail to file.
posted by JackFlash at 1:32 PM on April 9, 2006

The first time I filed as self-employed, I paid an accountant to do it. He helped me find lots of little things I could claim, and advised me on what kinds of deductions probably wouldn't trigger an audit. The next few years, I was able to do it myself, using the first year's return as a template.

You've already seen the kinds of mistakes you can make. Hire a professional this time around. It might save you more money than it costs.

As long as you file something by April 15, you can get an extention with not much in the way of penalties
The automatic extension that you can get just by filling out the form is an extension of time to file, not time to pay. The full amount is still due on April 15. Interest can accumulate quickly, especially since they may charge you the interest going back to last year when you actually earned the money, because you didn't pay enough estimated taxes.
posted by fuzz at 1:41 PM on April 9, 2006

I'm not an accountant, but knowing lots of folks in this or similar situations, you probably owe about $2500 to $3000, and you'll almost definitely be able to arrange payments with the IRS for the part you can't pay right now.
posted by anildash at 2:34 PM on April 9, 2006

You probably will owe a small tax penalty for failure to pay quarterly estimated taxes. This rate is 6% or 7% annually, but only applies to the income you received in each quarter of 2005.

Actually, maybe not—there's an exception if you didn't owe taxes the previous year. See here.
posted by staggernation at 2:37 PM on April 9, 2006

I was in a similar situation four years ago, with $13,000 in 1099 that I didn't think about until it came down to brass tacks. I wholeheartedly recommend that you have a reputable tax preparer do this return for you. The $125 dollars I spent was an extremely good investment.

You probably aren't as clueless as I was, but it helps when you have someone who prepares hundreds of returns a year and knows exactly where the danger deductions are on a return and such. You don't want to claim a legit deduction that's going to get you flagged because it's unusual. Your preparer will know how to avoid those situations and otherwise guide you well in figuring out claimable deductions.

I would also most definitely file on-line. Doing so, your return goes through a pre-audit that significantly reduces the chance that the IRS is going to come back at you later for an audit (unless they suspect you of gross malfeasance).

I would hazard a guess that there is a chance you could end up owing less than $800 (between state and SSI) if that is your sole source of income and you have the right deductions. You might not have federal tax at all. Personally, I wouldn't sweat it, but I do think you need professional guidance.
posted by mrmojoflying at 3:49 PM on April 9, 2006

Could those people recommending professional help mention how they found it? I (ahem) may be in the same boat, and it seems like hell to open the yellow pages this late in the game.

Especiallly mrmojoflying -- you only paid $125? How'd you pull that off?
posted by salvia at 4:10 PM on April 9, 2006

"You may qualify for an offer in compromise if you are unable to pay your taxes in full..."

(Summary: you'll be charged a $43 service fee, and some interest on the amount you can't pay up front, but the IRS will probably let you set up a payment plan.)

Whatever you do, make sure you file a return. The penalties for failure to file are harsher than the penalties for failure to pay.
posted by nebulawindphone at 4:40 PM on April 9, 2006

Actually, maybe not

Staggernation, you are absolutely right. I forgot that he said this was the first time he has ever filed. There is a safe harbor rule that says if you pay 100% of the previous year's tax in quarterly payments you aren't penalized for underpayment. Assuming his 2004 taxes were zero, he is not required to pay estimated taxes in 2005 and does not owe a penalty. Good news for anonymous. Tax preparation software would have caught this.

I doubt this applies, but if you are over 25 years old or have children, you might qualify for the earned income tax credit.
posted by JackFlash at 4:40 PM on April 9, 2006

Especiallly mrmojoflying -- you only paid $125? How'd you pull that off?

Salvia -- I see from your profile you are in SF. The $125 I paid was in a rural area. The least I ever paid in Los Angeles was $225. As for finding someone, ask your associates if they can recommend someone. If you are unable to do this before the filing deadline, file for a 6-month extension.

Oh, and from my own personal experience, the State of California is a bigger problem than the IRS. They issued a summary judgement against my 1099 money for the amount they believed they were due assuming no write-offs. I had to send them documentary proof that I filed everything properly and on time (including the extension) to keep them from suing me for $1000 dollars. I only owed (and paid) them under $100.
posted by mrmojoflying at 5:37 PM on April 9, 2006

There is a totally free online option available: TaxActOnline. That's free online prep and free federal e-file no matter what your income/whatever status.

I'm working my way through it myself. It seems competent, but it's not exactly brimming with entertainment value.
posted by NortonDC at 6:45 PM on April 9, 2006

No way the IRS would accept an offer in compromise if you have any income. I have a client who needs some back taxes to go away but since he's making money, the IRS will never give up on it. If you're retired and have almost no income coming in, or unemployed, or disabled, or otherwise hopeless, then you might get an offer through.
posted by gg at 8:08 PM on April 9, 2006

There's an entire industry dedicated to people like you who need to do their taxes quickly at the last minute and on the cheap.

Be aggresive about deducting everything you have spent money on that went into you doing your job. Depreciation on your computer. Your cell phone bills for the year. The percent of your rent or mortgage that pays for your "office." Yes, I know it seems dodgy but until we have a more equitable tax system, you are entitled to the same business deductions as Exxon. More money in your pocket = less money for bullets in Iraq.
posted by Slarty Bartfast at 8:30 PM on April 9, 2006