Paying taxes as a self-employed person for the first time on 2011 income
April 13, 2011 8:41 PM Subscribe
Newly self-employed in 2011, I have a few (U.S., Federal) tax questions for experienced independent contractors or otherwise self-employed persons out there.
Basic situation is, I've transitioned my role in a long-time position to being an independent contractor. The majority of my family income however is from my wife's salary, from which adequate withholding is made to cover her taxes. After running through the calculations of IRS form 1040-ES for 2011 I'm certain that, assuming things stay as they have been, I will owe less than $1,000 tax due to self-employment for 2011, so I am not required to make estimated withholding payments as I understand the paperwork. So, questions:
1) As long as I trust myself to set aside sufficient funds for taxes and not dip into those savings, it seems to me there is no benefit to making estimated payments if I'm not required to. Anyone disagree with this?
2) There is a chance my self-employment income will increase in 2011 such that I will need to make estimated payments after all. From how I read the forms it seems to say I can amend my calculations and start paying estimated taxes - but I may pay a penalty for not paying sufficiently on previous quarters. I won't complain about having more money than expected, but is there a more intelligent way to deal with uncertain, variable future income that I'm not understanding?
3) More of a philosophical question: I definitely feel my current self-employment income and my very simple business finances don't justify employing an accountant. I do have ambitions of possibly growing this income as my responsibilities as the primary caregiver for a child are getting smaller as he grows up. I would value advice on how you know when it's time to start considering professional accounting support.
I appreciate your insights.
Basic situation is, I've transitioned my role in a long-time position to being an independent contractor. The majority of my family income however is from my wife's salary, from which adequate withholding is made to cover her taxes. After running through the calculations of IRS form 1040-ES for 2011 I'm certain that, assuming things stay as they have been, I will owe less than $1,000 tax due to self-employment for 2011, so I am not required to make estimated withholding payments as I understand the paperwork. So, questions:
1) As long as I trust myself to set aside sufficient funds for taxes and not dip into those savings, it seems to me there is no benefit to making estimated payments if I'm not required to. Anyone disagree with this?
2) There is a chance my self-employment income will increase in 2011 such that I will need to make estimated payments after all. From how I read the forms it seems to say I can amend my calculations and start paying estimated taxes - but I may pay a penalty for not paying sufficiently on previous quarters. I won't complain about having more money than expected, but is there a more intelligent way to deal with uncertain, variable future income that I'm not understanding?
3) More of a philosophical question: I definitely feel my current self-employment income and my very simple business finances don't justify employing an accountant. I do have ambitions of possibly growing this income as my responsibilities as the primary caregiver for a child are getting smaller as he grows up. I would value advice on how you know when it's time to start considering professional accounting support.
I appreciate your insights.
1) correct
2) you may want to increase your wife's withholding. If you are married, the IRS doesn't care who they are getting their money from
3) in my experience the level of complexity surpassed my expertise once I needed to file multiple state returns.
Good luck!
posted by bq at 8:53 PM on April 13, 2011
2) you may want to increase your wife's withholding. If you are married, the IRS doesn't care who they are getting their money from
3) in my experience the level of complexity surpassed my expertise once I needed to file multiple state returns.
Good luck!
posted by bq at 8:53 PM on April 13, 2011
1. If you are disciplined enough to set aside enough money during the year in an interest-bearing account, then you are correct.
2. No. All I would recommend doing is re-examining your tax situation every quarter, and making appropriate catch-up payments if necessary. However, some people don' t mind paying the penalties as it is worth it to have access to the money during the applicable period of time.
3. Given your current fact set and lack of reported complex tax issues, you should be fine Turbotax-ing your returns for the foreseeable future. Even our current Secretary of the Treasury is (infamously) a Turbotax user.
posted by Mr_Crazyhorse at 8:53 PM on April 13, 2011
2. No. All I would recommend doing is re-examining your tax situation every quarter, and making appropriate catch-up payments if necessary. However, some people don' t mind paying the penalties as it is worth it to have access to the money during the applicable period of time.
3. Given your current fact set and lack of reported complex tax issues, you should be fine Turbotax-ing your returns for the foreseeable future. Even our current Secretary of the Treasury is (infamously) a Turbotax user.
posted by Mr_Crazyhorse at 8:53 PM on April 13, 2011
Hi, fellow independent contractor!
1) Yes; you're right. At least, I've done it for two years (I have a special savings account for this)
2) I have an excellent accountant/tax preparer. He is worth every penny I pay him and has saved me thousands of dollars in deductions. He helps me figure this & other business stuff out.
3) See #2. The upside of having a highly qualified accountant (mine is also a CPA among other things, so he can advise me on general personal financial planning) is that he or she can help you with these kinds of things. When I transitioned from being a state employee to contracting, mine advised me about all the various business license, documentation, etc. issues that I would have had no clue about.
posted by smirkette at 8:54 PM on April 13, 2011
1) Yes; you're right. At least, I've done it for two years (I have a special savings account for this)
2) I have an excellent accountant/tax preparer. He is worth every penny I pay him and has saved me thousands of dollars in deductions. He helps me figure this & other business stuff out.
3) See #2. The upside of having a highly qualified accountant (mine is also a CPA among other things, so he can advise me on general personal financial planning) is that he or she can help you with these kinds of things. When I transitioned from being a state employee to contracting, mine advised me about all the various business license, documentation, etc. issues that I would have had no clue about.
posted by smirkette at 8:54 PM on April 13, 2011
as a fellow independent contractor, unless you know your tax laws very well, i also recommend getting yourself a great accountant/tax preparer. like smirkette, mine has saved me thousands of dollars in deductions every year and is always available to answer any questions i have and make recommendations based on what he knows of my financial situation.
posted by violetk at 9:31 PM on April 13, 2011
posted by violetk at 9:31 PM on April 13, 2011
If your business is financially simple, you may well never need an accountant for it. Both my boyfriend and I do fine with self-employment income without one. We actually have been to accountants in the past and they always seemed kind of disappointed that they couldn't find any legitimate business deductions for us that we weren't already taking. The amount of income isn't the issue, it's the complexity of your business. Knowledge work done by yourself in your own home tends to be pretty simple from a tax and legal perspective. Anyway, you could always try going to an accountant once and seeing if you get anything from it.
posted by phoenixy at 10:39 PM on April 13, 2011
posted by phoenixy at 10:39 PM on April 13, 2011
You can pay quarterlies based on actual/projected income per quarter ("Matching estimated tax payments to income."). I did this once and decided never again, the paperwork ended up being a major headache (although at the time I was doing my return by hand).
Something to remember: (assuming you pay the same amount for estimated tax each quarter), as long as the total of your quarterly payments equals the tax you owed the previous year, you won't have to pay any penalties, regardless of how much you actually owe this year. So whatever you owe for last year, make sure you pay (at least) that in quarterlies this year.
Another minor tip: paying the last state quarter in December instead of January makes the Federal return a little simpler.
posted by and for no one at 11:18 PM on April 13, 2011
Something to remember: (assuming you pay the same amount for estimated tax each quarter), as long as the total of your quarterly payments equals the tax you owed the previous year, you won't have to pay any penalties, regardless of how much you actually owe this year. So whatever you owe for last year, make sure you pay (at least) that in quarterlies this year.
Another minor tip: paying the last state quarter in December instead of January makes the Federal return a little simpler.
posted by and for no one at 11:18 PM on April 13, 2011
Really, get yourself professional help here. I've got significant self-employment income for the first time this year, and the few hundred bucks I'm spending on a CPA is totally worth it. And I'm a lawyer.
posted by valkyryn at 4:33 AM on April 14, 2011
posted by valkyryn at 4:33 AM on April 14, 2011
If you do begin, or increase, your payments later in the year because your earnings increased, be sure to document your income - the date and amount of each check - to be able to prove you paid each quarter for what you earned that quarter. Otherwise they will assume you didn't pay your estimates as due but played catch-up later, and will penalize you for it.
posted by TruncatedTiller at 6:50 AM on April 14, 2011
posted by TruncatedTiller at 6:50 AM on April 14, 2011
Response by poster: Thanks for the input. I'll think harder about the potential benefits of engaging an accountant.
posted by nanojath at 7:49 AM on April 14, 2011
posted by nanojath at 7:49 AM on April 14, 2011
1) The only benefit to making the quarterly payments whether you need to or not, is that it sets up a stable workflow/habit that you don't have to re-invent each year or each quarter. It also would tend to make the end of the year paperwork easier to deal with. If it was me, I'd do annualized estimated income method way, it seems closer to reality and allows for fluctuations in income. Close out the quarter, fill in the numbers, write a check. At the end of the year, it should be a breeze.
Also, then the money is gone and where it needs to be. Emotionally, it seems to me to be easier to write a $500 check every three months rather than a $2000 check in April.
posted by gjc at 7:55 AM on April 14, 2011
Also, then the money is gone and where it needs to be. Emotionally, it seems to me to be easier to write a $500 check every three months rather than a $2000 check in April.
posted by gjc at 7:55 AM on April 14, 2011
This thread is closed to new comments.
posted by nanojath at 8:42 PM on April 13, 2011