Self-employed and taxed up the wazoo?!
April 11, 2013 4:35 PM   Subscribe

My husband made less than $10k this year but TurboTax is telling us he owes over $1k in taxes. Is that right?!

My husband is filing taxes in America for the first time (as am I), and as a self-employed audio engineer he made less than $10,000 and spent most of that on audio gear for his business. For some reason, however, even after entering all his business expenses into TurboTax, it's telling us that he owes the government over $1,000 and even a frantic phone call to my mom's Tax Guy hasn't clarified for us why that is. Any guesses and/or advice as to how to convince the government that he really can't afford that would be most welcome! (Side note: American taxes are IMPOSSIBLE to figure out. Okay, complaining over.)
posted by Mooseli to Work & Money (24 answers total) 3 users marked this as a favorite
Are you 'married filing jointly'?
posted by amanda at 4:36 PM on April 11, 2013

We are "married filing separately" because that same Tax Guy told me last year that that would be optimal
posted by Mooseli at 4:37 PM on April 11, 2013

Oh self-employed? Yeah that's certainly possible, it's the self-employment tax.
posted by 2bucksplus at 4:38 PM on April 11, 2013 [9 favorites]

When I was self-employed in the past (single), I think I paid about 34%. I think it's because you pay as the employeer and the employee. I am very much not an accountant or tax specialist.
posted by loveyallaround at 4:38 PM on April 11, 2013 [3 favorites]

Yikes!! So the rumors are true, it seems: the US government is extremely wary of the self-employed. Lame sauce! Thanks so much for your input so far, everyone!
posted by Mooseli at 4:40 PM on April 11, 2013

You're also paying medicare tax, which an employer would normally pay a part of. I don't think medicare and the payroll tax (normally paid by an employer) are affected in the least by deductions for expenses or anything.
posted by LionIndex at 4:47 PM on April 11, 2013

US government is extremely wary of the self-employed

The U.S. government has no problem with self-employed. But you still have to contribute to Social Security and Medicare even when you are self-employed.

Tax Guy is probably incredibly busy this week. If you think you might be able to come up with a different resolution you can always file for an automatic extension. You will get until 15 October to file the return.

It's very important to send in the money you think you might owe. If your eventual return shows that you don't have to pay the money then you will get it back. If it shows that you do, then you may have to pay interest and penalties on the unpaid tax.

It seems like you may want to have more of a chat with Tax Guy, because you may have to file estimated income tax payments every quarter in the future. Employed people get estimated taxes withheld from their paychecks but self-employed people have to do this themselves.
posted by grouse at 4:48 PM on April 11, 2013 [9 favorites]

And if he owes more than $1000 and expects to earn the same this year, he'll need to pay quarterly estimates for this year, first quarter due on the 15th, to avoid a penalty.

TurboTax can run the same numbers for "married filing jointly" to compare, just in case your Tax Guy got it wrong, although there are sometimes reasons tied up with immigration law that stop you from filing jointly in the first year you file.
posted by holgate at 4:51 PM on April 11, 2013 [4 favorites]

Don't assume you should file married but separately, just because Tax Guy said so last year. See if you can/should file jointly. But, the self employed are gonna owe some bucks unless they paid estimated tax, for reasons mentioned above.
posted by Snerd at 4:59 PM on April 11, 2013 [1 favorite]

As a lazy, self-employed person, I put 30% of every check that comes in into a savings account until after tax day. Make sure that he is taking every deduction. Mileage, expenses, home office, etc. File an extension. Set up a payment plan. After this, talk to your tax guy and get straight on how self-employment works from a tax perspective. It's no fun, to be sure.
posted by amanda at 4:59 PM on April 11, 2013 [3 favorites]

Yikes!! So the rumors are true, it seems: the US government is extremely wary of the self-employed.

Not exactly. What happens is that when you are an employee, half of your medicare and social security tax is being paid by your employer on your behalf. So you never see it on the paycheck. When one is self-employed, they see both sides of the tax. I wish they would abolish this method; it confuses people into thinking the government is screwing the small businessperson.

With TurboTax, it should be easy to fill out the forms jointly versus separately and see which one nets a smaller tax burden. It should also tell you what, if any, implications there are in changing how you file from year to year.
posted by gjc at 5:15 PM on April 11, 2013 [5 favorites]

Married filing separately is a somewhat weird case that limits a lot of the deductions and credits you can take. It was originally intended for cases in which spouses are separated and unable or unwilling to file a joint tax return, especially if you don't want to be responsible for any potential tax fraud on your spouse's part, but there are some circumstances where it makes sense for "normal" happily married couples, especially if there is a very large disparity in income between you and your husband. I'd try running the numbers through TurboTax for both of you filing jointly and see whether you come out ahead, unless you're unable to file jointly for special reasons.

Whatever you do, I'd encourage you to get some competent tax advice after the immediate tax filing situation is over, so that you guys are properly set up making estimated quarterly payments and maintaining appropriate records for your husband's business expenses.
posted by zachlipton at 5:37 PM on April 11, 2013 [1 favorite]

If he were employed, the employer would pay that much, probably. It covers Social Security and so forth.
posted by amtho at 5:57 PM on April 11, 2013

If you file jointly he/yr household may qualify for an earned income credit which will reduce that tax burden. Married couples filing separately can't claim the EIC.
posted by liketitanic at 6:07 PM on April 11, 2013 [1 favorite]

To put it slightly differently, a self-employed person is both the employer and the employee. They have to pay the employer-side taxes and the employee side taxes.

Of course it sucks if you don't know in advance that this is going to happen. But it's not the government specifically screwing self-employed people.
posted by alms at 6:09 PM on April 11, 2013 [2 favorites]

If he spent most of that $10K on his business, make sure that you are deducting that.
posted by samthemander at 6:14 PM on April 11, 2013 [2 favorites]

We put aside about 35% of every payment my husband gets, on the same principle that takes 30ish% out of my paychecks. That's just how it goes. Ten percent after deductions is pretty good.

But please do try your taxes both ways each year before you decide how to file for real. There's a bell curve where it helps to file separately, and large swaths where it just doesn't matter.

The IRS has stellar customer support (not joking, fantastic) and setting up a payment plan is easy. You don't have to produce the entire 1K at once.
posted by Lyn Never at 6:21 PM on April 11, 2013 [1 favorite]

If most of his income was spent on audio gear that does seem high. Perhaps you have TurbTax depreciating the equipment rather than taking the sec 179 exclusion and deducting it all at once. Depreciation can be tricky, consider hiring a professional.
posted by itsamonkeytree at 6:31 PM on April 11, 2013 [6 favorites]

US government is extremely wary of the self-employed

That has nothing to do with it. When you're employed by someone else, they make part of your contribution to Medicare and Social Security, and you make the other contribution. When you're self-employed, you have to make the entire contribution yourself. It's not meant to screw the self-employed; it's meant to ensure that the self-employed can maximize their Social Security benefits (which are related to earnings) after retirement.
posted by scody at 7:01 PM on April 11, 2013 [3 favorites]

I did the self-employed thing for years. Yes, this is very possible. And despite how disappointing this may be, trust me, the professional advice is worth it if your tax pro is advising you about what sorts of deductions you're owed given being a self-employed professional. While I still paid a ton of taxes, I saved not insignificant amounts by declaring legitimate and documented stuff.
posted by smirkette at 9:22 PM on April 11, 2013

Deductions don't factor in at his income level, practically speaking. His standard deduction and personal exemption is 10k. He has no income tax liability. If he can deduct more than 6100, you need to file jointly so you can take those deductions.

But FICA is about 14%, and there are no deductions for FICA. It's a flat tax until you hit six figures.
posted by politikitty at 11:26 PM on April 11, 2013

Deductions don't factor in at his income level, practically speaking.

(I am not an accountant, this is not tax advice, I've just filed as self-employed several times)

If he's self employed, he's filing a Schedule C, which means that all the deductions for business expenses come FIRST before he takes the standard deduction or itemizes and wahtnot.

But you're stuck with FICA on your net profit listed on your Schedule SE.

As someone said above, because some of that audio gear might have been counted as depreciating capital expenses by TurboTax, he needs to consult an accountant. In this case, it may be well worth it, even given the low income.
posted by deanc at 7:44 AM on April 12, 2013

If he's self employed, he's filing a Schedule C, which means that all the deductions for business expenses come FIRST before he takes the standard deduction or itemizes and wahtnot.

In both scenarios, his taxable income is zero. Deducting 10k or 15k from 10k gets you zero taxable income. There's no additional benefit from the deductions.
posted by politikitty at 9:15 AM on April 12, 2013

politikitty, my point is that he only pays both ends of the FICA on the net profit after deducting off the schedule C, rather than the gross.

Deducting your business expenses off a schedule C, which comes first, is separate from and different than itemizing deductions off a 1040, which comes later.
posted by deanc at 9:21 AM on April 12, 2013

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