June,
If a young person (under 18) earns money doing odd jobs (like mowing grass etc...) and then puts this money into a Roth IRA is he in any way exempt from having to file a tax return and thereby able to avoid paying self employment (social security) tax?
I realize that if he were going to use the money to buy comic books or something he would never even consider reporting the "cash" income, but I'm assuming opening the Roth IRA will put him on the IRS radar.
John in South Carolina
Hello John,
Regardless of how young the indie he may contribute to a pension only if he has taxable earned income. So, no he cannot hide the income and also put it into a pension.
If the grass cutter wanted to contribute, let's say, $4000 into a ROTH -- or any other pension/retirement account -- he must file a tax return showing that he had at least $4,000 taxable earned income.
Were he an employee that would be $4,000 in wages, for an indie that would be $4,000 net profit.
To establish a pension plan for a minor the account must be opened and held by an adult, as guardian, in the name of the minor. While the adult is the individual authorized to perform transactions on the account, the minor is considered the registered owner for tax purposes.
Although there is no minimum age, on various kinds of pensions there is a maximum age at which you may not longer contribute.
Best,
June
Tuesday, November 6, 2007
Monday, November 5, 2007
How does an indie pay social security tax?
June --
I am self-employed with no employees, however I am interested in paying something into the system toward social security benefits for myself in the future. What tax form do I fill out to get started?
Jane from Baltimore, MD
Hello Jane,
Every self-employed who has a net profit of $400 or more pays into social security when she files her tax return.The amount is figued on Schedule SE: Self-Employment Tax. Social security is part of self-employment [SE] tax.
-- June
I am self-employed with no employees, however I am interested in paying something into the system toward social security benefits for myself in the future. What tax form do I fill out to get started?
Jane from Baltimore, MD
Hello Jane,
Every self-employed who has a net profit of $400 or more pays into social security when she files her tax return.The amount is figued on Schedule SE: Self-Employment Tax. Social security is part of self-employment [SE] tax.
-- June
Sunday, November 4, 2007
How much should I charge?
June --
I have been a Web Developer / ASP.NET Programmer / Writer / Educator for 4 years.
I agreed to a rate before researching the real cost of taxes etc... is there a rule of thumb for consulting so I don't make this mistake again?
For example, should I add 35% to my minimum rate to ensure that I take home what I need?
Thanks.
David, M.Ed. from Seattle
Hello David,
I think you are asking two different questions.
I will ignore taxes for a moment and look at how much an indie should charge. Let's say you were making $50 per hour as an employee. All your work expenses would be covered and so $50 per hour meant $50 an hour -- less taxes -- into your pocket.
Now, as an indie you have many expenses that you must pay and they must be figured into your hourly fee. Not only do you need to look at things like the costs of a computer purchase and publications you read and the costs of running a home office, but what about hours on the phone with your computer guru who is helping you after your computer crash? What about your time or someone else's time cleaning your home office? Your time doing your own bookkeeping? Your time on the web getting answers to tax questions?
Most new indies -- that is, those without experience who have no history on which to judge their rates -- severely undercharge. They usually should double or triple their fees. When they give a fee of $500 for a project they think would take them 10 hours, they should have charged $1,000 or $1,500. Most often the project takes at least twice as long as they thought and they didn't figure in things like the two hours at Best Buy exchanging the modem they just bought.
The market and your reputation may limit how much you can charge but it is important to know your actual costs and to strive to charge what works for you. Especially at the start of your indie business it is important to keep a log of time spent on each client as well as on "general" time -- that's the bookkeeping, cleaning, errand running kind of stuff.
Your other question about fees and taxes: Plan on 1/3 to 40% of your net profit going toward taxes. Read more here Taxes: Which ones and how much do I pay?
Best,
June
I have been a Web Developer / ASP.NET Programmer / Writer / Educator for 4 years.
I agreed to a rate before researching the real cost of taxes etc... is there a rule of thumb for consulting so I don't make this mistake again?
For example, should I add 35% to my minimum rate to ensure that I take home what I need?
Thanks.
David, M.Ed. from Seattle
Hello David,
I think you are asking two different questions.
I will ignore taxes for a moment and look at how much an indie should charge. Let's say you were making $50 per hour as an employee. All your work expenses would be covered and so $50 per hour meant $50 an hour -- less taxes -- into your pocket.
Now, as an indie you have many expenses that you must pay and they must be figured into your hourly fee. Not only do you need to look at things like the costs of a computer purchase and publications you read and the costs of running a home office, but what about hours on the phone with your computer guru who is helping you after your computer crash? What about your time or someone else's time cleaning your home office? Your time doing your own bookkeeping? Your time on the web getting answers to tax questions?
Most new indies -- that is, those without experience who have no history on which to judge their rates -- severely undercharge. They usually should double or triple their fees. When they give a fee of $500 for a project they think would take them 10 hours, they should have charged $1,000 or $1,500. Most often the project takes at least twice as long as they thought and they didn't figure in things like the two hours at Best Buy exchanging the modem they just bought.
The market and your reputation may limit how much you can charge but it is important to know your actual costs and to strive to charge what works for you. Especially at the start of your indie business it is important to keep a log of time spent on each client as well as on "general" time -- that's the bookkeeping, cleaning, errand running kind of stuff.
Your other question about fees and taxes: Plan on 1/3 to 40% of your net profit going toward taxes. Read more here Taxes: Which ones and how much do I pay?
Best,
June
SE Tax and Partnerships
Hi,
My husband currently receives a 1099 & is self-employed as a territorial sales rep.
He pays alot on self-employment [SE] tax. We are thinking about opening up a retail store in which we would be partners in an LLC.
Does The Small Business and Work Opportunity Tax Act of 2007 mean that we would not need to file for SE tax on this small business? If I am understanding it incorrectly & we still do need to file SE tax, is there some way we can combine his territorial sales rep work in which he already pays SE tax with the small retail business, so that we are not paying SE tax on two related businesses?
Also, does the Small Business and Work Opportunity Tax Act of 2007 eliminate the double taxation that occurs with husband & wife partnership llc's?
Thanks, Eileen
Hello Eileen,
Wow! You are mixing up apples, potatoes and Fruit Loops.
First of all, there is nothing in the Small Business and Work Opportunity Tax Act of 2007 that eliminates SE tax. To make sure there was no hidden paragraph that I missed I called the IRS to confirm. If you found something that says it's been eliminated, please send it to me.
Second: There is not now nor was there ever a double taxation of SE tax. Read What is Self-employment (SE) Tax? on this blog.
In a partnership SE tax is paid on the net profit. For instance, if you and a friend were 50/50 partners then each of you would pay SE tax on half the profit. A husband and wife partnership would also split the profit and pay SE tax on his and her share.
By the way, a partnership is the least tax advantageous business structure for a husband and wife business. A better way: One spouse as owner, the other as an employee.
Best,
June
My husband currently receives a 1099 & is self-employed as a territorial sales rep.
He pays alot on self-employment [SE] tax. We are thinking about opening up a retail store in which we would be partners in an LLC.
Does The Small Business and Work Opportunity Tax Act of 2007 mean that we would not need to file for SE tax on this small business? If I am understanding it incorrectly & we still do need to file SE tax, is there some way we can combine his territorial sales rep work in which he already pays SE tax with the small retail business, so that we are not paying SE tax on two related businesses?
Also, does the Small Business and Work Opportunity Tax Act of 2007 eliminate the double taxation that occurs with husband & wife partnership llc's?
Thanks, Eileen
Hello Eileen,
Wow! You are mixing up apples, potatoes and Fruit Loops.
First of all, there is nothing in the Small Business and Work Opportunity Tax Act of 2007 that eliminates SE tax. To make sure there was no hidden paragraph that I missed I called the IRS to confirm. If you found something that says it's been eliminated, please send it to me.
Second: There is not now nor was there ever a double taxation of SE tax. Read What is Self-employment (SE) Tax? on this blog.
In a partnership SE tax is paid on the net profit. For instance, if you and a friend were 50/50 partners then each of you would pay SE tax on half the profit. A husband and wife partnership would also split the profit and pay SE tax on his and her share.
By the way, a partnership is the least tax advantageous business structure for a husband and wife business. A better way: One spouse as owner, the other as an employee.
Best,
June
Saturday, November 3, 2007
What is Self-employment (SE) Tax?
While income tax is paid on any kind of taxable income, self-employment (SE) tax is paid only by people who work for themselves. SE tax is social security and Medicare tax for self-employeds and is paid on a self-employed’s net earnings.
Net earnings – think of it as net profit. It's what you have left after subtracting all business expenses from your gross self-employed income.
You must pay self-employment tax if net earnings from self-employment are $400 or more. The SE tax rate is 15.3% and is made up of two components: 12.4% social security tax plus 2.9% Medicare tax.
Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system which provides you with retirement, disability, and survivor benefits.
Medicare coverage provides hospital insurance benefits.
There is a cap on the amount of earned income on which you must pay social security tax. The cap for 2009 and 2010 is $106,800.
That means that you do not pay social security tax on income over $106,800. If you were to make $106,800 as an employee and also have an indie venture with a $20,000 profit, you would pay no social security tax on the $20,000 profit because you had already paid the maximum social security tax for 2009 or 2010 via withholding on your wages.
If you had a job and were also self-employed you would pay social security tax on both wages and profit until you met the $106,800 limit.
If you earn $106,800 in 2009 or 2010 you will pay the same amount of social security tax as Max Millionaire who earns $1,000,000. Hmmmm... do you see an opportunity here for filling the social security coffer?
There is no cap on Medicare tax. You pay 2.9% Medicare tax on all earned income.
Net earnings – think of it as net profit. It's what you have left after subtracting all business expenses from your gross self-employed income.
You must pay self-employment tax if net earnings from self-employment are $400 or more. The SE tax rate is 15.3% and is made up of two components: 12.4% social security tax plus 2.9% Medicare tax.
Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system which provides you with retirement, disability, and survivor benefits.
Medicare coverage provides hospital insurance benefits.
There is a cap on the amount of earned income on which you must pay social security tax. The cap for 2009 and 2010 is $106,800.
That means that you do not pay social security tax on income over $106,800. If you were to make $106,800 as an employee and also have an indie venture with a $20,000 profit, you would pay no social security tax on the $20,000 profit because you had already paid the maximum social security tax for 2009 or 2010 via withholding on your wages.
If you had a job and were also self-employed you would pay social security tax on both wages and profit until you met the $106,800 limit.
If you earn $106,800 in 2009 or 2010 you will pay the same amount of social security tax as Max Millionaire who earns $1,000,000. Hmmmm... do you see an opportunity here for filling the social security coffer?
There is no cap on Medicare tax. You pay 2.9% Medicare tax on all earned income.
{revised 1/31/10}
Indies Need Health Coverage
The American jobs market has changed – more than that, it has been transformed – since Bill and Hillary Clinton’s unsuccessful attempt to put together a national health plan in the early 1990s. In the ensuing years the independent professional – in sheer numbers, although up to now not in political power – has boomed. No longer should the indie be an overlooked factor in US tax law or in labor or health benefits strategy.
Health coverage will certainly emerge as an issue in the national elections of 2008. It’s vital for indies to make themselves heard in the coming debate. We indies need health care coverage solutions that are in sync with our workstyle.
I’m going to have more to say on this topic in the coming months. For a brief but interesting look at such matters, check out Home-Office Politics, Matt Bai’s article in the November 4 issue of the New York Times Magazine. If no longer available online you may get a PDF version here.
Health coverage will certainly emerge as an issue in the national elections of 2008. It’s vital for indies to make themselves heard in the coming debate. We indies need health care coverage solutions that are in sync with our workstyle.
I’m going to have more to say on this topic in the coming months. For a brief but interesting look at such matters, check out Home-Office Politics, Matt Bai’s article in the November 4 issue of the New York Times Magazine. If no longer available online you may get a PDF version here.
Can I deduct meals & lodging?
June --
I've worked as a software consultant on 1099 on and off for 15 years.
I work at my clients business site 3-4 days of every week and the rest of the week I work at home. My home is 60 miles from my clients business. Since it's such a long commute I always stay in a hotel close to the clients site the 2-3 nites I'm working at the clients place. I do this every week. Can I deduct travelling expenses for the hotel/food etc? I do not claim a home office deduction.
Thanx a lot in advance.
Brian :)
Hello Brian,
You say "clients site" not client's site nor clients' site so I don't know if you are talking about one or more clients. If you have only client brings that brings up the question : Are you really self-employed?
Knowing nothing else about your work or number of clients, I'll assume for this situation that you are legitimately self-employed.
You have no home office so you may not take the commute to your client's site.
Sixty miles is not a long drive. If for your convenience you are staying there rather than driving back home then you may not deduct costs for lodging and meals.
If your work requires you to be available on your client's site for so many hours that you would be too tired to safely drive back home then lodging and meals would be a legitimate deduction.
Best,
June
I've worked as a software consultant on 1099 on and off for 15 years.
I work at my clients business site 3-4 days of every week and the rest of the week I work at home. My home is 60 miles from my clients business. Since it's such a long commute I always stay in a hotel close to the clients site the 2-3 nites I'm working at the clients place. I do this every week. Can I deduct travelling expenses for the hotel/food etc? I do not claim a home office deduction.
Thanx a lot in advance.
Brian :)
Hello Brian,
You say "clients site" not client's site nor clients' site so I don't know if you are talking about one or more clients. If you have only client brings that brings up the question : Are you really self-employed?
Knowing nothing else about your work or number of clients, I'll assume for this situation that you are legitimately self-employed.
You have no home office so you may not take the commute to your client's site.
Sixty miles is not a long drive. If for your convenience you are staying there rather than driving back home then you may not deduct costs for lodging and meals.
If your work requires you to be available on your client's site for so many hours that you would be too tired to safely drive back home then lodging and meals would be a legitimate deduction.
Best,
June
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