How much will my taxes really be this year?
It's my first year as a 1099 worker. I'm still unclear on what my tax rate is, and how much I will owe in taxes this year. I just hope that I've saved enough.
It looks like my overall earnings this year will be $60k.
That puts me in the 25% federal tax bracket.
So I owe the feds $15,000.
Then state taxes are 9.3%
I owe the state $5580.
Self employment tax is 15.3%
I owe an additional $9180
Totaling $29,760 in taxes for 2008.
Then I have minimal "income" from dividends, interest and such, which I will owe tax on.
I assume that means I will owe $30,000 in taxes, or 50% of my income.
That seems rather high, am I doing my math wrong?
9 comments:
Yup, you're doing your math wrong:) You're in the 25% tax bracket, but you don't pay 25% on all the income that you earn. You owe 10% on the first $7,000 or so of your income, 15% on income between $7,000 and $31,000 or so, and 25% on the money you earned above $31,000. These numbers aren't exact. You should be able to get the exact numbers from the irs website.
Also, you get to deduct 1/2 of your self-employment tax on line 27 of your 1040. This will reduce your adjusted gross income. And then you get to take either standardized or itemized deductions, which will probably decrease your taxable income by about $5000.
I was an independent contractor for part of last year, and this whole self-employment thing confused me to. I ended up downloading a 1040 and filling it in with estimated numbers. The good news is, you owe much less tax that you thought you did!
I suggest you invest (it is a deduction as well) in Turbo Tax. I was self employed last year, with 48K income for the portion of the year I was in the states self-employed. In federal taxes after deductions (and I did have a few at around 6-7K with my IRA contributions plus the standard deductions) I paid 7K in federal taxes. You shouldnt be hit that hard... it is more than if you were employed but not by that much.
As Shuchong said, if you make $60,000, your taxable income isn't taxed at 25%, just the top $27,450 (for 2008).
So if you make $60,000, your total income tax would be $11,344. That assumes you have no deductions and didn't contribute to your 401k, etc.
http://www.moneychimp.com/features/tax_brackets.htm
Using a tax program will make this so much easier. The first time I tried to figure out my taxes I did my math just like you did and was appalled. You will pay much less than that.
After you get a decent handle on the tax money you need to put away throughout the year, also realize that you will need to file quarterly returns with the Feds. If you just pay in a lump sum at the end of the year, I believe that you will get a penalty, as the Federal Govenment requires you to pay on a quarterly basis (which is how all businesses pay).
Girl your math is all crazy! You will eventually owe less in taxes than you calculated.....but at least you were preparing yourself for that.
Like other commenters said, you should invest in Quicken or some other such software. If you use H&R Block online etc. you can deduct the cost of that and it gives you a great estimate of what your taxes really will be.
Also, you can deduct any 401K, IRA contributions from your taxable income. Have a house? You can deduct the mortgage interest. Donate to charity? Deduct. Medical expenses? Deduct. I was in the 25% bracket last year as well, but only ended up paying 9% for the year due to deductions.
ASAP, and before the end of the year, you should get TurboTax and do a preliminary estimate of your taxes. It will be way lower than you have estimated, but you can lower it further.
Check on making an IRA contribution for 2008. As long as you had no other retirement plan from employment, and you make the deposit by April 15 of next year, you can deduct it.
Second, plan to make an "estimated tax" payment by 1/15/09. You should have been making them quarterly all year, but you can reduce the penalty you will owe if you make a tax deposit by then. I don't know if it will reduce your penalty more if you make a larger deposit; you can calculate that on TurboTax. (Your penalty could be several hundred dollars, but it won't be in the thousands. Worth trying to lower it, but don't freak out about it.)
Third, if your pay is reported to you on a Form 1099, you should carefully review the deductions that can be claimed on Schedule C of your tax return (TurboTax will walk you through it). You may be able to write off many of your car expenses (gas, insurance, repairs, depreciation), professional dues and subscriptions, some entertainment, perhaps most or all of your cell phone, land line, internet connection, computer, software purchases, and more.
When you do your TurboTax calculation, you will see that your "marginal" tax rate is 25%. Your "average" tax rate is probably between 15% and 20% and depending on IRA contributions and other deductions could be as low as 10%.
Your marginal rate tells you what you will save on each dollar of taxable income you can shave off your return through credits, adjustments (like an IRA), or deductions (like business expenses). So at a marginal rate of 25%, you will save 25 cents in taxes for every dollar you can deduct.
You could have H&R Block or someone else do your taxes for you, but as a self-employed person, you will benefit in the long run from understanding your tax situation and it's easier than people realize on TurboTax. (I assume there are other tax programs, but that's the one I know.)
Good luck!
As the others said, your application of the bracket is a bit off.... and you're still paying too much. ::grumbles about taxes::
;-)
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