There are a lot of ways that I get tax questions. Sometimes people send me questions directly through the website, USTaxAid.com. Sometimes I get questions through my Facebook Group, Diane Kennedy’s US Tax Group. And I often receive questions during the twice monthly coaching sessions that I do. Of all of these, the only way I can guarantee a timely response is through the coaching session. These are always answered at the earliest possible coaching session.
The only way to get a private personal answer is through a private consultation. So if you send me a message through email, Facebook, Skype or carrier pigeon, I will ask you to post the question in the Facebook group or through the website. I don’t do private consultations via anonymous emails or messages.
I just received a couple of questions that I think are representative of questions a lot of people are asking. So I wanted to highlight them in a blog. Today, it’s all about the surprise people who who are used to being W-2 employees receive when they get a Form 1099.
My tax question is that my daughter has her Master Cosmetology License in the State of Georgia. She is a Nail Technician. She gets a 60% commission and the owner gets 40%, which includes supplies, water, and electricity. The owner told her to claim booth rental when she does her taxes using her 1099 form at the end of the year. Should my daughter start paying her taxes quarterly, because at the end of the year she owes so much money in taxes and she feels that she is not progressing.
There are actually two different issues involved here. First is a budgeting concern. Let’s talk about that first.
When you are a W-2 employee, someone else is responsible for making sure you pay your portion of Social Security and Medicare tax on a regular basis. And, depending on your exemptions, you likely also have some federal and state income tax withheld. You aren’t paying any less. You’re just having someone else MAKE you pay it. That way at the end of the year, you are less likely to have a big bill. In fact, some people purposely overpay to get a “refund” which is not a refund at all. It’s you actually getting your own money back.
When you become a business owner, Form 1099 worker, independent contractor or whatever you want to call it, you are now responsible. No one is making you do it by withholding the money. You have to budget. You have to send money to the government. It doesn’t mean more tax. It just means you have to be responsible for the outcome. Wait until the end of the year and you’re going to get a bad tax surprise. But it’s really not about the taxes at all. It’s about budgeting and waiting until the end to pay what you should have been saving for and paying all along.
So, in answer to your question, yes, quarterly estimated tax payments should be made. And I’d also suggest setting up a savings account so that you can a portion aside for your taxes every month.
As to how much, use the amount of total taxes for the year before. It is a good place to start.
Now, the second part of the question that you didn’t ask was how come the tax was so high.
That’s the part that I can help you with. Look for all of your deductions. Obviously there are costs associated with running your business like the space rent, supplies, advertising, training and the like. These are clearly direct costs. Most people pick up most of those expenses.
There are also indirect costs that probably include your cell phone, ISP plan, computer, home office and more. Where do you spend your money now? For every single expense, ask yourself, “Is this expense reasonable and ordinary for the production of income?” If is it, it may be deductible. Ask your tax preparer, “How can I write this off?” You will likely pick up some more expenses as you work through that exercise.
The more write-offs you have, the lower your taxable income and that means less self-employment tax and federal and state income tax.
In other words, you’re going to have less of a shock when it’s tax time.
The quick answer to this question: Budget your money and look for write-offs. That’s how you avoid paying so much in taxes when you get your tax return prepared.