Tax advice

[OrphicSeth]

Ok, so time to do the taxes, but I'm really stumped.

I'm using TurboTax, and everything so far is going well. However, I feel like I'm getting screwed, and I can't seem to get the darn thing to play in my favor.

Last year, I made about 15,000 dollars, all W-2. I get a check back from Uncle Sam.

This year, I made about 3800 on W-2, and 12,000 as an "independent contractor" (Schedule C, 1099-Misc) and now I owe Uncle Sam 1,300 bucks.

I mean, I'm a dirt poor flight instructor! I can barely put Mac and Cheese on my plate and pay my rent, much less cut a check for 1300 dollars. So what's the trick? I've got other flight instructor co-workers who give their info over to a family accountant and they don't have to pay a dime, I can't afford their services.

I've got some money saved away, but with groundschool coming up, and 8 weeks of basically no pay, I'd hate to have to go into it.

Is this a "welcome to the real world" slap in the face? Or am I screwing something up?

In terms of deductions I've tried to claim myself as a business to be able to deduct the commute from my home/office to the airport, and that didn't do squat (10,900 miles of commuting/travelling!)

Thanks

 

[e12pilot]

This year, I made about 3800 on W-2, and 12,000 as an "independent contractor" (Schedule C, 1099-Misc) and now I owe Uncle Sam 1,300 bucks.

Welcome to the life of a Schedule C contractor. The reason you owe 1,300 in taxes is Social Security and Medicare. Those taxes are usually taken out of your standard paycheck by your employer, but when you work for yourself it is up to you to deduct the required amount.

Here are some "helpful" links:

http://www.irs.gov/businesses/small/article/0,,id=115045,00.html

If your net earnings are more than $400, and/or if you perform services for a church as an employee and receive income of $108.28 or more, you must pay self-employment (SE) tax using Form 1040, Schedule SE (PDF).

The dreaded 1040-SE:
http://www.irs.gov/pub/irs-pdf/f1040sse.pdf

It is important to note that if you do indeed owe over $1,000 to the IRS this April and want to continue operating as a Self Employed contractor you will need to start making quarterly estimated self-employment tax payments to the IRS each quarter. Basically, they want your money as early as possible, and if you owed them more than $1k the year prior they want your money every quarter.

What ends up happening is that at the end of next year(April 15th) you will be making your first scheduled payment of 2005. Confused yet?

Some notes:

1) Read and understand some of the good deducations you can take as a small business. One that comes to mind is the "home office" deducation. Remember, there are very specific rules that pertain to deducations and the IRS, so make sure you follow them

2) Itemize your "professional" expenses and see if those are deducatable as a business expense.

The thing you will learn very quickly is that you *should* have kept more records of your expenses, etc. This is very important if you want to take SB deducations.

This isn't tax advice, and I am not a professional, just another small business owner trying to make it....

Good luck,

Pete

 

[OrphicSeth]

Thanks man, the social security and medicare makes sense.

Fortunately, I only did this during the 2004 year, so I won't have to deal with this baloney anymore. I did keep all my receipts for charts and so on so I'll start plugging those in-- but they won't add to too much.

I'm beginning to get the sneaking feeling that the owner of the flight school made out big on this/me.

 

[User546]

I mean, I'm a dirt poor flight instructor! I can barely put Mac and Cheese on my plate and pay my rent, much less cut a check for 1300 dollars. So what's the trick?

EDITED: OK IGNORE ALL THE BELOW, I THOUGHT YOU WERE AN INDIVIDUAL CONTRACTOR (BY YOURSELF AT AN AIRPORT) I DIDNT REALIZE YOU WERE ASSOCIATED WITH A FLIGHT SCHOOL)

The trick is DONT report so much income! Usually contract work is cash, or payable checks to you as an individual. Don't tell the government you made so much last year, and pocket the rest.

If you are going to report it though, your going to have to be disciplined to take out your Medicare and Social Security from every single check you make. Stick it away in an envelope or bank account and FORGET ABOUT IT! That way when April comes around, you got all the money saved back, adn you dont have the burden to produce a huge sum of money.

Now if you want to be fair and honest when it comes to ole Uncle Sam, it really is in your best interest to hire a service like H&R Block or Jackson and Hewitt to do your taxes for you - they are exceptionally good at getting you the most money back. And I've been in your shoes before about not having the money to pay for a tax preparer, but it's well worth it to just find the money and do it.

I see it this way, your going to either pay $1300 to Uncle Sam for doing your taxes by yourself, or you could go pay a small fraction of that for a bookkeper and maybe pay a lot less!

Just some thoughts to chew on. (Not that I do any of this... )

 

[OrphicSeth]

The trick is DONT report so much income! Usually contract work is cash, or payable checks to you as an individual. Don't tell the government you made so much last year, and pocket the rest.

Yes, but I'm staring at a 1099-Misc from my boss with my name on it and the 12,000 bucks I made, and I know he submitted that on his end.

Edit: User997, right-o.

 

[User546]

Yea it doesnt do any good when you have someone reporting it on their end, I misunderstood that when I first posted that!

Good luck though, and hope you end up not owing too much! Turbo Tax is one of the best software to use out there, so it's probably your best bet if your going to do it yourself.

 

[lasflyer]

I am not a tax professional but I have filled out my own return for more years than I want to think about, and a few things jump out at me from your thread.

First, the amount of refund doesn't really indicate how much tax you paid. Last year you were an employee and your employer was deducting your taxes from each check. As an independent contractor it was up to you to pay estimated taxes each quarter, and it sounds like you were probably not doing that. That would explain why you owed money at the end of the year even if your tax liability was the same. There may even be a penalty in there for underpayment of taxes.

Second, as an independent contractor you pay self employment tax insead of social security tax. As an employee you will pay about 6% social security tax and your employer will match it for a total of 12%. Now you are self employed and, guess what -- the goverment still wants its 12%. You must pay both the employee's 6% and the employer's 6%.

Third, I was surprised you said the 10K miles of travel deduction didn't make a difference. You are entitle to somewhere around 37 cents per mile which totals about $4000. If its a legitimate deduction, it would be entered as a section 179 ordinary and necessary business expense on Schedule C and come right off the $12,000 income. I say "if its legitimate" because you are not allowed to deduct ordinary commuting from home to office and you did refer to it as commuting. But I don't know.

You should also scrounge around for every other possible deduction. As a self employed person you are entitled to deduct alll reasonable and necessary business explenses, such as license fees, periodicals, education expenses, advertising, office equipment, aviation equipment, training costs and basically anything necessary to conduct your flight instructing business.

You might even ask the other flight instructors in similar situations to look at their returns and see if there are things you missed.

 

[e12pilot]

I'm beginning to get the sneaking feeling that the owner of the flight school made out big on this/me.

Absolutely,1099'ing employees is of great benefit to the employer. They don't need to withold any taxes from your check, and all the accounting therefore is on the level of any sixth-grader.

As LASFlyer mentioned, your total SB taxes(medicare and social security) usually add up to about 12%. With income tax, etc expect to spend about 30% of your income on taxes as a small business.

LASFlyer mentioned that you may have to pay penalties because you did not pay quarterly taxes. That may be the case, however I am under the impression if your previous year's tax payment to the IRS were under $1,000 you do not need to pay estimated SB taxes that following year.

IMHO it would be worth it financially to run into H&R and see if they can get the total figure down a bit for you.

Good luck,

Pete