When do I write off business expenses?

Question

I'm a contract worker and make about $20,000 a year, a tax person said i should pay about $1000-$1,200 4 times a year for taxes. I was just wondering, do I write off business expenses when I pay taxes 4 times a year or do I figure that out at the end of the year with receipts. My parents think that i do it at the end of the year, but I just want to make sure.

Answer 1

You have to wait until the year is over to figure out how much you have made in order to completely figure out your tax liability. But since you are a "contract worker" you would get a 1099 at the end of the year, and be responsible for both regular tax, and also self-employment tax. If you want to you can keep track of your business expenses during the year to see how well or how bad you are doing. I have included an IRS link for business expenses for a self-employed person (which is what you are as a contract employee).

Answer 2

As a contractor you will be liable for self-employment taxes (15.3%) on top of the federal income tax you will owe. At $20,000 even if you have NO expenses, your taxes would be based on taxable income of $9,850. 20K - 1400 (1/2 SE tax adjustment) - 5350 (standard deduction) - 3400 (personal exemption). Self employment tax would be $2800 & income tax would be $1100. So, paying estimates of $3900 would be acceptable if you had no expenses, which is less than the $4000 - $4800 they suggested.

You can make unequal estimated payments if you have reason to believe that your income will be different from quarter to quarter and will not incur a penalty. However, since we are almost halfway through the year, this might not be the way to go. In addition, that's not always the best course for self-employed individuals like you.

What you might do is at the end of June, calculate what your net income (income - expense) is. Then you can double that number for an estimate for your annual income, figure the tax on that, and send in the final two estimates based on that figure. Or, using that tax figure, start to set aside the money to pay your taxes with when April 15th rolls around. Whichever way you figure it, your taxes shouldn't be more than $4,000 for this year at least, as long as you have some expenses.


Hope this helps!

Answer 3

You only actually write it off once a year when you file. You will also do it quarterly in a less formal way. Your quarterly tax payments are supposed to be estimates of what you expect to pay at the end of the year, split into four payments. Since you will be taking deductions for expenses at the end of the year, you can take them on your quarterly payment if you are expecting your expenses to be fairly equal (mileage expenses, etc.) for all quarters of this year. If you just spent a lot of money on tools and won't be doing that again for the rest of the year, you should spread the deduction for that major expense between each quarter. And err on the side of paying too much--if you pay too little, you can be penalized, but if you pay too much, you get the extra back when you make your fourth (final) payment when you file.

The basic idea is that you should be paying a quarter of your taxes with each quarterly payment. If you went to your tax adviser and he recommended paying $1000, you shouldn't make that number any lower unless your expenses are much higher (or your income lower) this year. He took your expenses into account to figure last year's taxes, and is assuming this year will be about the same.

Answer 4

Are you a w-2 contracted employee? Do you fill out w-2's every time you work and have your normal deductions taken out?

If yes, then you do it all at the end of the year.

If no, then it is smarter to start to calculate your exposure every quarter or so. This way you will be able to put aside the money you will have to pay. But at $20,000, it probably wont be much...

I know someone who did not keep track during the year and then did their taxes and found out they had to pay almost $10,000! If they had been keeping track during the year, they would have just thrown that money into a high-interest savings account and had the $10,000 to pay....

Without having the figures at hand, I would still guess that the tax bracket your earnings put you in will not be high enough to cost you a whole lot. (but get in the habbit of keeping track anyway!)

Answer 5

You actually calculate the totals at the end of the year when you file your return, but if you have significant expenses, since it would reduce your annual tax, it would also reduce the amount you need to pay in quarterly. The amount the tax person suggested would be about right if you don't have eligible deductable expenses related to your contract income.