Someone, please explain business taxes to me!?

Question

I am an independent contractor and am contracting myself out through my own business. I have an accountant, but I am still not understanding how exactly business taxes work. For example, if I make $10,000 per month, how much exactly will taxes be (both state & federal)

In addition, what can I do so between paycheck & tax filing time to allow me to keep as much of my paycheck as possible (legally) So, lets say I make 10K, someway that I only pay 2K (or nothing!) in taxes.

Oh yeah, I'm in the state of maryland.

Answer 1

Is the $10,000 per month a profit or your gross revenues?

As a self-employed person you are responsible for regular income tax, both at the federal and state levels, and also Self-Employment (SE) tax at the federal level. SE tax is 15.3% of 92.35% of net self-employment income, but if you make more than 97,500 in net self-employment income the SE tax changes to 2.9% of 92.35% of net se income for the amount over 97,500 (that is the taxable limit for social security income).

If your 10,000 per month was net profit, you would be paying 16,756 (120,000 in self-employment income for the year, 97,500 x 15.3% x 92.35% + 22,500 x 2.9% x 92.35%) in SE tax on top of regular federal and state income tax.

As far as regular federal and state income tax, I have no idea about your other income, your deductions (itemized versus standard), filing status (single, married, head of household, married filing separately), credits, etc, to come up with a reasonable estimate of those.

Your best bet is if your accountant also does your taxes is to ask him/her to explain it to you.

Answer 2

You need a CPA yesterday. You are making 120K per year as projected and have no idea what the tax situation is? This could be a 30K problem or more for you. Forget just the basic tax issue but go with the payroll taxes, depreciation of assets and things like self employment taxes. Then add in your business type (S-corp, LLC, or other entity) and that will also add in some complexities. Once you get to base calculations you can then determine resonable deductions which will not likely include 100% of your income although with good planning it's possible. You might want to research quarterly business taxes also because those penalties can really add up if you don't file.

Good luck and get a CPA.

Answer 3

To begin with, you do need a CPA, but you also need to set up a set of books that will help you track the income and expenses for your business. I am both a QuickBooks ProAdvisor and a Microsoft Partner Accountant Network Consultant. Either of these two programs will work for you. The level of soft ware you need will depend on the type of business that you have. There is also Peachtree, and probably a hundred other programs out there. You will need to spend some money to get set up and trained but that can written off also. Contact an Accountant and ask him/her what programs they are familiar with and would recommend. Then Purchase the programs and hire a the appropiate person to train you. The one thing you do not want to do is get behind on your taxes as that can become a nightmare. Do this right away, but always work with your acountant.

Answer 4

Talk to an accountant. If you don't know the tax rates, most likely you won't know what deductions are valid as well (no offense in that last statement). They should be able to help you out and at the end of the fiscal year when you need to file your taxes, they should be the ones doing this all for you. Just make sure to bring everything and discuss truthfully and openly with your accountant to do a tax return that is accurate and beneficial to you in the sense that you pay the least amount of tax possible.

Answer 5

Q. how much exactly will taxes be
A. Ask the accountant.

Q. what can I do so between paycheck & tax filing time to allow me to keep as much of my paycheck as possible (legally)
A. Set up a retirement plan for the business and contribute a lot to it. This is to lower your income tax. There is not much that you can do to lower your self-employment tax, other than to make less money.

Answer 6

You don't give anywhere near enough info to give you amounts that you'd owe. Your accountant can explain it to you.

You might have expenses that you can subtract from your income to get your net income that you'll be taxed on.

You will owe self-employment taxes of approximately 15% of your net income. This is for social security and medicare.

You'll owe federal income taxes - the amount depends on too many things about your personal situation that you didn't mention in your question to estimate an amount, but it could be as much as around $25,500.

Maryland will probably get another 4.75% of your net income.

You are required to make quarterly estimated payments to the IRS and to Maryland - your accountant should have explained that to you. If you don't and just waited until the end of the year, you'd most likely have to pay penalties for under-withholding as well as the taxes that you owe.

You need to talk to your accountant very soon - is he or she also going to do your taxes? If you haven't talked to him/her about that, they might not realize that you are expecting them to do that also.