Taxes Owed?

Question

I am self-employed and it looks like I will end up making around $8,000 by the end of the year. I added up my expenses and that was around $6,000. Since my office is around 20% of my home I took 20% of the $6,000 which is $1200. Using the tax estimator on HR Block it said I would owe around $1,000 without putting any expenses into it, with the expenses added it still says I would owe around $937. How can this be correct when I have $1,200 in expenses? Please help.

Thanks!

Thanks so much :) The $8,000 is total income and the $6,000 is household expenses like rent, internet (I work online), phone line (the only reason I have a phone is because I have to have it to have internet access and it is only used for that purpose).

Answer 1

The only expenses you can deduct are any legitimate BUSINESS expenses.

If you have a home office and meet the requirements for deducting those costs the deduction is limited to the proportional amount of the area of your home that the office takes up. If your home is 1,500 square feet and the office takes up 150 square feet, you can deduct 10% of your rent or mortgage interest, utilities, and repairs. You can deduct a cell phone used exclusively for business. You cannot deduct the cost of your land-line phone service but can deduct any long-distance charges. If you have a second land-line used exclusively for business you can deduct the basic charge as well.

The self-employment tax on $8,000 would be more than $1,000. If you put in $6,000 in expenses it would be a lot less than $937 so you must be doing something wrong. However if the $6,000 was your rent, etc. then 20% of that deducted from the $8,000 would be about right.

Keep in mind that the IRS may wonder how you managed to survive on that small amount of profit if it is your only income.

Answer 2

To calculate home office expense you don't take the 20% of your BUSINESS expenses, you use 20% of the expenses of your home - for example, rent and utilities. Be very sure that you qualify for the home office - it's an area the IRS sometimes looks at closely.

I'm assuming you are saying that the $8000 is your total revenue, and doesn't already have the business expenses taken out. That would leave you with $2000 net income if you meant the $6K is the total of your business expenses, leaving out the home office issue for the moment. On $2000 net income you wouldn't owe any federal income tax and many places wouldn't owe any state income tax either but that depends on your state. You would owe self-employment tax of a little under $300.

If you qualify for a home office deduction, that amount would subtract from the $2000 net income before that, and would further reduce if not eliminate the self-employment tax.

If you mean the $8K already has business expenses subtracted, and the $6K is your home expenses for the year, then you're doing the home office deduction right, and still wouldn't owe federal income tax but your self-employment tax would be $900+ like you calculated on the estimator - your net income would be around $6800 and you'd pay the self-employment tax on that.

So the question is - what is the $6000, business expenses or home expenses? And are business expenses already subtracted from your estimate of $8000 that you'll make for the year? Add that info and we can give you a better answer.