WhiteSites Blog

Tax Time again for 3rd Quarter

Posted on Oct 15, 2009 by Paul White

Its natural to do everything you can to keep your money from going to the government.  This means doing work without a contract, accepting money under the table, not claiming your income on your taxes.  In Texas many small business owners operate in this way.  They get away with it until they make a mistake, that shows up under the IRS's radar.

In the beginning it seems that everyone does some business under the table. At this point they don't consider their business to be real.  They think of it as just a hobby.  But after a while they start to see a larger part of their income come from this so called hobby.  At that point its a good ideal to make it a legit business.  Yeah this means uncle sam is gong to get his hands on your money.  But its better to go legit, then to live with a false and illegal sense of worth.

Why its good to incorporate


It doesn't matter if you are going to get just an LLC or fully incorporate your business.  They both provide liability protections that are better than doing work based on your Social Security Number.  There are also great tax benefits to doing it this way.  The first is you can now deduct a lot of stuff that you couldn't when you were doing things freelance.  This is a huge advantage to people with Home based offices.  You can deduct a portion of your home for business use.  You can detect meals with clients.  And you can deduct your mileage for client business meetings.  A portion of your electric / utilities can be duducted for business use

You don't need an accountant for a small business.


Even though most small businesses will use an accountant at the end of the year.  You don't need one for your quarterly filings.  Just make sure you know what you are doing.  Have your accountant help you with your first few quarters.  Then after that you should be able to do it yourself.  Even though you would think accountants want their clients dependent on them for everything, I have found accountants would rather have an organized client that does quarterly filings themself, which makes things easier for tax time in March / April.  Then to have a client that throws piles of receipts of unorganized data at them every quarter.  To be a good business person you have a know where you money is. 

Use a system that works for you


Some accountants will try to get you to use QuickBooks or some other business keeping software to organize your business, but if this is not the way your business operates, or the way you think, just use something like an excel spreadsheet.

Understanding Taxes


First in Texas we have no state income tax, so this may not apply to other states who do have state income taxes.  As a small business in Texas you are responsible to pay the following.
  • Federal Income Tax ( variable percentage )
  • Social Security and Medicare ( 15.3% )
  • State Unemployment Tax ( variable percentage dependent on claims to business )
Even though it would be great if each of these were just a flat percentage applied to your income, they don't work that way.  Each Tax has a wage base, or a ceiling.  So the tax only applies to the first X dollars of your annual income. 

Federal Income Tax: No Wage Base
Social Security and Medicare: increases yearly,  about $100K
State Unemployment Tax: $9K in texas ( varies by state )

What this means is if you make $200K / year.  You only pay State Unemployment on the first $9000, and Social Security on the first $100K ( not exact figure )

How I do figure my monthly taxes?


I made a spread sheet to calculate my taxes for me.
Here is an example of what it looks like


Take HomeIncome TaxSS Tax1GrossSS Tax2UnemploymentTotal Amount
$1776.00$71.00
$153.00$2000$153.00$54.00
$2207.00

To explain this
Gross = The total amount you earned ( $20 / hr x 100 hours )
Then half of Social Security is paid by you ( taken out of your check ) and the other half is matched by your employer. Since its your business, you essentially are paying both.  Federal Income tax is taken out of your check.  This number would represent the lower rates since Obama came into power.  It used to be much higher.  Unemployment is paid by your employer.  So for $2000 of earned income.  You only get to take home $1776.00 while the actual cost to your employer is $2207.00, and the government pockets $431.00.  These figures are based on a monthly payment cycle, and for an individual that is married and has earned less than $9000 of income for the year.

Quarterly Reports


I have to file and pay the following at the end of each quarter
  • File ( Mail ) 941 to IRS
  • Pay Social Security and Medicare on the EFTPS (IRS) website
  • File and Pay State Unemployment Taxes on the Texas Workforce Commission Website

Yearly Reports


I have to file and pay these at the end of the year
  • Mail and Pay FUTA 940 Federal Unemployment
  • Mail and Pay State Sales Taxes
It may seem like a lot of work, but once you get used to it, its very simple.

The truth about taxes


Its sad but Unemployment and Social Security are really taxes on the poor.  As they only apply to those making under $100K.  Even though the Income taxes increases gradually as your income increaes and with no Celing.  There is another thing you should know about taxes.  Most small businesses do not pay their employees / employee for self employeed people, the entire amount of business income.  For example Warren Buffet only pays himself $100K salary.  There is no law that states you have to pay yourself a high salary when you run a billion dollar company.  This is how the rich get and stay rich.  They pay themself a low salary and then at the end of the year they take a huge dividend payout which is only taxed at 15% thanks to George Bush II.  This means someone like Warren Buffet who pays over 40% on the $100K salary,  only pays 15% on the millions he gets in the form of dividends from his company.  This in turn makes his effective tax rate lower than even the ultra poor.  This is why so many people invest into companies that pay dividends.  This is also why its so beneficial to start a small business.

Permalink
1971 Visitors
1971 Views

Categories associated with Tax Time again for 3rd Quarter

Discussion

No Comments have been submitted
name
Email Needed to confirm comment, but not made public.
Website
 
 
When you Post your Comment, you'll be sent a confirmation link. Once you click this link your thoughts will be made public.. Posts that are considered spam will be deleted, Please keep your thoughts and links relavent to this Article