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Author Topic: Tax Question (first time worker)  (Read 548 times)
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Lordnine
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« on: June 21, 2008, 06:50:26 PM »

I have only been working for a little over a month at my current job, I work on a by project basis.  They informed me that because I don’t work full time but still make over $400 I will have to file a 1040-ES form and pay quarterly.  They send me checks without taxes pre-taken out of them. 

Looking at the form there is a line that says:
Quote
“Exception. You do not have to pay estimated tax for 2008 if you were a US Citizen or resident alien for all of 2007 and you had no tax liability for the full 12-month 2007 tax year. You had no tax liability for 2007 if your total tax was zero or you did not have to file.”

Everything on the form says I need reference 2007 but I never had an income because I was a student. I’m a little puzzled about what I’m supposed to do to file taxes this year.
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KC
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« Reply #1 on: June 21, 2008, 07:26:26 PM »

It also sounds like they are treating you like an self employed/independent contractor and not an employee.  This means that in addition to withholding on your income taxes, you are responsible for paying for social security and medicare taxes at double the rate that an employee would pay.  IIRC, the self-employed rate for these taxes is a combined 15.3%.  The rate for an employee would be half of that because the employer picks up the other half. 

Keep in mind that you may also have to pay state withholding taxes too on the state version of the 1040 ES if your state has an income tax. 
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Lordnine
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« Reply #2 on: June 21, 2008, 07:29:37 PM »

Yes I read this BUT the form says to base this information on earnings in 2007, which I don’t have, so I don’t understand how I am supposed to set this up.
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KC
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« Reply #3 on: June 21, 2008, 07:40:38 PM »

OK, it's actually a little more complicated than that.  There is also an exception to the withholding requirement if you don't expect to owe much in federal taxes this year.  Go to the www.irs.gov and look up IRS publication 505. 
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Ironrod
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« Reply #4 on: June 21, 2008, 07:57:25 PM »

Quote from: Lordnine on June 21, 2008, 07:29:37 PM

Yes I read this BUT the form says to base this information on earnings in 2007, which I donít have, so I donít understand how I am supposed to set this up.

You are not required to make quarterly estimated payments, but you will still owe the same tax burden at the end of the year. Your contract employer will report your income to the IRS on form 1099, and you'll have to pay self-employment taxes as well as income taxes on 1099 income. Since the IRS has no basis year to compute your expected obligation, you can choose between smoothing it out quarterly or giving it to them all in one big lump next April. Assuming that you're disciplined about such things, your smartest strategy would be to compute your quarterly obligations, then pay that money into an interest-bearing account that you will drain next April. If you are less disciplined, you probably ought to make the quarterly payments to avoid having one obscenely huge bill next year (and yes, don't forget to check your state's rules, too).

The Bride of Ironrod earns 1099 income in very irregular chunks. Every time she gets a freelance check, I take out 25% for the feds and 5% for the state. Four times a year, I send in whatever I've withheld during the previous quarter. This method works out pretty accurately for us. Depending on your overall deductions, your effective percentage rate might be higher or lower than that.

Welcome to the joys of the 1040 long form and Schedules A, C and SE. Besides 1099 income, we also have wage income and corporate profits to account for. Tax season is a major ordeal when you aren't a wage slave.   finger
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Lordnine
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« Reply #5 on: June 21, 2008, 08:39:31 PM »

Quote from: Ironrod on June 21, 2008, 07:57:25 PM

Quote from: Lordnine on June 21, 2008, 07:29:37 PM

Yes I read this BUT the form says to base this information on earnings in 2007, which I don’t have, so I don’t understand how I am supposed to set this up.

You are not required to make quarterly estimated payments, but you will still owe the same tax burden at the end of the year. Your contract employer will report your income to the IRS on form 1099, and you'll have to pay self-employment taxes as well as income taxes on 1099 income. Since the IRS has no basis year to compute your expected obligation, you can choose between smoothing it out quarterly or giving it to them all in one big lump next April. Assuming that you're disciplined about such things, your smartest strategy would be to compute your quarterly obligations, then pay that money into an interest-bearing account that you will drain next April. If you are less disciplined, you probably ought to make the quarterly payments to avoid having one obscenely huge bill next year (and yes, don't forget to check your state's rules, too).

The Bride of Ironrod earns 1099 income in very irregular chunks. Every time she gets a freelance check, I take out 25% for the feds and 5% for the state. Four times a year, I send in whatever I've withheld during the previous quarter. This method works out pretty accurately for us. Depending on your overall deductions, your effective percentage rate might be higher or lower than that.

Welcome to the joys of the 1040 long form and Schedules A, C and SE. Besides 1099 income, we also have wage income and corporate profits to account for. Tax season is a major ordeal when you aren't a wage slave.   finger


Thank you Ironrod; that clears up quite a lot. 

Seems like a lot of extra stress for a first time job...of course setting my own hours and working for home makes up for it.  icon_smile

Edit – that seemed rude – thanks to you too KC! - Edit
« Last Edit: June 21, 2008, 09:51:55 PM by Lordnine » Logged
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