Tax Law (Questions About Taxes)/Sole Proprietor
Hello, I am a first time filer. I am twenty-six (single, no children, and can't be claimed, live in Georgia, and I fall under low-income). I interned (free) and freelanced after graduating graduate school as it took a while and was hard to find full-time, permanent employment. I owe about $950 (8,823 earned) in taxes (federal and state combined) on the money I earned freelancing online. I did add business expenses (service fees and subscription fees - over $800 dollars worth) for deductions. I did not know that you could pay taxes quarterly, and I did not know how high taxes were on self-employment (that it was different). I did apply for and have an EIN. I just thought you reported at the end of year\first of the year (tax season). I am no longer freelancing since I obtained a career (landed in Oct.) and will not in the future. However, I cannot afford to pay the full amount before the 15th. I know I can pay in installments with interest, but I'd rather just pay it off. Do you think it is a bad idea to take a personal loan out at the credit union (lower interest) for the full amount or at least half of it (and then I pay the other half)? At least the interest will be lower. If I had known to pay quarterly, I would have gotten a refund (because of my permanent job). If I pay the full amount by the fifteenth, could I still get the refund I would have had? I added dental\medical expenses as deductions but the amount owed hardly went down (about $2,500). Can individual dental insurance be a deduction and life insurance (I had both - just not medical)? Why is that? Thank you. I would greatly appreciate your help.
Hello first time filer, and welcome to world of business and commerce.
You are getting a crash course that many may never have. If you had been an employee growing up, you probably wouldn't have learned exactly how taxes affected you, because withholding and income taxes, and payroll taxes are all taken care of before the individual ever sees the money. But you stepped into business, you may not have meant to, but you did and that opens a whole new view on the world.
Graduate school for what degree?
". . .If I pay the full amount by the fifteenth, could I still get the refund I would have had?. . .? Refunds only come from over payments. Quarterly estimates are paid, and those estimates are intended to be bigger than the tax actually owed. If you have calculated your taxes properly, then no overpayment will exist.
Certainly lower interest rates will save you money. a 3% reduction in interest rate on $425, would be a little over $1.00 a month savings. 3% annual interest, divided by 12 months, is 0.25%, times $425 is about a dollar. Assuming you can pay it back to the Credit Union in 9 months you would save around $10.00 in interest payments. What is the difference in rates between the IRS and your CU?
Did you calculate Self Employment Tax? Self Employment tax is social security (12.4%) and Medicare (2.9%). $8800 less $800 in expenses, shows $8000 subject to SE tax. Which is $1224 which is also past due.
Deductions only reduce the taxes owed by the tax rate. A $1000 legitimate deductions for someone in a federal income tax bracket of 15%, would reduce the tax owed by $150.
Each taxpayer is provided with a "standard deduction" an amount not tied to any specific money outgo. If you want to itemize deductions, actually add up what legitimate deductions you have experienced during the year, for many it would be less than the "standard deductions". Choosing to itemize and keep track of each deduction including medical deductions may not be lower than not doing all the math. Itemizing to try and get your medical may not reduce your taxes at all, in fact it might raise them.
Don't feel bad that you didn't understand all of this, this isn't taught. It is hoped that you will simply get a job working for someone else and they will take the money away before you ever knew it was there, and you'll hire an accountant to do your tax return so you won't know what it really costs. If everyone knew how heinous the tax structure was, there would be a revolt.
But it's just us business owners with this knowledge and were too busy trying to build something to benefit society to try and compete with the education system.