SE and Income Tax?

11 years ago

Originally Posted by PhillyIMBlog

If your a sole proprietor, are you required to pay the self employment tax AND the income tax? Seems a bit much, thought I'd ask on here while I await some tax experts replies.

Welcome to the wonderful world of being your own boss.

Yes, if you hit the thresholds, you pay both SE and income taxes. Even employees have the equivalent of SE taken out of their pay, although they only pay half and the employer pays the other half.

They say that the only two sure things in life are death and taxes. Science is giving death a run for its money these days, but taxes are forever.

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timpears

11 years ago

Once you become both the employer and the employed (self employed), you get to pay both sides of that tax. Sounds harsh, but in reality, it is no different than working for someone else, both sides have to be paid.

I am assuming you are in USA in my answer. The medical and other benefits government provides have to be supported. Welcome to socialism. (deleted because it was a bit political)

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Tim Pears

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PhillyIMBlog

11 years ago

Only asked since I read in this article => Sole Proprietorship vs. S Corporation: The Pros and Cons of each Revealed - Los Angeles entrepreneurs | Examiner.com

Sole Proprietorships Pros
Least expensive to establish
Overall, a sole proprietorship is one of the least expensive business models to set up. All that is required is that the sole proprietor file for tax identification number from the IRS and obtain any local licenses necessary to establish their business.
No double taxation on income

the no double taxation I assumed was the SE and Income tax

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pewpewpewmonkeys

11 years ago

If your a sole proprietor, are you required to pay the self employment tax AND the income tax? Seems a bit much,

Yes.

And you would pay the same if you were working for someone else. It's just that most people have absolutely no idea that they're being taxed that way and that they're losing out on money. Self employment tax covers social security and medicare/caid (forget which)

no double taxation I assumed was the SE and Income tax

No. They're talking about being taxed twice. If you're a C-corp then your business owes taxes...your "business" pays you a salary...which you again have to pay taxes on.

Compare that to an LLC - where you pay taxes just once as a sole proprietor.

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timpears

11 years ago

In a corporation you pay corporate taxes up to 35%, and then when you take the profits as dividends, you have to pay personal taxes on it as well. Up to 39.x%. So, a duple hit for taxes.

Sole proprietor only pays taxes on the earnings once. The SS taxes are paid as usual, you pay your share, and you as the employer pay the employer share.

You are going to pay the taxes no matter how you set it up. The corporation has paid the taxes due on the income you will be required to pay yourself in income derived from the corporation, and you will pay the other half out of that income you derive. So either way, you will pay it.

I am not a tax attorney and so don't take this as legal advice. You should direct these questions to a tax attorney, they do not belong in a forum such as this. You get half baked opinions and often receive wrong information. While I believe my information is correct, I can not guarantee it. It is personal opinion from my years of having to deal with it.

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Tim Pears

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PhillyIMBlog

11 years ago

Originally Posted by timpears

In a corporation you pay corporate taxes up to 35%, and then when you take the profits as dividends, you have to pay personal taxes on it as well. Up to 39.x%. So, a duple hit for taxes.

Sole proprietor only pays taxes on the earnings once. The SS taxes are paid as usual, you pay your share, and you as the employer pay the employer share.

You are going to pay the taxes no matter how you set it up. The corporation has paid the taxes due on the income you will be required to pay yourself in income derived from the corporation, and you will pay the other half out of that income you derive. So either way, you will pay it.

So for instance lets say I would have made 36k from internet marketing. I would pay the 15% for the SE tax, the 25% for the federal income bracket tax, and on top of that a state income tax right? How do people live working online?

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pewpewpewmonkeys

11 years ago

In a corporation you pay corporate taxes up to 35%

If it is a C-corp or S-corp, yes. But not as an LLC. You have to be clear, because LLC is also a corporation (though in a legal sense, not a traditional sense).

Sole proprietor only pays taxes on the earnings once. The SS taxes are paid as usual, you pay your share, and you as the employer pay the employer share.

No, Social Security taxes are payed as part of the Self Employment tax.

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Some cause-oriented hackers recently hacked one of my websites. So I researched what they're about and then donated a large sum of money to the entity they hate the most.

The next time they hack one of my websites I'm going to donate DOUBLE.

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timpears

11 years ago

Originally Posted by PhillyIMBlog

So for instance lets say I would have made 36k from internet marketing. I would pay the 15% for the SE tax, the 25% for the federal income bracket tax, and on top of that a state income tax right? How do people live working online?

That is about it, thanks for contributing to the betterment of our federal deficit.

That is the price we all pay for succeeding. Seems high, but we elected these bozos, and this is what we get. Most successful people lose half their income for taxes. There is almost no way around it. You are going to pay the same SE tax if you create an LLC as that money is all viewed as sole proprietor income. Same as an S-corp.

Again, I am not a tax attorney. See above.

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Tim Pears

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pewpewpewmonkeys

11 years ago

So for instance lets say I would have made 36k from internet marketing. I would pay the 15% for the SE tax, the 25% for the federal income bracket tax, and on top of that a state income tax right?

For instance in what example? A sole proprietor?

$36k places you in the 15% tax bracket (for 2013) not the 25%. And you're not simply paying 15% of $36k. Oh no - it gets MUCH more complicated. You will pay 10% on the first $8,925 you make, then you will pay an additional 15% on the remaining. If you do the math then it's much less than what you thought.

*THEN* the Self Employment tax is added on.

How do people live working online?

The same way all businesses try to survive...by pinching and saving.

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Some cause-oriented hackers recently hacked one of my websites. So I researched what they're about and then donated a large sum of money to the entity they hate the most.

The next time they hack one of my websites I'm going to donate DOUBLE.

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PhillyIMBlog

11 years ago

Well 36.5K lol. I hear that outright is good for organizing stuff on paypal when tax time comes around?

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Shane12

11 years ago

It is a bit much, particularly when you're single with no children and minimal deductions. The good thing about IM is that most of the time it can be done just about anywhere. Short of leaving the country, one of the best places to cut is at the state level. I'm searching for a new place to live, and I immediately eliminated all states with a state income tax from consideration.

I find the Dinkytown calculator to be pretty spot on when estimating taxes (filed on my personal tax return Schedule C).

Thanks
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AlexGeorge

11 years ago

Originally Posted by Shane12

It is a bit much, particularly when you're single with no children and minimal deductions. The good thing about IM is that most of the time it can be done just about anywhere. Short of leaving the country, one of the best places to cut is at the state level. I'm searching for a new place to live, and I immediately eliminated all states with a state income tax from consideration.

I find the Dinkytown calculator to be pretty spot on when estimating taxes (filed on my personal tax return Schedule C).

That's it as soon as my monthly income is good enough I'm out of the UK.

Thanks
1 reply

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JohnMcCabe

11 years ago

Originally Posted by Shane12

It is a bit much, particularly when you're single with no children and minimal deductions. The good thing about IM is that most of the time it can be done just about anywhere. Short of leaving the country, one of the best places to cut is at the state level. I'm searching for a new place to live, and I immediately eliminated all states with a state income tax from consideration.

I find the Dinkytown calculator to be pretty spot on when estimating taxes (filed on my personal tax return Schedule C).

You didn't think that the only reason Florida teams have such an easy time signing free agents was the weather, did you?

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emelef

11 years ago

If you're in a high tax bracket try not to pay yourself. Reinvest in your business. But salaries are tax deductible for a company so either you pay yourself - deduct it in your company and pay personal tax. Or you have higher profits in the business and pay higher taxes. If you're a company you can also pass tax credits onto shareholders if you pay yourself through dividends rather than salary... There are many options. Talk to your personal accountant.

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