Confused On the Tax Issue

20 replies
I live in Florida and was trying to figure out how much in taxes I would "owe". I'm not entirely too sure on the tax advantages or disadvantages between sole proprietorship and forming an LLC/Corporation.

I was doing the math for a sole proprietorship based on the earned revenue in profit was $250 a day for 30 days a month.

The Federal Income Tax (biggest scam ever) Taxes -

25% of earnings a day
$18.71 added onto the 25% daily

Then you have Social Sec (another scam) & Medicare Taxes

Sole Proprietor - 15.3% added onto the fed income tax.


So all of those combined would equal to more than 45%

I know you can deduct things like certain costs to your business but I doubt this would decrease the percentage much.

So I would have to work 1000 times as hard to bring in $4000 a month compared to say $2000 at a regular job.


Perhaps I'm just going about this the wrong way? Is there a better alternative such as setting up a corporation and not acting as a sole proprietor? It just seems absolutely ridiculous that anyone should have to pay 40% + in taxes when we have a million other taxes, such as: sales tax, gas tax, taxes to legally drive your vehicle, and so on.
#confused #issue #tax
  • Profile picture of the author Mav91890
    One source tells me it goes by how much you make in a year another says how much you make per weekly/monthly
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  • Profile picture of the author Croque
    Consult your local lawyer/accountant.

    The following is for entertainment purposes only

    You pay taxes on earned income/profits. $250 revenue is not the same as $250 profits.

    Also as a sole proprietor you'll be taxed on income only once and not twice as you mentioned.
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  • Profile picture of the author Dan Grossman
    Half of that 15.3% self-employment tax is itself deductible as an expense.

    Rather than try to do it all out by hand (which you CAN do with a copy of the 1040 and 1040 instructions in front of you, but there's a lot of steps and a lot of worksheets)...

    Use the TurboTax TaxCaster. It's a free online tax calculator and it handles income from a business, which is what this is, whether you're a sole proprietor or register an LLC down the road. As long as you categorize everything right, it'll tell you your actual tax liability for the year, taking all the rules into account.

    TurboTax® Free Tax Calculators, Free Income Tax Estimators, Tax Guides, Tax Tips

    As mentioned, you put in your PROFITS from a business, not revenues. Any "ordinary and necessary" expense you incurred in the running of your business, from web hosting to advertising to training courses, should be deducted from your revenue. As long as you can produce records showing you paid for these things and they were for your business, you can deduct them on your Schedule C.
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  • Profile picture of the author Mav91890
    I didn't even think of that. Thanks Dan.
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  • Profile picture of the author iAmNameLess
    If you're making 3K/mo it's worth paying $100/mo for a decent accountant to help you. It's a big jump, on many levels because you're giving away a level of control, it's another expense, and its a tough beast to tackle but it's worth getting an accountant.

    There are different things you will benefit from, and certain deductions you never would have expected. BTW, and accountant's fees are deductible.

    I messed up and tried handling it all myself.... don't make the same mistake I did... call your accountant or find one ASAP.
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    • Profile picture of the author kenmichaels
      Originally Posted by iAmNameLess View Post

      If you're making 3K/mo it's worth paying $100/mo for a decent accountant to help you. It's a big jump, on many levels because you're giving away a level of control, it's another expense, and its a tough beast to tackle but it's worth getting an accountant.

      There are different things you will benefit from, and certain deductions you never would have expected. BTW, and accountant's fees are deductible.

      I messed up and tried handling it all myself.... don't make the same mistake I did... call your accountant or find one ASAP.
      In my experience accountants wind up costing you money.

      A tax attorney, saves you money.

      Being a FL business , if you are looking to LLC, the BEST place
      ( for way too numerous reasons to mention in this post )
      is Delaware

      If you ever want to get into the nitty gritty, and have about 3 hrs,
      i will tell you what i know. and what i have been through.

      One floridian to another.

      I also suggest, unless some one runs a business IN FLORIDA...
      do not listen to there advise.. we have some * ucked up laws
      that most people DO NOT even realize exist
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  • Profile picture of the author Mav91890
    @ Dan, does that program also include the 7-15% from social sec & medicare? Thanks
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    • Profile picture of the author Dan Grossman
      Originally Posted by Mav91890 View Post

      @ Dan, does that program also include the 7-15% from social sec & medicare? Thanks
      Yes, it takes into account self-employment tax (and the deduction of half of it) and all the other relevant deductions and credits you qualify for. It's an accurate tool. You probably owe less than you think when you take into account the standard deduction, the self-employed health insurance deduction, etc. It gave me the same numbers my expensive CPA did for last year's return.
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      • Profile picture of the author Mav91890
        Originally Posted by Dan Grossman View Post

        Yes, it takes into account self-employment tax (and the deduction of half of it) and all the other relevant deductions and credits you qualify for. It's an accurate tool. You probably owe less than you think when you take into account the standard deduction, the self-employed health insurance deduction, etc. It gave me the same numbers my expensive CPA did for last year's return.
        Ok, I'm starting to understand more. I've been playing with the calculator and just have one other question.

        Why does it deduct half your self employment tax? Is that from an amount you earlier paid or?

        Its kind of confusing. For example: I put in under the business profits $12,000. My deductions were $6,648 & exemption was $3700. So the taxable income was $1652. The marginal tax rate was 10% and said I would owe $1640 for the year. Does that seem about right? 14% total, perhaps because it is such a small yearly number.
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        • Profile picture of the author Dan Grossman
          Originally Posted by Mav91890 View Post

          Ok, I'm starting to understand more. I've been playing with the calculator and just have one other question.

          Why does it deduct half your self employment tax? Is that from an amount you earlier paid or?

          Its kind of confusing. For example: I put in under the business profits $12,000. My deductions were $6,648 & exemption was $3700. So the taxable income was $1652. The marginal tax rate was 10% and said I would owe $1640 for the year. Does that seem about right? 14% total, perhaps because it is such a small yearly number.
          Why do you deduct half? Because employers pay half of their employees' social security and medicare taxes, and that payment is a deductible business expense. When you are self-employed, you are both the employer and employee, but you are still given the same deduction. On Schedule SE, you will compute your total self-employment tax, and the approximately half which is deductible. That goes back on line 27 of form 1040 to be subtracted from your income before calculating your AGI.

          Yes, $1640 looks right. Your effective tax rate on that income would be less than 14%, not the 45% you expected huh.
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  • Profile picture of the author Mav91890
    Yes I will get an accountant as soon as I can, just trying to get some kind of figure in my head.
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  • Profile picture of the author Mav91890
    Only issue is it seems the 2012 tax bracket went up. If you make over $8700 a year you now have to pay 15% instead of 10%

    Thanks for the help.
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    • Profile picture of the author iAmNameLess
      Originally Posted by Mav91890 View Post

      Only issue is it seems the 2012 tax bracket went up. If you make over $8700 a year you now have to pay 15% instead of 10%

      Thanks for the help.
      I hate taxes so much Mav.... the word makes me want to throw my desk out of the window. And then we get into the stupidity of how the tax dollars are spent....
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      • Profile picture of the author Mav91890
        Originally Posted by iAmNameLess View Post

        I hate taxes so much Mav.... the word makes me want to throw my desk out of the window. And then we get into the stupidity of how the tax dollars are spent....
        Yep, spent on unnecessary crap and illegal wars. If we actually spent the trillions we do on war, instead on world hunger; I am certain we could feed everyone and set up sustainable food sources for people in third world countries. Yet we choose to do the opposite, so sad
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        • Profile picture of the author iAmNameLess
          Originally Posted by Mav91890 View Post

          Yep, spent on unnecessary crap and illegal wars. If we actually spent the trillions we do on war, instead on world hunger; I am certain we could feed everyone and set up sustainable food sources for people in third world countries. Yet we choose to do the opposite, so sad
          Forget about the war... what about the education system, and politicians being paid year after year when they're out of office!?

          It's so irritating. Anyway, guess we should avoid politics before we get slapped with Paul's ruler.
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  • Profile picture of the author Mav91890
    Yeah I hear you, those are just as bad as our foreign policy and the costs associated with it. It's all a joke. Ok I'm done.
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  • Profile picture of the author FleeceHEAD
    Every state is different to a degree but after some consultations here in NY we decided to file as an S Corp. In NY LLC you have to spend $1,000 posting your LLC into a specific list of newspapers so it's just not worth the extra expense and it provides no real advantage over S Corp anyways.

    You can always give LegalZoom a buzz. We used them to handle all the paperwork cause quite honestly I spent like 2-3 hours researching the forms, which we need to file, etc. and it was just a lot easier to call a professional and let them handle the dirty work.
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  • Profile picture of the author luke1213
    I agree with Ken and Iamnameless. I live in FLorida and owned a construction business for many years. Having a good accountant to help with your taxes could save you from loads of pain, especially if you are starting to see higher revenue. Unfortunately, my accountant sucked but he was good enough.
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  • Profile picture of the author Green Moon
    Originally Posted by Mav91890 View Post

    So I would have to work 1000 times as hard to bring in $4000 a month compared to say $2000 at a regular job.
    This is absolutely not correct. The only material difference between your total taxes on self employment income and your taxes from a job is that with a job, the employer pays half of the 15.3%. Disregarding for a moment the fact that a self employed person can deduct half of the self-employment taxes, you would need about $2160 in self employment income to have the same "take home" that you would have in a $2000 per month job.
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    • Profile picture of the author Mav91890
      Originally Posted by Green Moon View Post

      This is absolutely not correct. The only material difference between your total taxes on self employment income and your taxes from a job is that with a job, the employer pays half of the 15.3%. Disregarding for a moment the fact that a self employed person can deduct half of the self-employment taxes, you would need about $2160 in self employment income to have the same "take home" that you would have in a $2000 per month job.
      Yeah I was do research on this last night and I guess a few of the sources were wrong or I just misunderstood it. I also wasn't taking into account the automatic deductions that I didn't even knew existed.
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