Help me understand taxes

[radioguy01]

Hi all,

I've been a W2 employee for years, and have just started getting paid at my second job (as an "independent contractor") as a 1099 employee. My 1099 job is as an LLC (Radioguy LLC for the sake of this discussion.)

So, I'm trying to understand how taxes work under this circumstance. For example:

I rent a hanger for $400/month, and this calendar year I purchased an airplane outright, lets say for $15000. These are all to be owned by Radioguy LLC. (I even set up my office in my hangar's extra space, so it's double official.) I purchased a desk, and some other stuff for my hangar/office, so lets say that's another $1,000 in furniture.

So, last year when I was working my second job as a 1099 employee, I saved approx 33% of each paycheck, and payed that as quarterly taxes. I ended up just about breaking even last year with taxes between my 1099 and my W2 job. My question is, how do I calculate how much I need to pay in quarterly taxes now that I'm going to have a lot of write offs? (I should get a better break this year because we had a child in January.)

For example, I will write off 12 months of hangar fees ($3200), the cost of my plane ($15,000), furniture ($1000), etc. So how do I calculate how much to pay in my quarterly taxes? Let's say my expected earning at my 1099 job is $100,000/year (for a nice round number.) That would put me paying about $33,000 in taxes, or $8250/quarter last year. But this year if I make $100,000 at the 1099 job, I plan to expense at least $15,000 + 3200 + 1000 = $19200. So does that mean I should budget like $100,000 - 19,200 = 80,800 * 0.33 = $26,665 / 4 = $6666 per quarter for my taxes instead of the $8250 I paid last year?

Basically, shouldn't I only be paying taxes on what I will count as income? Argh, this confuses the heck out of me. I need a CPA.

 

[JOhnH]

I'm sure that someone smarter than I am will chime in here, but my accountant has told me that I need to calculate my estimated taxes so that the total withholding + estimated will equal 110% of the amount of taxes I paid last year. Even if your income is unexpectedly high, you won't get in trouble if you follow that rule. And if you don't make as much, then you get your interest free loan to the government back next year.

Hi all,

I've been a W2 employee for years, and have just started getting paid at my second job (as an "independent contractor") as a 1099 employee. My 1099 job is as an LLC (Radioguy LLC for the sake of this discussion.)

So, I'm trying to understand how taxes work under this circumstance. For example:

I rent a hanger for $400/month, and this calendar year I purchased an airplane outright, lets say for $15000. These are all to be owned by Radioguy LLC. (I even set up my office in my hangar's extra space, so it's double official.) I purchased a desk, and some other stuff for my hangar/office, so lets say that's another $1,000 in furniture.

So, last year when I was working my second job as a 1099 employee, I saved approx 33% of each paycheck, and payed that as quarterly taxes. I ended up just about breaking even last year with taxes between my 1099 and my W2 job. My question is, how do I calculate how much I need to pay in quarterly taxes now that I'm going to have a lot of write offs? (I should get a better break this year because we had a child in January.)

For example, I will write off 12 months of hangar fees ($3200), the cost of my plane ($15,000), furniture ($1000), etc. So how do I calculate how much to pay in my quarterly taxes? Let's say my expected earning at my 1099 job is $100,000/year (for a nice round number.) That would put me paying about $33,000 in taxes, or $8250/quarter last year. But this year if I make $100,000 at the 1099 job, I plan to expense at least $15,000 + 3200 + 1000 = $19200. So does that mean I should budget like $100,000 - 19,200 = 80,800 * 0.33 = $26,665 / 4 = $6666 per quarter for my taxes instead of the $8250 I paid last year?

Basically, shouldn't I only be paying taxes on what I will count as income? Argh, this confuses the heck out of me. I need a CPA.

 

[Capt. Geoffrey Thorpe]

You don't use the airplane / hangar at all for personal use - it's just for the buisness? You expect to deduct the purchase cost of the aircraft in a single tax year? It's not a capital investment that you depreciate?

 

[cowman]

I don't know much about LLCs but I'm sure you normally can't deduct anything unless you can prove/make a reasonable argument that it's a cost of doing business.

According to my accountant I can deduct aircraft expenses for travel related to doing business but that's it. I can't fly for fun 95 hours a year and fly a 5 hour business trip and deduct everything for example... just a reasonable fuel/maintenance reserve cost for those 5 hours.

I do know all about quarterly estimates though, if it helps the first year you don't have to pay them. Or to be more specific the first year you can get away with not paying until taxes are due next year on april 15th and not have to pay a penalty. However then going forward you have to pay estimates or you get penalized which I believe is just a reasonable interest rate on what you didn't pay. As long as it gets in by april 15th they're not going to come arrest you or anything like that, you just owe interest on what you didn't pay.... so you still do want to pay them on time.

They're estimates not set amounts- you want some reserve so yeah paying what you'd expect based on 110% of last year's income is reasonable. If you overpay you can either get a refund or use it as credit towards the next year. But they are estimates... so if you know you're making a lot more money in a given year then pay more, if you know it's less maybe pay less.

 

[poadeleted20]

I've been a W2 employee for years, and have just started getting paid at my second job (as an "independent contractor") as a 1099 employee.

No such thing as a "1099 employee". Either you're an employee getting a W-2 or an independent contractor getting a 1099. The distinction is very important.

My 1099 job is as an LLC (Radioguy LLC for the sake of this discussion.)

So, I'm trying to understand how taxes work under this circumstance. For example:

I rent a hanger for $400/month, and this calendar year I purchased an airplane outright, lets say for $15000. These are all to be owned by Radioguy LLC. (I even set up my office in my hangar's extra space, so it's double official.) I purchased a desk, and some other stuff for my hangar/office, so lets say that's another $1,000 in furniture.

How do the hangar and airplane play into the business?

So, last year when I was working my second job as a 1099 employee, I saved approx 33% of each paycheck, and payed that as quarterly taxes. I ended up just about breaking even last year with taxes between my 1099 and my W2 job. My question is, how do I calculate how much I need to pay in quarterly taxes now that I'm going to have a lot of write offs? (I should get a better break this year because we had a child in January.)

That is a question best asked of a tax professional.

For example, I will write off 12 months of hangar fees ($3200), the cost of my plane ($15,000), furniture ($1000), etc.

No, you won't. First, the only way you can "write off" the entire cost of the airplane and its support is if it is used solely for the revenue-generating business, which I doubt. Second, you cannot "write off" all of the capital cost of the plane and furniture as expenses in the year they were purchased -- those must be depreciated and amortized over a span of several years. Your tax professional can tell you how many years and how to depreciate it, e.g., straight-line, sum-of-the-years-digits, etc.

So how do I calculate how much to pay in my quarterly taxes?

You take all your information to a tax professional and do what s/he says.

Let's say my expected earning at my 1099 job is $100,000/year (for a nice round number.) That would put me paying about $33,000 in taxes, or $8250/quarter last year. But this year if I make $100,000 at the 1099 job, I plan to expense at least $15,000 + 3200 + 1000 = $19200. So does that mean I should budget like $100,000 - 19,200 = 80,800 * 0.33 = $26,665 / 4 = $6666 per quarter for my taxes instead of the $8250 I paid last year?

Not even close to the way it must be done, and I don't have the hours it would take to explain how to do it properly.

Basically, shouldn't I only be paying taxes on what I will count as income? Argh, this confuses the heck out of me. I need a CPA.

Finally -- something that is 100% accurate. Now go find one.

 

[Let'sgoflying!]

Don't forget, taxes are paid with taxed income....so "taxes are taxable"! And the tax you paid on the previous year's tax? Also taxed in the current year. Ad infinitum.
Something suspicious going on here.

 

[poadeleted20]

Don't forget, taxes are paid with taxed income....so "taxes are taxable"! And the tax you paid on the previous year's tax? Also taxed in the current year. Ad infinitum.
Something suspicious going on here.

Somewhat misleading, and not helping the OP figure this out. Note that while it's true taxes are paid with post-tax earnings, Federal taxes are deductible for state tax purposes, and vice versa.

 

[Old Geek]

You don't use the airplane / hangar at all for personal use - it's just for the buisness? You expect to deduct the purchase cost of the aircraft in a single tax year? It's not a capital investment that you depreciate?

There's a $25k limit for accelerated depreciation in 2014. I believe it was $500k last year. Assuming it's for business and there aren't special rules for airplanes.

Bottom line is he needs a good tax accountant.

Edit: Looking over Section 179, vehicle deductions, it is not at all clear that a used airplane is deductible.

http://www.section179.org/section_179_vehicle_deductions.html

 

[docmirror]

Hi all,

Basically, shouldn't I only be paying taxes on what I will count as income? Argh, this confuses the heck out of me. I need a CPA.

Ron covered most of the stuff. You need a tax accountant, not necessarily a CPA. CPAs provide audit-able records for people and businesses using generally accepted account practices. This often includes, but is not limited to taxes, and their focus is often corp, and not personal.

And one more voice, you can't just 'write off' things you buy, and use in business in one year. That's a heck of an accelerated depr schedule! There are schedules for all kinds of items used in business, and for partial business and personal use, and repairs, mx, etc. Making mistakes on 1099 income can get costly very quick in fees and penalties.

 

[John Baker]

Have a professional do your taxes, it will save you a whole lot of grief in an audit.

-John

 

[steingar]

One thing I sure as hell wouldn't do is take tax advice from a bunch of strangers on the internet.

 

[silver-eagle]

One thing I sure as hell wouldn't do is take tax advice from a bunch of strangers on the internet.

Actually, the best advice was to seek professional assistance whom you probably should have talked to BEFORE the LLC. They might have saved you some money. And since the first QUARTER is over, time's a wasting.

 

[John Baker]

One thing I sure as hell wouldn't do is take tax advice from a bunch of strangers on the internet.

Sorry Steingar, I have to respectfully disagree with you, my advice was absolutely brilliant.

-John

 

[PaulS]

The only advice I have is don't mess with the IRS.

 

[Let'sgoflying!]

Note that while it's true taxes are paid with post-tax earnings, Federal taxes are deductible for state tax purposes, and vice versa.

I was not talking about state or local tax. In fact, until this point no one has brought up such taxes in this thread. Strictly federal income tax. And what I said about it was true, and not misleading.
You can read about it here if you'd like:
http://www.irs.gov/taxtopics/tc503.html

"Some taxes and fees you cannot deduct on Schedule A include federal income taxes"

You will pay your federal income tax with taxed income.
ie you cannot take a deduction for payment of federal income tax.

 

[RevDMV]

Actually, the best advice was to seek professional assistance whom you probably should have talked to BEFORE the LLC. They might have saved you some money. And since the first QUARTER is over, time's a wasting.

This many times,

I have a full time W2 job and side consultancy.

For the consultancy there is a lawyer and accountant, plus my finance trained better half. There a lot of great and beneficial things about have a corp structure lying around, but you have to take the time to do it right.

 

[EdFred]

I was not talking about state or local tax. In fact, until this point no one has brought up such taxes in this thread. Strictly federal income tax. And what I said about it was true, and not misleading.
You can read about it here if you'd like:
http://www.irs.gov/taxtopics/tc503.html

"Some taxes and fees you cannot deduct on Schedule A include federal income taxes"

You will pay your federal income tax with taxed income.
ie you cannot take a deduction for payment of federal income tax.

Not quite, Dave. If you end up paying out of pocket come April 15th it's because you had non-taxed income. Either your withholding was too little, or you had other income (investments, cap gains) that wasn't originally taxed.

 

[nddons]

Somewhat misleading, and not helping the OP figure this out. Note that while it's true taxes are paid with post-tax earnings, Federal taxes are deductible for state tax purposes, and vice versa.

Ron, that's only true in a few states, including Iowa, for example. In most states the amount of federal taxes paid is completely irrelevant for the state return.

But you are right, the OP needs a CPA ASAP. Lots of bad information in there, and I have no time to really address them.

 

[radioguy01]

I will contact a CPA that was recommended to me asap. Thank you guys. I don't understand the depreciation, etc. I always thought business expenses were "written off." I have a lot to learn.

 

[asgcpa]

Ron covered most of the stuff. You need a tax accountant, not necessarily a CPA. CPAs provide audit-able records for people and businesses using generally accepted account practices. This often includes, but is not limited to taxes, and their focus is often corp, and not personal.

Not necessarily....lots of CPAs that do taxes and don't do audits. It is true only a CPA can render and audit opinion. I'm a CPA and have a MAsters in Tax and do both.

My advice, get an extension and go to a tax professional. Sounds like you may have issues to discuss.

Unfortunately I'm buried until the 15th .... if the OP wishes to PM me, I will see what I can do.

 

[radioguy01]

Oh, this is all for next years (2014) taxes.

 

[docmirror]

Not necessarily....lots of CPAs that do taxes and don't do audits. It is true only a CPA can render and audit opinion. I'm a CPA and have a MAsters in Tax and do both.

My advice, get an extension and go to a tax professional. Sounds like you may have issues to discuss.

Unfortunately I'm buried until the 15th .... if the OP wishes to PM me, I will see what I can do.

This often includes, but is not limited to taxes,

sigh,,,

 

[Let'sgoflying!]

Not quite, Dave.

OK, good to know you can deduct Federal Income Tax.

Thanks for the clarification, my CPA needs retraining because I have never been allowed a deduction for Federal Income Tax payments.

 

[yetti]

Is the 1099 income for the LLC or personal? If personal then do a schedule C. Treat the LLC as a business. It will pay no taxes and the profit loss pass through to your 1099 and the other listed partners. Turbo tax will work for you here. You have to buy the business and the personal editions. Do the LLC first/

Don't forget to write off your car expenses on your schedule C.

Read up on section 179 deductions and you can write off up to what you have profits. You will also find that an Expedition is 6000lbs and that makes a difference. Not as much as last year.

 

[yetti]

Oh and you can't expense turbo tax this year... jerks

 

[EdFred]

OK, good to know you can deduct Federal Income Tax.

Thanks for the clarification, my CPA needs retraining because I have never been allowed a deduction for Federal Income Tax payments.

I was addressing the paying taxes with taxed income. You aren't paying taxes with taxed income. You are paying what you should have paid vs what you did pay out of the untaxed income you got. i.e. some of your income was taxed, some of it wasn't.

 

[denverpilot]

I will contact a CPA that was recommended to me asap. Thank you guys. I don't understand the depreciation, etc. I always thought business expenses were "written off." I have a lot to learn.

It'll be a lot easier with a professional explaining it. Many are busy and will give the impression that things they say are flat facts without much explanation at first, since it's stuff they do every day.

Let them know up front you're new to independent contracting 1099 work and a new business owner and you'd like a little bit more background and most will happily oblige.

A side story...

My accountant is very flat and matter of fact and I knew something was "odd" this year when he sounded almost "conversational".

He went on to explain that he wanted to tell me something and it wasn't bad news, and then that I had a huge State refund coming back. He said the interesting part was that it was because my main employer was holding out 10% of my salary for State taxes in a State where the average paid is 3%. He said he'd never seen it before.

He then surmised that someone hit the wrong button and instead of withholding 5% which would match my withholding request for exemptions (none), they doubled it.

My bad for not noticing it sooner, but the funny part to me was how happy he sounded. Finding oddities makes accountants happy I guess. He likes puzzles. And my employer handed him one.

He joked, "I should tell you that once you get that fixed, I wouldn't expect much of a return next year if nothing else changes. You'll have less deductions next year."

Yeah... Tell me about it. Ha. I know. I know. Always with the bad news! See how you are?

Anyway, depreciation is pretty simple once you get the general concept. You can't write off all of a capital asset in the first year you purchased it. (Should I type "usually" here or do we all understand there's exceptions to damn near everything in the tax code under the right circumstances? Okay... That said...)

The IRS assumption here is the thing you bought loses value over time. You paid X and it isn't worth that next year. You get to write off that "loss" over time.

Some stuff depreciates faster than other stuff. Vehicles and such take a while. Real Estate can be really long and gets into all sorts of other rules. Consumables that get used up quick, generally are "instant" write-offs. You've used up all of their value within the year. Computers were sped up a few years ago, folks complained they actually lost value way faster than was allowed and couldn't fully depreciate them before they had to be replaced/upgraded. Etc.

That's horribly oversimplified to help with the overall concept. The tax pro can explain and look up different items, or will just know common items off the top of their head.

The biggest mistake new business owners make is not keeping receipts for everything. And I mean everything. The accountant has nothing to work with if you don't keep them.

It also only makes sense that the business should have a good ledger somewhere showing every single dollar in and out from day one, when you capitalized the business by putting your own money in, to the day you close it down and withdraw the remaining cash.

Additionally a record of every asset purchased for the business or sold by the business. If you can keep up on those things, almost any accountant can figure out the rest.

Keep the business accounts separate, too. It makes life a whole lot simpler even though it might not feel that way at first.

Have fun.

 

[asgcpa]

I'm sure that someone smarter than I am will chime in here, but my accountant has told me that I need to calculate my estimated taxes so that the total withholding + estimated will equal 110% of the amount of taxes I paid last year. Even if your income is unexpectedly high, you won't get in trouble if you follow that rule. And if you don't make as much, then you get your interest free loan to the government back next year.

The 110% is the safe harbor rule for penalties. You still have to pay tax obviously, you just won't get hit with penalties.

 

[asgcpa]

Somewhat misleading, and not helping the OP figure this out. Note that while it's true taxes are paid with post-tax earnings, Federal taxes are deductible for state tax purposes, and vice versa.

State taxes are deductible on federal returns. Not vice versa in Illinois. While I don't claim to know the taxation rules of all states, the ones I know of don't allow federal taxes to be deductible.

 

[asgcpa]

Is the 1099 income for the LLC or personal? If personal then do a schedule C. Treat the LLC as a business. It will pay no taxes and the profit loss pass through to your 1099 and the other listed partners. Turbo tax will work for you here. You have to buy the business and the personal editions. Do the LLC first/

Don't forget to write off your car expenses on your schedule C.

Read up on section 179 deductions and you can write off up to what you have profits. You will also find that an Expedition is 6000lbs and that makes a difference. Not as much as last year.

I LOVE when people prepare taxes with Turbo Tax. When I pick up their file the next year, I usually can amend and save them money.

 

[EdFred]

I LOVE when people prepare taxes with Turbo Tax. When I pick up their file the next year, I usually can amend and safe them money.

Not people like me, though I've used taxslayer the past 6-7 years or so.

Single, mortgage paid off, no medical bills, I didn't move, no dependents, no capital losses, no continuing education, no job changes, etc... My deductions are pretty much state taxes, property tax, license plates, and if I happen to do charity flights that year.

If I someone can get be back an extra $2000, I'd give em all of it. But that ain't gonna happen.