I’m a little concerned. I’m making more taxable income this year outside of my full-time job, but my tax withholding was calculated based on only my full-time income. Last year I had a few thousand dollars extra income, but I was able to use related expenses and my SEP IRA to offset a good portion of that. With the web-based busienss picking up this year, I need to do something to make sure I won’t end up with a hefty IRS bill next year.
I plugged some estimated numbers into the IRS’s withholding calculator, which determined I should set my withholding exemption level to 0 and freely give to the government $150 each paycheck in addition. I wasn’t completely comfortable with that number, so I adjusted my full-time withholding to level 0 plus an extra $50 each paycheck.
This just means that I’m going to have to use some of my side income towards expenses rather than just leaving the bulk of it in savings. Starting next month, I’ll transfer 50% of my additional income into my active accounts to help pay for regular expenses.
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11:09 pm (reply)
Using the IRS withholding calculator is a good idea, but I’m surprised someone as organized as yourself doesn’t just go ahead and fully estimate your 2006 taxes. It’s a good way to have a sense of how things will look when you’re actually doing your taxes.
8:51 am (reply)
Ouch. With all the other taxes we pay, I hurt every time I see people paying more money to the Feds. Not everyone has the same circumstances, and I am sure you are considering all of the possible expenses you incur that are business related, but I would check again and again. The problem with the side business income is the FICA and FICA match you have to pay. Regardless of your marginal tax rate, 15.3% of your money is going to the garbage holes known as Social Security and Medicare. Every dollar that you can claim as an expense will save you the ~15 cents plus your marginal tax rate and whatever state/local income tax you will have to pay. For me, that is 34 cents per dollar, for side business funds. For you, it is probably more. I am probably in a lower marginal tax rate (15%) because I am married filing jointly, and I have three kids. Here is what I would look for first:
1) Mileage, mileage, mileage: You probably write off some mileage already. Keep a log book in your vehicle for mileage, and then, if you have anything that can be construed as business related… count it. If you are going to the store and buying stamps, and you think you will use some of those stamps for business mail, write off the mileage to the store.
2) Communications: I would be writing off 100% of my cell phone, Internet, and any additional phone lines at home (fax/business). If you only have one phone line, write off a portion of it, as you probably use that phone instead of the cell phone when you are home.
3) Medical: since you have your own side business, you can claim 100% of your medical expenses as business expenses through reimbursement. If you were to claim them through itemizing, you would have to exceed a certain percentage before you could do so. This lets you claim it all!
4) Employee award: Each year, you can give a tax free award of $400 to each employee… are you giving yourself this award?
5) Donations: Do all of your donations or charitable work through the name of your side business. You can claim these as business expenses. If you can claim most or all of what would require you to itemize, then you do not end up having to itemize, and you still get the standard deduction and you get to write that stuff off… that could be like doubling your standard deduction, or more.
That is all I can think of, and I am sure you have considered most, if not all, of it… but you always have to revisit this… constantly.
9:02 am (reply)
Brett,
I’m really not as organized as I appear to be. One look at my computer desks at work or at home would give that away. :-)
Dus10,
Thanks for the tips!
3:39 am (reply)
8:51 pm (reply)
I personally always tried to adjust my withholdings for the best possible outcome. While searching online I realized that no sites offer an easy way to do this so I published my spreadsheets for others to use. I’m always looking for feedback or suggestion.
“mywithholdings.com”
Dave