What % to dole out in taxes for 1099?

[Sean]

Greetings, dear colleagues!  Since I've ventured into the world of independent contracting, I'd be curious to know what percent of total 1099 income received to date you'd recommend I pay in estimated quarterly tax to the Feds and state.  I've heard a ball park figure is 20-25% Fed and 5% state (depending on the state).  Mind you, I'll be contributing to my solo 401k and deducting expenses for work, so the actual tax owed might be even less on the 2018 tax return, esp given the new 20% QBI deduction.

Any opinions?

[childay]

Do you know about the safe harbor rules?  That might be easiest if you aren't sure how much you will be making this year.

[jfoxcpacfp]

It depends upon your total income (are you 100% IC?), spouse's income (pushes you into another bracket), and other factors. I tell people to set aside 1/3 - 40% of income for taxes but I don't recommend estimating the actual amount due without a decent tax projection. If your side job is medical services, I doubt the QBI deduction will apply.

[Craigy]

You need to talk to a CPA about this.

Better to err on the side of high unless you keep lots of cash on hand around tax time.

[AnjaliFIT]

I agree with Johanna that it depends on a lot of factors. I usually have people put 30% away if they live in a state that is income tax free and 35%-40% if they live in a high income tax state.  You're better off putting away more than you need to.  I also usually have clients start putting money away for the solo 401(k) in a separate savings or taxable account with each paycheck since if you are trying to max it out you'll need $55k.

[Sean]

Thanks for the replies.  It's a one-man operation, a simple sole proprietorship 1099 being the main source of income in the medical industry.  The W-2 component is v small.  I hope to be below the QBI limit threshold, at least for now.

Johanna & Anjali, what's the latest interpretation of the new rules re: QBI?  If the bulk of total taxable income is from 1099 (no employees) and one's below the $157.5k/$315k threshold, can the full 20% QBI deduction still apply?

Isn't it true that solo 401k contributions would fall on page 1 on the 1040, not on Schedule C, so it'd be an above-the-line-deduction, thereby reducing taxable income?

[jfoxcpacfp]

There are no "latest" interpretations of section 199a - we are still waiting on final updates to our tax planning software, hopefully in q3 2018. However, if your taxable income is below the above thresholds and you have pass-through income, you may be able to take advantage of the deduction. I have totally ignored this part of the new bill and intend to continue to do so until later in the year.

AnjaliFIT has written an article about it for Miss Bonnie MD and may want to comment.

Anything that is deducted on your tax return reduces your taxable income, whether it is ATL or BTL.

[jfoxcpacfp]

There are no "latest" interpretations of section 199a - we are still waiting on final updates to our tax planning software, hopefully in q3 2018. However, if your taxable income is below the above thresholds and you have pass-through income, you may be able to take advantage of the deduction. I have totally ignored this part of the new bill and intend to continue to do so until later in the year.

AnjaliFIT has written an article about it for Miss Bonnie MD and may want to comment.

Anything that is deducted on your tax return reduces your taxable income, whether it is ATL or BTL.

[AnjaliFIT]

Agree with Johanna, so far there hasn't been any guidance so most of us CPAs are waiting on the IRS to issue this in order to see how it will play out.  So far my understanding is that the limitation is based on taxable income.  Thus, if your taxable income - income after all deductions including 401(k) contributions - is below the threshold amount then you may get the 20% QBI deduction on the amount of business income (1099 not W-2).  If you are an S Corp then my understanding is that the salary portion is not included as part of the deduction.  I wouldn't try to figure out how much to put away based on all of the nuances with the new tax law.  Just pick a percentage and start putting the money away.

[spiritrider]

I have done this for many years of my career.

If this is the first year of 1099 income, childay's suggestion has merit. it is likely your total tax liability including SE taxes will be higher the first year you file a Schedule C and SE. This will allow you to use the 100% (110% if AGI > $150K) of last year's tax liability as a safe harbor and pay any remaining balance when you file your return. You would have needed to have already paid 1/4 on 4/17/18 and pay 1/4 on 6/15/18, 9/17/18 and 1/15/19.

If you are not using that safe harbor. Your best bet is to use IRS publication 505 Chapter 2 and Form 1040-ES Instructions. I always found it a good idea to do a projected proforma Schedule C and SE (or the Self-Employment Tax and Deduction Worksheet from Pub 505 or Form 1040-ES). This allows you to calculate and project just how much you will need for estimated taxes.

If you have unequal business income during the year and you are a gluten for punishment you can use the Annualized Estimated Tax Worksheet. I wouldn't wish that on my worst enemies (not that I have any).

[Sean]

Thanks for the tips, spiritrider.  I'll definitely look into the IRS publications and forms.

... "you are a gluten for punishment..."  No, am not allergic to gluten, but sure ain't a glutton for punishment either! )

 

[Complete_newbie]

Excellent discussion

 

Question for @AnjaliFIT and/or @jfoxcpacfp just confirming as I gear to strategize to minimize taxes form my side businesses - assuming its non-service business

1. the  20% of QBI

vs.

2. 50% of the W-2 wages of the business; or

3. The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all “qualified property” in the business

 

Only really comes into play if your taxable income is > 315K / 157.5K correct? Otherwise, please proceed to 20% QBI. Beyond the phaseout limit of 415k MFJ limit you are utilizing the difference in reduction from W2/W2+prop rule to reduce your QBI.

In service business you are pretty much SOL if over 415 MFJ. Correct?

Still this is pretty awesome tax cut. Can't wait. A boon for entrepreneurs.

[AnjaliFIT]

Hi @complete_newbie if the business is service or non service business and you are below the threshold amounts than full 20% QBI but keep in mind there is a lessor of test - lessor of 20% of their qualified business income or 20% of their taxable income.  If you are above phase out range but its a non service business than 2 part test would apply.  If it is a specified service business and you are above the threshold, then there is no deduction available.

[Complete_newbie]

AnjaliFIT wrote:

Hi @complete_newbie if the business is service or non service business and you are below the threshold amounts than full 20% QBI but keep in mind there is a lessor of test – lessor of 20% of their qualified business income or 20% of their taxable income.  If you are above phase out range but its a non service business than 2 part test would apply.  If it is a specified service business and you are above the threshold, then there is no deduction available.

Click to expand...

Thanks! Time for my wife and I to file separately.

Opens a whole bunch of schemes to get around. Exciting time to tax plan I suppose.

[Sean]

Another q:  if I don't pay the estimated tax for the state by June 15th, can I pay more by Sept 15th to make up for it?  I figure the state doesn't know how much I made as a 1099 until I file my return the following year.  1099 income can fluctuate.  But as long as I've paid a reasonable amount by the end of 2018, regardless of whether I paid nothing the first two quarters then paid more the next two quarters, would there still be a penalty?