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I'm not yet making enough money to worry too much about this, but in the general desire to learn ahead of time, I have a question.


I see a lot of people who say set aside 30% of what you make for taxes. Is this 30% of your NET INCOME? For instance, if you make $2000, but you spent $1000 on deductible expenses/advertising, you're paying taxes on the remaining $1000 net income, correct? So you'd be setting aside roughly $300 for taxes.

Am I following this correctly?
 

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Better still, incorporate and pay yourself a weekly or monthly salary, with taxes deducted. Then you don't have to worry about quarterlies and your salary is then a business expense for the company. I even made it a condition of employment that my company pay for my health care. To claim medical expenses on your personal tax return, you have to meet a threshold of medical expenses and then only a portion is deductible. As a condition of employment, the cost can be expensed by the company.
 

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I doubt anyone here is paying takes at the 40 percent rate. (If so, congratulations, and enjoy them before they go even higher, as they inevitably will.)

The rule on underpayment of taxes is most low- and middle-income people need to come within 90 percent of the total owed, or else have paid in at least as much as they owed and paid the previous year. So if your combination of withholding and estimated tax payments for 2020 equals what you paid for 2019, you're okay. (Unless you're rich, of course.) Don't forget that you also pay FICA on net self-employment income of $400 or more.

I always strive to underpay, then make a catchup payment in January when I have a pretty good idea of the previous year's taxes.

At the present time, there's absolutely no benefit, and a lot of expense and hassle, in incorporating. Schedule C filers can deduct health-insurance premiums up to the amount of self-employment income, they get the same 20 percent tax rate on self-employment income that corporations pay, and they pay less in FICA taxes because a percentage of those are likewise deductible. The major difference is that Form 1040 filers have to have a reasonable expectation (meaning history) of turning a profit, for the IRS will declare that a regular money-loser is actually a hobby, meaning that income is taxed but expenses aren't deductible. By contrast, the IRS doesn't seem to care how often a corporation loses money.

All this, of course, will change, either in 2025 when the 2017 tax bill expires, or as soon as the President-plus-Congress repeal or replace it. But we're golden for 2020.

 

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Whatever you decide, you are wise to research this both federal and state. Some horror stories about those who ignored it and ended up owing late charges.
 

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Incorporating and S-Corps come with specific rules and vary by state. You have to research your specific state. For my current position and a big piece of property I want to buy with cash, it works against me to incorporate. And, yes, I do pay 40% on my taxes and I know many others in this business who do as well.
 
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