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I was always under the impression those who are self employed pay less taxes each year. I only just learned there is a self employment tax rate of around 15.3%. What does that end up working out to on a $100k salary? And is this usually not a big deal as I understand there are very standard tax write offs, such as your vehicle and mileage to work.
So is making $100k as self employed the equivalent of like $85k if you were on a W2? Though I believe 7% of that 15% is tax deductible. So is it more like the equivalent of $87k then you get a few tax write offs from your car and miles which gets you around $90k w2 equivalent?
Self-employed pay more taxes because we're paying the employer and employee portions. Everyone's bottom line is going to be different, depending on your unique tax situation and the type of business you own.
There are not "very standard write offs" because each business is different. Mileage to work (your regular office) is not deductible plus you can't write off both vehicle expenses and mileage.
I suggest seeing an accountant and see how your numbers would compare to being an employee vs self employed.
The best place to go if you don't want to hire a tax person is the IRS site.
The only thing I found miss-leading about that site is how long to hold tax information. The documentation says to save 3-5 years of tax information. If we get an audit, they may ask for 8-10 years worth of documentation so save documents longer than indicated to protect yourself.
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You will still have all of the standard personal deductions such as mortgage interest and taxes, on the net income from the business after the deductions for the allowable expenses. I doubt that many business owners would pay $15,000 in taxes on income of $100k, especially if they own a home and have a spouse and/or kids. While it's not "legal" and I would not recommend it, most small business owners pay less taxes because so often they can trade goods and services off the books with other businesses.
Don't forget other costs associated with being self employed. Even though you can deduct them they still cost you bucks: health insurance and retirement accounts. These costs are huge. My health insurance is higher than what my mortgage was. Lack of matching in retirement accounts hurts compared to being an employee.
Retirement can't be just the 5K to an IRA, you'll never survive in retirement. You will need to go more to a Keough or SEP IRA trying to put at least 10% of your income away. Sucks compared to a defined benefit pension.
So to answer your question, self employed people lay less in taxes because they pay more in expenses that employees don't have to spend.
Self employment is social security tax. If you are an employee, you pay half and your boss pays half. If you are self employed, you pay all of it. So self employed pays more for that tax.
For income tax, employee or self employed, you pay exactly the same tax for the same amount of income. Exactly. The tax tables are the same for everyone.
The best place to go if you don't want to hire a tax person is the IRS site.
The only thing I found miss-leading about that site is how long to hold tax information. The documentation says to save 3-5 years of tax information. If we get an audit, they may ask for 8-10 years worth of documentation so save documents longer than indicated to protect yourself.
What circumstances would allow the IRS to look back 8-10 years?
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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It may take them several years to catch up with someone who makes a mistake or fraudulent return, they have more work than staff and prioritize based on their list of red flags. Sometimes business returns can be audited based on something found on the return for another business. For example, an audit reveals that receipts for expenses of $100,000+ paid to your business, but your total sales reported for that year is only $80,000. Below is the IRS
suggested retention. You have to love #6, "Keep records indefinitely if you file a fraudulent return."
Self-employed is much more tax costly out of pocket to the tax payer. You pay the 7.65% FICA match right on your 1040, subject to income limitations (medicare is paid regardless of the income level).
With regards to tax information being kept - the rule of thumb is 7 years due to the potential of a double statute of limitations case, but I generally suggest 10 on the conservative side. A tax year is closed 3-years after it is filed, unless fraud is involved. If there is a year of an un-filed return, that year has no statute and can be examined anytime down the road.
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