Tax question

[bignateyk]

My wife and I were in the 25% tax bracket. I just started doing consulting outside of my normal job which pushes us into the 28% tax bracket.

My current employer will continue withholding at the 25% amount, right? Will I be penalized come tax time for this when I need to give them the other 3%? Do I need to tell my employer to withhold more tax from my paycheck?

 

[Farmer]

Withholding is up to you, depending on how many exemptions you claim on your W-9.

You're suppose to follow their guidelines in claiming exemptions, however, you can put in as many or as few exemptions as you'd like. It is not tied to your current tax bracket.

When tax season comes, the difference will be either refunded to your or asked of you.

In other words, if you withhold more now, you'll get a bigger refund next year. It try to strike a balance where you minimize your refund.

 

[bignateyk]

Withholding is up to you, depending on how many exemptions you claim on your W-9.

You're suppose to follow their guidelines in claiming exemptions, however, you can put in as many or as few exemptions as you'd like. It is not tied to your current tax bracket.

When tax season comes, the difference will be either refunded to your or asked of you.

I thought that if you owed more than a certain amount you got penalized?

 

[CPA]

I thought that if you owed more than a certain amount you got penalized?

There is a penalty for underwithholding, but there are rules around it. Plus, how do you know your consulting will push you into a higher tax bracket? Remember, you will be allowed to deduct all kinds of expenses against that consulting income.

 

[Farmer]

I thought that if you owed more than a certain amount you got penalized?

That's true. Try to get your exemptions correct so your refund come April 15th is around 0. You won't get a penalty. I think it's something like, if you pay 90% of what you owe by April 15th, there will be no penalty. You pay (or your employer pays) with your withholding, so its a matter of pay now or pay later.

I just often find that if I compute the number of exemptions based on what the W-9 instructions say, I always overwithhold, and get a refund check. I'd rather have my money now instead of later, otherwise you're giving Uncle Sam (or your employer) a free loan.

 

[Apple Of Sodom]

Tax brackets are tiered. You paid the same amount of tax (well, tax rate) on the first $20,000K you made as the billionaire next door did. Your day job will still be taxed at the same rate.

Just pay 28% on the new income you are bringing in and you will be fine. Make quarterly payments.

 

[bignateyk]

There is a penalty for underwithholding, but there are rules around it. Plus, how do you know your consulting will push you into a higher tax bracket? Remember, you will be allowed to deduct all kinds of expenses against that consulting income.

What kind of stuff can I deduct? It's just software design, so I'm not really buying anything for it. I'm just writing code using hardware that is delivered to me on a computer that I already had. Not really any traveling or anything like that involved.

 

[bignateyk]

Tax brackets are tiered. You paid the same amount of tax (well, tax rate) on the first $20,000K you made as the billionaire next door did. Your day job will still be taxed at the same rate.

Just pay 28% on the new income you are bringing in and you will be fine. Make quarterly payments.

Didn't know that. That's a good thing I guess. I thought I was gonna owe a shitload of money come tax time.

 

[Farmer]

What kind of stuff can I deduct? It's just software design, so I'm not really buying anything for it. I'm just writing code using hardware that is delivered to me on a computer that I already had. Not really any traveling or anything like that involved.

It's all a matter of how much time you want to spend doing your taxes. If you itemize all your deductions (i.e., use Form 1040) and spend time reading the tax code, you'll find tons of little stuff you can deduct if you keep records. If you find yourself with a large tax burden, that might be worth it.

Because I just make one salary and don't have any huge deductables like tuitions or IRA contributions or mortgages or whatever, I normally forgo itemizing.

 

[dullard]

Tax brackets are tiered. You paid the same amount of tax (well, tax rate) on the first $20,000K you made as the billionaire next door did. Your day job will still be taxed at the same rate.

Just pay 28% on the new income you are bringing in and you will be fine. Make quarterly payments.

Apple of Sodom is correct. The first $139,350 (after deductions and other adjustments) will be taxed at the same 25% no matter how much you earn. Only the amount above that is taxed at 28% (or higher if you earn a whole lot).

If that consulting amount is small (after deductions like CPA mentioned it likely will be), then I'd skip the hassle of quarterly payments and instead just tell your employer to withhold more each paycheck.

If the consulting amount is large, then quarterly payments are necessary starting NEXT year for you. But you might as well do them now to learn how (very easy) and it'll solve any problems that you might mention in this thread.

 

[EagleKeeper]

What kind of stuff can I deduct? It's just software design, so I'm not really buying anything for it. I'm just writing code using hardware that is delivered to me on a computer that I already had. Not really any traveling or anything like that involved.

Dig through the tax threads that are put up each year. EK and others provide a boatload of ideas on what can be written off against Schedule C income.
It requires understanding and thinking outside the box. You should be able to write off a few K of direct/indirect expenses under most cases.

 

[Schfifty Five]

Didn't know that. That's a good thing I guess. I thought I was gonna owe a shitload of money come tax time.

It would be really F'ed up if the tax brackets weren't tiered.

For simplicity's sake, imagine if someone made $10,000/year and was at the top of the 25% bracket, and anything above $10,000 gets pushed into a 30% bracket.

If someone gets a raise to $10,500, they'd be taxed $3,150, yet if he stayed at $10,000, he'd be taxed $2,500.

So a raise of $500 actually cost you more in the end. Again, all those numbers are arbitrary but it shows what could happen if the brackets weren't tiered.

 

[Fern]

My wife and I were in the 25% tax bracket. I just started doing consulting outside of my normal job which pushes us into the 28% tax bracket.

My current employer will continue withholding at the 25% amount, right? Will I be penalized come tax time for this when I need to give them the other 3%? Do I need to tell my employer to withhold more tax from my paycheck?

Consulting?

The most important thing for you to determine at this time is whether you will be treated as an emplyee for that consulting work, or whether you will be treated as an independant contractor.

If you are going to be an independant contractor your 'employer' will NOT be withholding on your pay.

Also, if you are to be an independant contractor you will be responsible for 100% of your SS tax (or Self-Employment tax in your case), this will be approximately 15% of your net income from the independant contractor activity. Itemized deductions, personal exemptions etc can NOT be used to reduce your SS tax.

So, before you can even start to quantify your increase in federal tax you must determine whether or not you will be an independant contractor (and reporting that income on a Sch C and Sch SE).

Fern