Independent Contractors: Moonlighting

Jocomama · Jul 23, 2006

Several residents moonlight. This comes under Schedule C of your Federal Income Tax Return, and usually they are paid gross, without taxes withheld.
At the end of the year, one is sent a 1099 form rather than a W-2.

How many are in this situation?
How many understand the quarterly estimates that should be paid?
What about deductions?
Would encourage comments and questions from those currently in this situation.

kate_g · Jul 30, 2006

At the very most basic level, the income tax you owe is equal to your income times your tax bracket, right? So, quarterly estimates are easy - just multiply the total earned moonlighting in that quarter by your tax bracket, and pay it. It doesn't have to be exact, you don't get penalized until your tax paid during the year is some percentage (10%? 20%? check with IRS) below your actual tax owed for the year. And the foregoing is already a highball estimate, because nobody actually pays income tax on their full gross income (standard deduction at the very least, loan interest, dependents, etc.) The only hairy thing is, generally you won't know if you paid enough in estimated tax *this* year until you do this year's taxes, by which time it's too late to pay estimated payments.

If you don't make much moonlighting, or you have a lot of deductions, the tax withheld from your residency paycheck may actually already be 80% or 90% (or whatever) of the tax you'll eventually owe, and then you wouldn't have to pay estimated tax at all (you will owe that 10% or 20% in one lump when you file - but at least you get to earn the interest in the mean time, not the IRS). Again, the hairy thing is you have to try to figure out in advance (i.e. now) what your total situation *will* be at the end of the year.

I had to do this a bunch because my university didn't withhold taxes from my grad student stipend; it gets easier after you file taxes once. Incidentally, if you use TurboTax or TaxCut or one of those programs, you can feed in projections for the coming year and it will calculate estimated taxes and print out little forms for you to send in each quarter.

I don't *think* whether you get a W-2 (showing nothing withheld) or a 1099 (showing nothing withheld) makes a difference at least in terms of estimated payments and eventual tax owed, but I'm not positive. Oh, and, of course: Don't take tax advice from a public forum, go consult your friendly local tax professional.

etf · Jul 31, 2006

or just lie on your taxes...

Jocomama · Jul 31, 2006

There is a big difference, and rules governing estimated quarterly payments when you receive a 1099 vs a W2 which already included the W4 you provided upon employment to declare your dependents.

Estimated quarterly taxes are done based on the prior year. However, if this is your first year moonlighting, then it is best to take your gross, minimal deductions (only if you are sure they are eligible) and pay. You WILL get penalized at the end of the year if your estimates are below what was needed, and you owe at the end of the year. They will go back.

Thanks

kate_g said:
At the very most basic level, the income tax you owe is equal to your income times your tax bracket, right? So, quarterly estimates are easy - just multiply the total earned moonlighting in that quarter by your tax bracket, and pay it. It doesn't have to be exact, you don't get penalized until your tax paid during the year is some percentage (10%? 20%? check with IRS) below your actual tax owed for the year. And the foregoing is already a highball estimate, because nobody actually pays income tax on their full gross income (standard deduction at the very least, loan interest, dependents, etc.) The only hairy thing is, generally you won't know if you paid enough in estimated tax *this* year until you do this year's taxes, by which time it's too late to pay estimated payments.

If you don't make much moonlighting, or you have a lot of deductions, the tax withheld from your residency paycheck may actually already be 80% or 90% (or whatever) of the tax you'll eventually owe, and then you wouldn't have to pay estimated tax at all (you will owe that 10% or 20% in one lump when you file - but at least you get to earn the interest in the mean time, not the IRS). Again, the hairy thing is you have to try to figure out in advance (i.e. now) what your total situation *will* be at the end of the year.

I had to do this a bunch because my university didn't withhold taxes from my grad student stipend; it gets easier after you file taxes once. Incidentally, if you use TurboTax or TaxCut or one of those programs, you can feed in projections for the coming year and it will calculate estimated taxes and print out little forms for you to send in each quarter.

I don't *think* whether you get a W-2 (showing nothing withheld) or a 1099 (showing nothing withheld) makes a difference at least in terms of estimated payments and eventual tax owed, but I'm not positive. Oh, and, of course: Don't take tax advice from a public forum, go consult your friendly local tax professional.

kate_g · Aug 1, 2006

Jocomama said:
There is a big difference, and rules governing estimated quarterly payments when you receive a 1099 vs a W2 which already included the W4 you provided upon employment to declare your dependents.

Editing to clarify:
I thought you said in both the W2 and 1099 cases, no income taxes were withheld, but now it sounds like you're assuming those who got the W2 did in fact have taxes withheld from their paychecks. Depending on funding sources and accounting funkiness, it *is* possible to have nothing withheld from your paycheck and end up with a W2 at the end of the year (my grad funding was this way, for instance). That doesn't absolve you from estimated payments, though.

The test for whether you need to make estimated tax payments is simple: if you have no income taxes withheld from your paycheck, then make estimated payments. (All paychecks I've ever gotten have had an itemized statement of gross pay and all deductions, so it should be easy to tell.)

If you need to make estimated payments, the very safest thing you can do is exactly what I said above. If you expect to make $5K moonlighting this quarter, and your tax bracket based on expected gross pay for the year is say 20% to make the math easy, send in $5000x0.2=$1000. That assumes *no* deductions, *no* dependents, etc., which is almost certainly not true but also almost certainly safe - you'll get any extra back as a refund.

It's possible there's a difference with medicare and social security withholdings, and if you make enough moonlighting you then *might* need to pay self-employment tax, which would certainly suck. Again, something like TurboTax should be able to tell you if that's true.

Bobblehead · Aug 3, 2006

If you're having a hard time calculating your quarterly tax payments another option would be to simply meet safe harbor for the current year. So either 90% of taxes owed with less than $1000 owed OR 100% of last year's taxes (110% if you're making over $150,000).

http://www.fairmark.com/estimate/whomust.htm

If you have a reasonable handle on your self-employment taxes and federal taxes owed for the current year you can also use your salary withholdings to overwithhold from your paycheck. In that way you can avoid making quarterly payments if shelling out several hundreds/thousands of dollars on a quarterly basis becomes too bothersome.

Taurus · Sep 5, 2006

The great thing about being independent is that you can put more away in retirement vehicles like SEP-IRA.

To reduce your tax liability, max out how much you can sock away in retirement accounts.

Independent Contractors: Moonlighting

Jocomama

Make 'em bleed!

kate_g

Senior Member

etf

Full Member

Jocomama

Make 'em bleed!

kate_g

Senior Member

Bobblehead

Senior Member

Taurus

Paul Revere of Medicine

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