i got some simple questions i need answered if anyone can help me it would be great. For taxes this year i only file for jan 1 to dec. 31st 2007 right? If thats true lets say my total earnings for the 07 year is around 6,500$. Most is through paypal lets say around 5,000$ and the rest is through affiliate network sites. Since im self employed basically im gonna have to pay 40% on this money right? if thats true im looking to pay around 2,500$ in taxes! For someone who only made 6,500$ in 07 i am expected to pay 2,500$ in taxes and still live comfortably? Someone please tell me there are ways to lower that number because honestly thats insane and i understand why some people dont pay taxes.... they can't afford to!
NO WAY will you pay 40% on 6500 bucks. Our system is PROGRESSIVE, which means you pay a lower rate on lower amounts of money. First of all, you'll pay at the 15% bracket on the whole 6500 bucks. You won't kick up into the 28% bracket unless you make like 24K I think it is. Not only that, you have a personal exemption of something like 5400 bucks, which you subtract from 6500 to get your taxable income. So you'll only pay income tax on like 1100 bucks. But before you jump for joy, there is the small matter of FICO taxes (social security and medicare--your grandma has to get money to get those overprice pharmaceutical drugs for free from the government, right?) FICO taxes run about 15.3%, and you'll probably have to pay pretty close to that on the whole amount. You'll need to fill out a return to calculate it exactly. I recommend TaxSlayer.com, it's like 10 bucks to file, and free to military personnel.
Don't forget you have deductions. Everything from paper and office supplies to research materials to your cell phone bill. A good accountant could tell you the details (and tell you how many years you have to spread certain deductions over), but I will tell you I've learned to be obsessive about saving receipts and finding deductions. Even mileage to go buy office supplies or meet with a client can be deducted. Anything you buy for your office. My site? Is entertainment industry related, with a heavy emphasis on sf/fantasy. I deducted my netflix account and my dvd, anime & manga purchases this year. And I can do this legitimately -- it's related to the site. I HAVE to keep up on what's current in the industry to stay abreast of trends. My accountant raised her eyebrows a bit, but agreed. It's research material. -- Leva
Yes, take as many deductions as you can. Deduct your PayPal fees, deduct Internet access fees, deduct hosting fees, deduct domain name fees, Adwords fees, other advertising fees, etc. You can also deduct the percentage of your home that you use for business. If it were say 10%, then you could deduct 10% of the following: rent, mortgage (careful on mortgage), electricity, natural gas, water, sewer, taxes, property insurance, etc. Mileage would be hard to claim with an Internet business, unless you are meeting clients.
Depends on your situation. I'm 30 miles one way to the office supply store and 40 to Barnes and Nobles. (Joys of living rural.) I'm kicking myself for not tracking it last year. It's business related, so ... -- Leva
Current head of household deduction is $7850. If you are unmarried and live alone, you do not need to pay federal income tax. Otherwise, adding in the cost of an internet connection, hosting, any computer equipment you've bought, outgoing paypal for services to support your sites...I'm sure you can get taxable income to $0. Not sure about FICA for self-employed, but that's a different agency, the SSA, and I don't believe the IRS collects that tax. I'd like to be corrected if that's mistaken. EDIT: You are apparently required to pay a SECA tax at 15+ percent.
You need to file a Schedule C for you business income and expenses, and then a Schedule SE to calculate your FICA taxes. In the convoluted logic of the IRS, you then get to deduct a small portion of your FICA taxes from your AGI (adjusted gross income) making the effective rate about 13.4% of your net business income. If $6,500 is your total income and you are not claimed as a dependent by anyone else you probably owe no federal income taxes, however you will owe the FICA taxes. If it is your first year being self employed it will be to your benefit to consult with a tax planner. (Different from a tax preparer). There are many deductions when you are self employed but you must take them the right way or risk the wrath of the IRS. Disclaimer: While I am a professional tax adviser, it is not tax advice unless you pay for it!
You're not going to pay any taxes on your earnings. One of the great myths (perhaps the greatest myth?) of the US tax system is that the rich get the tax breaks and the poor and middle class get screwed. That's not true. In your case, e.g., you won't be subject to income tax because the first $5K to $10K of your income will be "erased" because of the standard deduction. The next $3500 of income will get erased, too, because of your personal exemption. If you have other people in your family or a mortgage, etc., these amounts go up... The one tax you do have to be careful of is the self-employment tax... but the earned income credit typically wipes that out for people at your income level. Also, as people noted above, the taxes only get applied to your profits (which are calculated by taking your income and then deducting all your business expenses...) FWIW, I commonly see tax returns where someone makes $40K or $50K or $60K and pays maybe $200 in income taxes...
You have to file but I agree you won't have to pay any taxes if your total income is 6,500/year, in fact you probably get money back from earned income credit. But how do you survive on 6500, seems impossible?