You know how I complained about looking up all of our deductions for 2013 since it was our first year to itemize deductions? Well, I won’t need to go through all of that again. I’ve started a few things to make next year WAY simpler.
Managing Taxes Year Round
- Spreadsheet for pet sitting income, costs, and mileage
- Spreadsheet for rental income, costs, and mileage
- Spreadsheet for medical costs including premiums, visits, prescriptions, etc.
- Spreadsheet for rescue fostering for costs and mileage
- Spreadsheet for Big Brothers Big Sisters costs and mileage. Also tracking what we do and how long we hang out for BBBS records.
- A separate envelope for each thing above to keep the receipts as we spend.
- Will continue tracking all of our expenses.
- Will continue keeping all tax documents, property tax receipts, and home insurance renewals in a folder of their own.
Pretty much, if a purchase will be tax deductible, I’m recording them in my spreadsheets at the end of each day and the receipt is being placed directly into the appropriate folder. April 2015 will be easy-breezy for me. Mr. BFS will still need to do the 10+ hours of work it takes to fill in the forms and research deductions and tax changes, but he’s accepted that and is enjoying finding all of the deductions that we can get. He’s getting to be a master of all of the tax forms and schedules…
Are you getting organized in advance for 2014 taxes?
We just did our taxes and found out that we overpaid by $5100! Oops and yay!
Itemizing was Finally Worth It
Self-employment has positives and negatives. The largest negative is that we pay the employer’s part of social security and Medicare taxes, which means that we hand over an additional 7.65% to the IRS along with our normal taxes, but blah, blah, blah. That’s definitely a first world problem. This post isn’t to whine.
Since our current home does rack up the mortgage interest, itemizing our deductions for 2013 was financially beneficial to us for the first time ever. Before this, the standard deduction was always higher for us. I know that having $17,000 in deductions isn’t actually a good thing since it means we spent more than before, but I’ll take the silver linings that I can get.
Why It Couldn’t Be Easily Avoided
Four years ago, I would have hit myself upside the head for letting the government borrow $5100 for me interest-free. BUT, estimated quarterly taxes are only super easy if you take the previous year’s tax return, divide the total owed by 4, and then send them that amount 4 times throughout the year.
We never really know if we will make less or more, but at least this divide-by-4 method guarantees that we will be penalty-free when April rolls around. And to ensure we don’t cry if we do make more than expected, we save big chunks of any extra for taxes too. In the end, this method works for us, but it does mean that we’ll be giving out free loans some years. There’s worse problems.
Drumroll please…we’ll be using this $5100 for…wait for it…our 2014 Roth IRA’s.
Yep, we’re exciting people. Seriously, this makes us really happy. This $5100 along with what we already have put aside will max out our contributions for 2014. That will check off our first main goal for this year!!! Woot! Then we can move on to the others we still have left like the car fund, an extra money account which may be used for a second rental property, and then the fun ones like our summer trip. So this is putting us closer to the fun stuff!
You’ve been asked a million times about your tax refund. So I’ll say, mix it up and ask or comment about anything you want! How was your breakfast? I just wanted to share our recent tax hijinks.
Today’s post is super short. Know why? Because 2013 will be our first year ever that we aren’t taking the standard deduction on our taxes – the first year that we will be itemizing. For everyone that has been doing this for a while, more power to you! This is a pain in the butt.
Finding All of Our 2013 Tax Deductions
Our life is complicated. Before 2013 though, itemizing would have been a silly decision since the standard deduction for a married couple filing jointly was higher than what our deductions would have been – we had a small, low interest mortgage, no rental house, no HOA fees, no large medical expenses, etc. We just filed our taxes, Schedule C forms for side hustles, and investment income stuff. Done.
But we bought a new, larger home at the end of 2012, rented out our first home, tripled our housing expenses (and have that extra income), had major dental expenses, and so on. For the first time ever, it will benefit us to dig up every deduction we possibly can find. That means that I’ve spent the last 6 hours (and am not done yet) putting together totals for:
- All Property Taxes
- All Mortgage Interest
- Home Insurances
- Flood Insurances
- HOA fees for the new house
- Health Insurance Premiums
- Medical Expenses
- Utilities to take off a percentage of for our home office deductions.
- Rent house deductions like contracted help, maintenance expenses, and mileage.
- Volunteer mileage and expenses.
- Side hustle income, expenses, and mileage.
I Hope It Pays Off
This coming Sunday, Mr. BFS will do our taxes by hand as usual. By the end of the day, we’ll know whether we will see any of our $32,400 ever again. I’m betting on $3000+. Mr. BFS thinks we’ll be lucky to get back $1000. Wish me luck!
Any deduction venting out there? Tax stuff is AWFUL!
***I AM NOT A TAX EXPERT. THIS IS NOT ADVICE. DO NOT EVEN TAKE IT ANY OF IT AS A SUGGESTION FOR YOUR OWN TAXES OR BUSINESS. THIS IS A PERSONAL EXPERIENCE. IF YOU WANT REAL ANSWERS, SCHEDULE A MEETING WITH A TAX LAWYER OR CPA YOURSELF. DO NOT MAKE ME BAN YOU FOR BEING STUPID. THANK YOU.***
Today’s post happened because when a blogger puts hours into something, they blog about it. Hopefully it’ll help some other self-employed person out there who uses Paypal for everything.
My husband and I work from home with the online business I created in 2011. I blog and we manage the advertising for my sites and other bloggers. My online business uses Paypal for 99% of its money stuff. The other 1% of our business is through personal checks.
When we get paid for groups (via Paypal), we then have to send everyone their cuts (via Paypal). When our clients are paid for their own deals, they send us our cut (via Paypal). I also do deals on my own sites, receive commissions from my eBooks, and get paid for freelance work and writing (all via Paypal). Altogether, we are a great Paypal client and make them tons of money.
I figured out a way not to feel bad about all of their fees. They save us hours and hours and some money for tax forms every January…
Every January, Mr. BFS and I receive the same question about a dozen times – “Will you be sending me a 1099?”
Our short answer: No, you won’t receive a 1099 from us.
No, we don’t send 1099’s. We have based this decision in the past on information from the Instructions for Form 1099-MISC:
“Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K. “
And on the information from the Instructions for Form 1099-K:
“If you receive payments from a PSE on behalf of one or more participating payees and you distribute such payments to one or more participating payees, you are:
The participating payee with respect to the PSE who sent you the payment(s), and the PSE with respect to the participating payees to whom you distribute the payments.”
This means that we are considered the Payment Settlement Entity for you (our clients), but because we pay you with PayPal (who is also a Payment Settlement Entity), there are multiple PSEs for you. This problem is also addressed in the Instructions for Form 1099-K:
“If two or more persons qualify as PSEs for the same reportable transaction, the PSE that submits the instruction to transfer funds must file the return.”
The Payment Settlement Entity in this case is PayPal. While we tell PayPal to pay you, PayPal is the actual PSE that submits the instructions to a bank or other financial institution to transfer the funds. PayPal is responsible for submitting to the IRS and to you a Form 1099-K if you received enough income through them during 2013.
Now, it is possible that you may disagree with my understanding of what “submits the instruction to transfer funds” means. However, even if we are considered to have submitted the instructions to transfer funds, we used PayPal to complete that transaction. Therefore, PayPal was an Electronic Payment Facilitator. From the Instructions for Form 1099-K:
“If a PSE contracts with an electronic payment facilitator (EPF) or other third party to make payments in settlement of reportable payment transactions on behalf of the PSE, the facilitator or other third party must file Form 1099-K in lieu of the PSE.”
Because we used PayPal to complete the transaction, PayPal is the EPF and must file Form 1099-K instead of us.
We also got all of this information verified by a rep at the IRS Information Returns Center on January 23, 2014. It took 2.5 hours of calls and hold time to find the right place and person with the info, but now we at least have her to back us up.
Also, if we were to send a 1099-MISC for $1000 (for example) to you and PayPal sent you a 1099-K for $1000 (because we paid you using PayPal), it would appear as if you made $2000 when you only actually were paid $1000.
So, if you make more than $20,000 a year via Paypal in 200 or more transactions, all of that income will be reported via Paypal’s 1099-K. Yay for small business owners like me! If you made less than $20,000 with Paypal, you should report the income but you won’t be receiving a 1099-K. This also means that my clients that pay me via Paypal don’t need to send me a 1099-Misc either. Paypal will cover it with our 1099-K. Double yay!
Hope this helps! Do you have to send 1099’s every year?
We paid a buttload in property taxes this month, and the only reason that I’m not bawling my eyes out is that we saved it up throughout the year. Savings buckets work if you make sure to treat them like they are not your money anymore once you make a deposit.
Our Savings Buckets
I have set us up quite a few separate savings accounts at CapitalOne360 (formerly ING). In fact, here they all are:
- Emergency Fund – for crappy months that pop up. A small percentage of any monthly extra gets put here until this hits $15,000.
- Taxes / Insurance / HOA – set monthly amounts for property taxes and 30% of our paychecks get put here, no limit.
- Roth IRA / Investments – a super huge chunk until the Roth IRA’s are fully funded, no limit.
- Home Maintenance – large percentage of any monthly extra until this hits $10,000.
- Rent Home Maintenance – large percentage of any monthly extra until this hits $10,000.
- Car Maintenance / New Car – $500 a month gets sent here plus a small percentage of any monthly extra until it reaches $25,000.
- Vacation – 5%-15% of any monthly extra depending on how the other accounts look, $5000 limit. We stole from it for the new house too.
- Hubby’s Fun Money – 2.5% percentage of any monthly extra. If it gets huge, we steal from this for other goals (like when we bought our new house).
- My Fun Money – 2.5% percentage of any monthly extra. If it gets huge, we steal from this for other goals (like when we bought our new house).
Altogether, we squirrel away half or more of our gross income into those accounts every month (obviously, the tax account sees the most, lol).
No Exception Rule
Moving money from our checking account into those savings accounts isn’t the hard part. The hard part is avoiding the impulse to raid accounts at will when we really want something. Heck, sometimes we make the choice to ignore our own advice. For example, we zeroed out the vacation account and the car account when we bought our new home in October 2012.
But we do have one no exception rule.
We don’t touch the taxes account for anything other than income taxes, property taxes, home owner’s insurance on both homes, the Home Owner’s Association fees, and an annual allowance to check for overages. No exceptions.
Once money is put into this account, it can’t be taken out unless there is a surplus in April of each year after our income taxes are paid (and yes, we take into account January-April’s contributions when we check for the surplus). If there is any money that wasn’t used for the previous year that was set aside, we divide it up between our other savings buckets based on where our percentages are set at the time and move on.
Prioritizing Your Savings Buckets
We base our percentages breakdown of where to place excess cash on which goals have the highest priority for us. Once those are achieved, the percentage of the money that we were funneling that way then gets divided up between the remaining savings buckets. For example, here is a screen print of our percentages sheet:
Our Savings Priorities (aka, “Yep, I’m That Anal”)
As you can see, we have prioritized our goals in the left column and along the top. We base the percentages breakdown of savings on these priorities. When one is fulfilled, we move to the next column of the sheet and use that breakdown instead. We’ve only made it to the second column this year (Percentages After Roth IRA Target). We’re hoping to blow this chart away next year, lol.
How do you handle annual expenses like property taxes and home owner’s insurance?
It’s that time again – the next payments for estimated quarterly taxes are due on September 16. A few other people thinking about self-employment have asked me about how hard estimated quarterly taxes are to file, and I figured it was time to let everyone know that it’s really easy! It’s just one little form. The hardest part is parting with the check to give the IRS your money.
Okay, so here is the link to find the form you’ll need to fill out to include with your check.
You’ll see a ton of info and even a worksheet to help you figure out how much to send in. But if you want to keep it super simple, don’t freak out. You can simply divide what you owed overall last year by 4, and then send in that amount every quarter.
If you end up owing more than you did last year, you can send in the remainder in April with no penalties since you paid 100% of what you owed the year before. If you end up owing less than the previous year, you’ll get that refund in April. Either way, it keeps things super simple during this year.
Here is the only part of the form that you really care about:
Here is an example of a 1040ES. Just fill out this tiny bit of info and send it with your check. It’s that easy.
Just Make Sure You Have the Money to Send
Okay, so now you know how simple it is to send the IRS their share every quarter. The trick is remembering to save some cash for them as you go, right?
Make it easy on yourself. We have all of our self-employment money deposited into one savings account and distribute it from there. We simply transfer a little more than 30% of what we make into a different savings account that we use just to save up the taxes we may owe to the IRS.
Normally we end up paying 25%-30% of what we make, so we move a little more than that to side and forget it is there until we write the checks. It’s still painful to send off thousands of dollars 3-4 times a year, but at least it is set aside for us to send. Freaking out about rounding up tax money every 3 months would drive me insane.
And that’s all there is to estimated quarterly taxes. Any questions that I didn’t cover?
I can’t believe we’re thisclose to June already! This year is just flying by! I felt like we just paid April’s taxes yesterday, but nope, there is that estimated quarterly taxes due date of June 17, 2013 staring at me on my white board. Poop.
Our Way of Handling Estimated Quarterly Taxes
There is an official way you can work your numbers and make sure to cover your butt from penalty fees by paying as little each quarter as possible. But that takes time without tax help and we don’t generally mind maybe overpaying a tiny bit compared to possibly underpaying by a ton. So we follow the secondary rule – as long as you pay in at least what you owed for last year’s taxes, then you won’t have any penalties even if you owe double in the upcoming year.
So we are taking what we owed in total in 2012, dividing that by four, and sending in that amount by each due date. For us, that comes to about $8000 each quarter (covering the employer’s part of taxes along with the regular part hurts, lol).
Making Sure We Have It
In order to send off $8000 four times this tax year, we make sure to religiously fund an account just for our taxes. We have a blog income account that receives all of our withdrawals from Paypal and pays us $4000 automatically every two weeks. From that $4000, $1250 is automatically moved over every two weeks to our tax account to cover ourselves there too. That means a minimum of $7500 is being placed in there every 3 months (more if there is a three paycheck month).
The key is that we treat our tax account like it isn’t even our money. We don’t touch it at all unless we are adding to the total, making withdrawals to send to the IRS, or making a one-time withdrawal after April’s taxes when we take out any extra that we ended up not needing to use for the year (our own personal tax refund, lol).
Covering Extra Money Too
If we ever make way more than we ended up paying ourselves AND our blog income account already has the padding amount we want ($20,000 is our goal right now), then we disburse the extra based on our priorities but take taxes into account first. For example, if we ever end a month at $21,000 after our last monthly paycheck, then we would send a third of that extra $1000 to our tax account and divide the rest up between our priorities like Roth IRA investments or the new car fund. That way our tax fund is always healthy enough for us to pay the quarterly amounts without dipping into the emergency fund.
So there you have it, the wonderful world of handling taxes when you are self-employed.
Do you do something similar (for all of the self-employed readers)? Or for my non-self employed, aren’t you glad you don’t have to worry about this?