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HOT TOPIC Figuring Out Net Income for Owning A Business

freelancer123

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I am brand new here and thought it was worth a shot asking my question here. I am looking for some advice on how to figure out some tax/financial details regarding my business. I am a teacher and performer and have learned that I basically own a small business.

I am having significant trouble figuring out the Gross Income i need to make in a year so that I can comfortably pay my taxes, pay my bills and still have enough for savings. It seems like with a significant amount of deductions, modest living expenses and frugal spending, I am still struggling to have anything left over when taxes roll around.

This year I grossed about 90k, and had a net profit of about 13k after deductions. It seems self employment tax is hitting me really hard at the end of the year. I’m trying to figure out if I just need to earn a ton more money to offset taxes and living expenses or I need to show more profits for my business or something else.

How much gross income would I need to earn per year to take home $60k after taxes?
 

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Only you or your accountant can answer that as you don't give enough information:

General calculations:

Gross income - deductions = Taxable income

Taxable Income - (Tax rate * Taxable Income) = Take Home
 
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freelancer123

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Only you or your accountant can answer that as you don't give enough information:

General calculations:

Gross income - deductions = Taxable income

Taxable Income - (Tax rate * Taxable Income) = Take Home
I understand the logic of the basic calculations. My problem is the tax rates are confusing me, I am not certain, but suspect that my business is getting taxed 15.3% then my personal income is getting taxed another 15%, does that sound possible or correct?

What information do you need to answer more in depth?

I’m having trouble understanding how i’m being taxed. The tax rate seems to require several calculations. It seems like I’m not consitently being charged the same tax rate year to year, but I may be, I can’t tell. Again, just an observation, but it appears I’m getting taxed twice. Possibly once on the business then one on my personal?
 

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Self-employment tax is 15.3% - this is your Medicare and Social Security tax.
If you had a W-2 job, you would pay 7.65%, and your employer would pay the other half. As a self-employed individual, you are both the employer and employee.

On top of this, you pay income tax for federal (and potentially state) purposes. There are different rates depending on the amount of income you make in a year. To confuse you even more, these rates changed for 2018 from 2017.

Both Self-employment and income tax are charged only on your net business income (revenue minus expenses).
 
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freelancer123

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Self-employment tax is 15.3% - this is your Medicare and Social Security tax.
If you had a W-2 job, you would pay 7.65%, and your employer would pay the other half. As a self-employed individual, you are both the employer and employee.
I had about 4300 in w-2 income and the rest in 1099, cash and checks. So was my net income probably taxed 15.3% or are there more calculations than that? Im doing the math and i just dont understand how im getting taxed, I dont understand how to calculate the numbers my cpa is giving me. It’s making it quite difficult for me to understand how much money I’m actually making.

How does tax liability work in all this? What is it?

On top of this, you pay income tax for federal (and potentially state) purposes. There are different rates depending on the amount of income you make in a year. To confuse you even more, these rates changed for 2018 from 2017.

Both Self-employment and income tax are charged only on your net business income (revenue minus expenses).
Did they go up in 2018? Is the income i make in a year calculated on my AGI? Is this the second tax calculation i’m missing?
 
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CareCPA

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I wouldn't say twice, I would say it's cumulative.
It's 15.3% + income tax (anywhere from 0% to 37% in 2018).

It's also not strictly as laid out above, as the math is a little more involved, but that's close enough for argument's sake.
For example, half of your Self employment tax is a deduction on the front of your 1040, and you only pay SE on 92.35% of your earnings.
 

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Book a two hour appointment w/ your CPA. Ask him to walk you through your 1040 line by line.
It will be the best money you have spent (and tax deductible!).

Then you can hit investopedia and even come back to this thread w/ more questions.
---------------
For this forum, where do you want to be? Where are you trying to get? What vehicle to you plan to use to get you there? Post an intro in the intro thread....
 
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freelancer123

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Book a two hour appointment w/ your CPA. Ask him to walk you through your 1040 line by line.
It will be the best money you have spent (and tax deductible!).

Then you can hit investopedia and even come back to this thread w/ more questions.
This year I am in a bad spot, I pay my CPA $750 per year to file and $50 per 1099 to issue to contractors (I have from 10-20 per year). I tried making an appointment this year, like I have done the past 2 years. They told me to just come in (I assumed that was because I have worked with them for 2 years). Upon going into their office they told me to file an extension to do my taxes after the deadline and suggested I send a couple thousand dollars to the government just in case I owed more than normal -- this conversation lasted about 1 minute. I was dumbfounded. I asked if the estimated stubs they gave me to pay last year weren't sufficient. She reiterated, yeah I'd just send them a couple thousand dollars because you'll have to pay interest. I asked again, there's no way, she said, "we're too busy". I called around to other CPAs, found someone who said they'd do my return on time and went to my original CPA to get my documents and they suddenly had time for me and were able to get my return done on time within a day. As it stood the estimated payments that they gave me stubs for last year added up to about 1700 and I ended up owing over 3k more. It's a total nightmare. I'm a responsible person, I did everything they told me to do. On more than one occasion I've tried to set up an appointment to go into their office and have a detailed meeting with them regarding these questions and they responded with a one line answer to my email, what questions do you have?

I have deducted that since their upgrade last year to a larger corporate suite that I am just not a big enough account for them to justify helping me. Being a business owner myself it seems like a horrible business practice to push me aside after two years when they could've just told me my account isn't large enough for them. I can also easily go on yelp. I have been a loyal client for 2 years, even referred several people to them, but am now ready to move on. I am in damage contro trying to take control of the situation because the money I've paid them clearly seems to have the privilege of them doing my taxes as opposed to them actually working with me do better each year.
 
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freelancer123

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I wouldn't say twice, I would say it's cumulative.
It's 15.3% + income tax (anywhere from 0% to 37% in 2018).

It's also not strictly as laid out above, as the math is a little more involved, but that's close enough for argument's sake.
For example, half of your Self employment tax is a deduction on the front of your 1040, and you only pay SE on 92.35% of your earnings.
Ahhhh. I see. Thank you very much for your help. This is sooo helpful. I greatly appreciate it. I understand...kind of...I'm fairly certain the self employment tax is what's getting me.
 

GoGetter24

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Sounds like you need new accountants. Also sounds like room for a new competitor in accountancy wherever you are.

Basically if you have an accountant, but still that chaos is happening, and you're asking on a free internet forum for help on the very thing they should be doing, you don't have an accountant, you have a fraud.
 
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freelancer123

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Going to be honest. I don't understand how small businesses survive, I understand that in reality they do, but this tax stuff confuses me greatly. Is there a way to make 90k in a year and manage it in a way that it is more profitable? I make what I thought was decent money, it's quite frustrating. Does a business have to have an AGI of 150k/200k to be able to provide any kind of solid income?
 

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freelancer123

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Sounds like you need new accountants. Also sounds like room for a new competitor in accountancy wherever you are.

Basically if you have an accountant, but still that chaos is happening, and you're asking on a free internet forum for help on the very thing they should be doing, you don't have an accountant, you have a fraud.
Agreed. I have been paying this CPA who has a team of 10+ people and lawyers and last year got an inkling that they were "changing" their strategy. This year though...I'm out, can't deal with this. I pay them all this money because I'm too busy working 60 hours a week running my business to deal with all the numbers. I honestly needed the validation and greatly appreciate your feedback. They will only fool me once.
 

levijean

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This is exactly what my question is, WHAT are good numbers/margins?
That is a pretty subjective question but anyone here will tell you that working 60 hrs/week to net $13,000 is majorly spinning your wheels, unless you are looking down the road to a huge payoff.
 

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so you tried to talk to your accountant 2 days before their busiest time of the entire year and they actually answered you ..... and your account has amounted to ~$1500 over two years for them...... and they still answered you.......

sounds like you just need to plan a better time to talk to them.... would you really want to use an accountant that was not busy the week before the filing deadline??

1st thing you need to do is get on irs.gov and start studying yourself so you can ask better questions. read through the 1040 and prepare it yourself and read through all the tables and figure out what is going on.....

Next thing you need to do is increase revenue substantially. Then you can get people to handle your questions for you. Right now you have little to show for a lot of hours.

in the meantime, be patient with this CPA ..... book an appointment at the end of May and go in and talk ..... send your questions beforehand so they can prepare......

hang in there.... every business was at some point at the point you are now..... :)
 

Richard Greene

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I am brand new here and thought it was worth a shot asking my question here. I am looking for some advice on how to figure out some tax/financial details regarding my business. I am a teacher and performer and have learned that I basically own a small business.

I am having significant trouble figuring out the Gross Income i need to make in a year so that I can comfortably pay my taxes, pay my bills and still have enough for savings. It seems like with a significant amount of deductions, modest living expenses and frugal spending, I am still struggling to have anything left over when taxes roll around.

This year I grossed about 90k, and had a net profit of about 13k after deductions. It seems self employment tax is hitting me really hard at the end of the year. I’m trying to figure out if I just need to earn a ton more money to offset taxes and living expenses or I need to show more profits for my business or something else.

How much gross income would I need to earn per year to take home $60k after taxes?
If you go to the IRS website they have an entire course on taxes for small business.
Lots of great info for free. Best of luck.
 

Merging Left

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You're making $90k and after taxes you have $13k left over. Taxes are not eating $77k of your earnings... that would be like 85%. Your question is ultimately how much do you need to earn to live comfortably, so let's back up and away from taxes for a moment.

What's your net profit before any tax considerations? Just revenue - expenses.
 
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freelancer123

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so you tried to talk to your accountant 2 days before their busiest time of the entire year and they actually answered you ..... and your account has amounted to ~$1500 over two years for them...... and they still answered you.......

sounds like you just need to plan a better time to talk to them.... would you really want to use an accountant that was not busy the week before the filing deadline??
Haha. My return was finished recently. I contacted them months ago to schedule an appointment, last November and in january and march.

1st thing you need to do is get on irs.gov and start studying yourself so you can ask better questions. read through the 1040 and prepare it yourself and read through all the tables and figure out what is going on.....

Next thing you need to do is increase revenue substantially. Then you can get people to handle your questions for you. Right now you have little to show for a lot of hours.

in the meantime, be patient with this CPA ..... book an appointment at the end of May and go in and talk ..... send your questions beforehand so they can prepare......
Hence why I am asking questions. Had no idea there are resources on the irs website site.

How much of a revenue increase??
 
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freelancer123

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You're making $90k and after taxes you have $13k left over. Taxes are not eating $77k of your earnings... that would be like 85%. Your question is ultimately how much do you need to earn to live comfortably, so let's back up and away from taxes for a moment.

What's your net profit before any tax considerations? Just revenue - expenses.
It fluctuates year to year. I can calculate net profit...Im interested in knowing what i’d need to make to have 60,000 per year to live on after taxes.
 
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freelancer123

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That is a pretty subjective question but anyone here will tell you that working 60 hrs/week to net $13,000 is majorly spinning your wheels, unless you are looking down the road to a huge payoff.
What amount isnt spinning your wheels???
 

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exclusives88

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It fluctuates year to year. I can calculate net profit...Im interested in knowing what i’d need to make to have 60,000 per year to live on after taxes.
If you are only netting 19k on 90k, I would look to see why your margins are so low and how to improve it. Taxes isn't the problem. In any case..

Here is a High Level Calc

If your Federal tax rate is 24% and 15.3% self employment tax. Your combined Federal tax after taking self employment tax deduction is 30.48%

$60,000 / (1-.3048)= $86,306

This does not take in account:

1. State Tax Rate (varies based on state)
2. Assuming business not in a C corp, S Corp, or Partnership
3. Not including exemptions/standard deduction/itemized deduction

Why do you need to know how to make 60k after taxes when you haven't even made 60k before taxes?
 
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It fluctuates year to year. I can calculate net profit...Im interested in knowing what i’d need to make to have 60,000 per year to live on after taxes.
Right, you've missed my point.

You're taxed based on net profit; not based on revenue. If you're making $90k, but you have $85k in expenses, you'll be earning peanuts compared to if you're making $90k but have $10k in expenses.

@exclusives88 offered a perfectly reasonable calculation to get you to $60k in actual cash earnings each year. You need to have a net profit, before taxes, of $86k. That number is super rough and has a lot of assumptions in it, but maybe it can at least serve as a starting point for you.

So you tell me: How much money do you need to make to have a net profit of $86k?
 
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freelancer123

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If you are only netting 19k on 90k, I would look to see why your margins are so low and how to improve it. Taxes isn't the problem. In any case..
I understand. My margins are low because I’m getting killed on expenses...I don’t think taxes are killing me as much as think it feels like nothing is left for savings after paying rent, bills etc.

Here is a High Level Calc

If your Federal tax rate is 24% and 15.3% self employment tax. Your combined Federal tax after taking self employment tax deduction is 30.48%

$60,000 / (1-.3048)= $86,306

This does not take in account:

1. State Tax Rate (varies based on state)
2. Assuming business not in a C corp, S Corp, or Partnership
3. Not including exemptions/standard deduction/itemized deduction
This is awesome! This is exactly what I was looking for! Thank you!! I am going to have to do some studying to understand everything you are saying. Will be doing that tonight.

Why do you need to know how to make 60k after taxes when you haven't even made 60k before taxes?
Because I don’t understand the math yet...thats why im asking. It would give a ballpark of how it equates. It is an attempt to get an idea an approximate amount that would allow one to get by/to live and pay bills and save a little...
 

CareCPA

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Because I don’t understand the math yet...thats why im asking. It would give a ballpark of how it equates. It is an attempt to get an idea an approximate amount that would allow one to get by/to live and pay bills and save a little...
I think there's a disconnect here. People on this forum can't help you, because we don't know anything about your business structure, expenses, etc.
I run a service business. If I bill out $90k, I'm probably looking at $80k in profit.
If you run an eCommerce business, you may be looking at $10k in profit.
If you run a grocery store, you may be looking at $2k in profit.

There is no one-size-fits-all answer as to how much you need to gross in order to get $60k after taxes. It will be highly dependent on what type of business you are running.
 
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freelancer123

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@exclusives88 offered a perfectly reasonable calculation to get you to $60k in actual cash earnings each year. You need to have a net profit, before taxes, of $86k. That number is super rough and has a lot of assumptions in it, but maybe it can at least serve as a starting point for you.

So you tell me: How much money do you need to make to have a net profit of $86k?
you are awesome. Thats exactly what i didnt understand. Thank you! I get it! Y’all are great! I was miscalculating because I was only using 15% as opposed to 30.85

Calculating...one sec. BTW super cool of you for quizzing me...figuring it out now one sec.
 
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freelancer123

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I think there's a disconnect here. People on this forum can't help you, because we don't know anything about your business structure, expenses, etc.
I run a service business. If I bill out $90k, I'm probably looking at $80k in profit.
If you run an eCommerce business, you may be looking at $10k in profit.
If you run a grocery store, you may be looking at $2k in profit.

There is no one-size-fits-all answer as to how much you need to gross in order to get $60k after taxes. It will be highly dependent on what type of business you are running.
Understood. I think my big questions are answered actually, Thank you!

In all this, I am actually developing an understanding of this I think. I probably sound stupid, that doesn't bother me.

I wouldthen assume that a business that has "good" margins could earn say 90k and have 80k in profit, whereas a business with "bad" margins could earn 90k and only have 10k in profit correct?

If somebody made 10k of net profit on 90k gross, to earn 60k net with that business model one would have to earn 6 times that (540k-ish)? Is that also meaning that grocery stores have to sell a large volume because they have so many expenses? Meaning possibly that companies with bad margins have to do a ton more volume to make any money than companies with good margins?
 
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freelancer123

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Right, you've missed my point.

You're taxed based on net profit; not based on revenue. If you're making $90k, but you have $85k in expenses, you'll be earning peanuts compared to if you're making $90k but have $10k in expenses.

@exclusives88 offered a perfectly reasonable calculation to get you to $60k in actual cash earnings each year. You need to have a net profit, before taxes, of $86k. That number is super rough and has a lot of assumptions in it, but maybe it can at least serve as a starting point for you.

So you tell me: How much money do you need to make to have a net profit of $86k?
Gulp...here we go:

86000/(1-.3048)=$123,705.41

So to truly know this exact number you'd need to factor in expenses, etc. relating to doing a volume of work that generates 123k correct?
 
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exclusives88

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Gulp...here we go:

86000/(1-.3048)=$123,705.41

So to truly know this exact number you'd need to factor in expenses, etc. relating to doing a volume of work that generates 123k correct?
I think he’s asking, how much revenue do you need to generate to profit (before taxes) of $86k after business deductions.

Are you selling products? Pm me and I can help you figure out why you’re netting so little.
 

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