Tax for self employment..

[dyanisis2]

What is the name of your state? UTAH

I am a fulltime student, married with one child. On my 2004 tax return i only grossed around 23k and i get a refund of almost 4k. My 2004 was mostly just W-2 wages from my jobs. This year we're going to make almost the same, 23k, but the majority of this income was from my wife running a licensed daycare out of our home- self employment. I started computing taxes and it looks like we're only going to get a refund of around $1000- how can that be right? Is it possible to have almost the same gross income- especially how low it is- and have that big of a difference in refunds?

 

[justalayman]

You need to be concerned with the total tax bill, not what you get back.

Did you pay taxes on your wife's income? Did you pay the appropriate social security taxes on her income? If you are now a business owner, your tax deductions change drastically. You are trying to do the old comparing apples to oranges. It won't work.

 

[dyanisis2]

I'm just saying the same thing in a different way.. I i got a way bigger return last year than im looking at this year- then i am obviously paying much more taxes this year than last. But yet- my income is considered poverty level in both years and this year will actually be less than last year. So once again- is it just because my wife did self employment that we're having to pay so much more in taxes? Also, no, throughout the year we did not pay taxes on her income. Which i understand that if we made a lot of money we would owe taxes on it. But being the fact that in the last 4 years we always got every dollar in tax we paid back, and more, whats the difference in getting every cent back and not paying it in the first place?

 

[LdiJ]

I'm just saying the same thing in a different way.. I i got a way bigger return last year than im looking at this year- then i am obviously paying much more taxes this year than last. But yet- my income is considered poverty level in both years and this year will actually be less than last year. So once again- is it just because my wife did self employment that we're having to pay so much more in taxes? Also, no, throughout the year we did not pay taxes on her income. Which i understand that if we made a lot of money we would owe taxes on it. But being the fact that in the last 4 years we always got every dollar in tax we paid back, and more, whats the difference in getting every cent back and not paying it in the first place?

When you work for someone, your employer withholds Social Security and Medicare taxes, and you don't get those back. In addition to the withholding, your employer is also required to pay exactly the same amount of Social Security and Medicare taxes on your behalf. The total, between you and your employer is a tad less than 16% of your gross pay.

When you are self employed, you still have to pay the Social Security and Medicare taxes, AND you have to pay the employers share as well. Therefore the entire 16% comes out of your pocket.

That is why your refund is so much smaller this year.

 

[dyanisis2]

Thanks for the help- doesn't seem like self employment is worth it

 

[LdiJ]

Thanks for the help- doesn't seem like self employment is worth it

You do know that your wife can and should deduct any expenses of the self employment?

That includes supplies, meals for the children, licensing or insurance costs...etc.

 

[dyanisis2]

Yeah i knew that- thanks again