Saturday, March 31, 2007

Taxes, Taxes, Taxes (Federal, State, and Self-Employment)

Today is April Fool's Day, but it's also exactly 16 days from when you either must file your taxes, or obtain an extension, and joking around with your tax obligations can get you in hot water.

It's a sad fact that most people don't recognize -- the government, in one form or another, takes about 50% of your profits. I'd love to see the day taxes are due as the week before election day each year, but alas, our elected officials have put it as far away from that date as possible.

Just how does our taxes add up to 50%? Well, if you only earned a profit of $20k, your taxes as a single person are $2,600, or about 13%, at $50k, your taxes are $9,000, or about 18%.


The above tax table for 2006 shows the range from 10% to 35% for your federal obligation only. Since the disbelievers of the 50% total tax liability tend to be young, and single, I am showing just this tax table, but the entire schedule can be seen 2006 Tax Rate Schedules (http://www.irs.gov/pub/irs-pdf/i1040tt.pdf?portlet=3) on page 84 shows the summary for the various filing statuses.

You can't survive long with just a $30k taxable income (i.e. that's what's left over for you once you have paid all your expenses) but even at that figure, your federal taxes are 25%, at $62,000 you pop up to a 28% tax.

State taxes - beware! It's not just the various state income taxes (http://www.retirementliving.com/RLtaxes.html) that will cost you. Many states with seemingly low income tax rates more than exceed other states with personal property taxes. Virginia, for example has a range for income taxes of a low of 2% to a high of 5.75%. Since the 5.75% rate applies at a taxable income total of just 17%, allmost all tax payers who are photographers will be at this rate (actual taxes are $720 + 5.75% of the amount over $17k). Yet, Virginia, like many other jurisdictions charges personal property taxes. For example, living in Fairfax County, in Northern Virginia near Washington DC, both personal property and business personal property is taxed (http://www.fairfaxcounty.gov/dta/tax_rates.html) - per year - at $4.57 per $100, or 4.57%, so each year you pay 5.75% + 4.57% based upon the value of your cameras and computers and vehicles, and such. In other words, you're paying more than 7% to be sure. So, with that in mind, let's add that arbitrarily (but reasonably arbitrarily) arrived to 7% with the 28% federal, and you're now at 35%.

What then, is the next 15%? Well, if you're familiar with your cryptic friend FICA, from your days getting a semi-steady check from your desk job where FICA kept taking money from you for no apparently reasonable reason, then you're familiar with Social Security, also known as Self-employment tax, for those of us who are, well, self-employed. They are the same thing, just different names. And, in the case of FICA, you only pay 7.5%, and your employer is responsible for the remaining 7.5%. When filing as self-employed, you are responsible for the entire 15%. Here's a nice descriptive page - (http://www.irs.gov/businesses/small/article/0,,id=98846,00.html) Self-Employment Tax. According to the site "SE tax rate. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance)."

See? 35% + 15% equals 50%, sadly, it's that simple. So, be sure to save every receipt that is business related. For every $100 business expense you have a receipt for, you are reducing your taxable income by $100, and thus, preventing you from having to pay $50 out of your pocket. In other words, for every $1 as a valid business expense, you save $0.50.

Of course, I am not an accountant, so take this as just an eye-opener and an inspiration to seek professional tax advice from someone who is actually licensed to do so -- I am not!


Please post your comments by clicking the link below. If you've got questions, please pose them in our Photo Business Forum Flickr Group Discussion Threads.

7 comments:

Billy said...

You can deduct half of your self-employment tax (essentially the additional 7.5% you're paying for social security for being self-employed) from your income when calculating your AGI. This deduction is taken on line 27 of the 1040 form.

IRS.gov: Self-Employment Tax

So not quite 50%, but still a healthy chunk of your profit goes to Uncle Sam.

Anonymous said...

I guess I'm one of the young, single disbelievers because I can't imagine how an average photographer could owe 50% in taxes. Let's assume a taxable income of $30,650 (because it's easy to calculate and probably about average for U.S. photographers). I challenge anyone to figure out a way for "the man" to take away $15k of it. And that taxable income is after at least a standard deduction of $5k or so, right? Even with a taxable income of $74,200 (another number I'm pulling from the rate schedule John posted), can the feds actually take $37k when all is said and done? I just don't see how the numbers actually add up to that when you do the math. It seems misleading to claim that we're somehow taxed 50%. Then again, I'm young and single, which is probably why I'm a disbeliever!

Anonymous said...

It is a marginal tax rate guys. If you don't know what this means look it up it is very important. It is 50% on the last dollar not the first, it makes a big difference.

Mike Larson said...

All this advice is golden, good job guys...

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Poelinggb Yuette said...

If you had the choice between taking out $40,000.00 of your inherited cash which is part of a larger IRA to pay off debts (but did not have to sell stocks to get that $ & your tax bracket is $15% but perhaps less since I am on SSD & earn less than 14,000.00 a year) or take out a 9% re-fill on a 2nd home, which is being rented for $1000.00 a month that will be sold in 3 years with a contract)- is it as simple as comparing interest rates to decide that a 9% re-fill is a better deal than a 15% deal? ( the 9% is non-negotiable as I can only get a "no doc/no asset loan" at that 2013 tax bracketsunfortunately)or are there other matters to consider.

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