Withholding location + tax-deductible items

[lukegrundy]

Thanks for hosting this!

• Does the location in which I withhold my income matter? Eg if I withhold in an interest-bearing bank account, am I then liable to pay taxes on the interest generated from the money I withheld? Or if I withhold in an investment account and then withdraw, I realize will have to pay capital gains tax but would there be any other considerations?
• Where I have tax-deductible / non-taxable items - IRA contributions, medical expenses, other - do I claim these back the same way at the end of the year? Should I just provide these as per normal at end of year to be treated as non-taxable income, or do I need to incorporate these into quarterly filings, or something else?

[VolvoGirl]

Are you asking about  self employment income?  No it doesn't matter what kind of account you use.  You will pay  income tax on interest and dividends or capital gains tax as normal.  Same for deductions.  Just as normal.  

If you have 1099 or self employment income,  To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax. You can enter Self Employment Income into Online Deluxe but if you have any expenses you will have to upgrade to Premium version. Or any of the Desktop programs. But you will get the most help in the Home & Business version.

You should send in quarterly estimated payments to cover the income tax and self employment tax (FICA).

For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

Don't confuse itemized deductions on schedule A with your business expenses/deductions on schedule C. They are separate. For Schedule A personal deductions, you get to take your itemized deductions or the standard deduction, whichever is larger. Itemized deductions are things like Medical, Gifts to Charity, State Income Taxes Paid, Mortgage Interest, Property Taxes, Car Registration fees, etc.

You get to take both, your business expenses AND the Standard Deduction (or your personal Itemized Deductions). 

[DashonnonH]

Hi lukegrundy,

1. Yes, the location of the withholding matters.

• The withholding must be submitted to the IRS. If you withhold and place the money in an interest bearing bank account, the IRS won't consider this to be withheld and you be subject to paying interest and penalties on late payment of taxes. 
•  Yes, if you withhold in an interest bearing account. The interest earned is subject to income taxes. You will receive a 1099INT for interest earned over $10

2. Yes, you can incorporate the tax-deductible/nontaxable items in your quarterly filing information to accurately calculate estimated quarterly taxes due. If you choose to leave these items out of estimated taxes, your estimated payment will be higher but you will see the benefit of lower tax liability when you file your tax return. 

Whether you include these items in estimated payments or not, you would always provide the information at end of year filings to get an accurate tax liability when preparing the tax return for the year.

Thank you for joining us today!

[lukegrundy]

Thanks for this - but conflicts with answer above re: withholding location. To be clear - I'm talking about where I would withhold before I pay to the IRS, i.e. in the intervening time between being paid and then the due date for the quarterly filing. Does that location matter? Understand from both answers I will be subject to usual interest and/or capital gains tax depending on what option I take. But want to ensure there are no limits on where I can hold the money in the interim (I would assume there aren't so long as the money is then paid on time to the IRS).

[VolvoGirl]

No.  It's all your own personal money.  You can put it anywhere.  

[DashonnonH]

No, the location you hold the money while waiting to pay the quarterly taxes does not matter and is completely up to you.