Regarding statement #1, cash or accrual: The majority of tax payers (and small businesses) use the cash basis. Under the cash basis, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.
- If you did not report income that you received in the correct year, you need to file a prior year tax return or amend your tax return(s). Each year's income and expenses get reported separately. You can't lump all the income and expenses together if it was earned in different years.
Regarding statement #2: Depending on your other income, 25% may not be enough since your wife has to pay self-employment (SE) tax, in addition to federal income tax and state (if your state has an income tax).
- The SE tax rate is 15.3% with 12.4% for Social Security and 2.9% for Medicare.
- If you set aside 25%, that leaves you with only 9.7% to cover federal income tax.
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