Figuring out self-employment tax installments for the first time

[Daboa]

(Asking on behalf of someone else)

I have never before been self-employed and am trying to figure out tax installments. I provide childcare in my home for a family member and they pay me. (If it matters, they'd like these payments to count toward their dependent care FSA.) 

I am married with a child of my own and we file jointly. I do not expect this income to continue for the rest of the year and I expect to earn less than $10k total. My spouse has the primary income in our home. 

How do I estimate a quarterly installment given that my expected earnings are so low, this income likely won't last the whole year,  and I file jointly with my spouse? The number of variables makes my head spin. Thanks!

[JulieS]

The net profit from the child care will be subject to income tax and self-employment tax. The self-employment tax is a fixed 15.3% of your net income from the child care. Your estimated tax should at least cover your self-employment tax. 

The income tax is harder to predict as it varies by total taxable income on a joint return. You can use the chart below to estimate your tax rate. It is based on taxable income, so that is after you subtract your standard or itemized deductions.

Your estimated taxes are based on each quarter's income. For example, if you are paid $300 per week and work the entire quarter, that would be $3900 for the quarter. $300 X 13 weeks = $3900

The self employment portion of your tax would be $3900 x 0.153 = $596.70.

These number may be a little daunting, but you are allowed to take deductions from your self-employment income that could take a big bite of taxes.

[Opus 17]

Firstly, you need to give your client a form W-10 giving them your name and social security number so they can claim the credit.  This will trigger the IRS to look for matching income on your tax return.

Self-employment tax is 15% of your net profit (income minus expenses).  Since you are married filing jointly, you need to look at your overall family income, and your federal income tax rate will probably be 12% or 22%.  

https://www.cnbc.com/2021/11/10/2022-income-tax-brackets-and-standard-deduction.html

You don't need to think about your family deductions or credits because you will claim them anyway on your spouse's income.  Self-employment isn't changing those, it's only adding income.  So your estimates probably should be 27% or 37% of your net profit.  Don't forget you may need to make estimated state tax payments too, I've seen state tax rates between 3% and 13% depending on the state and income level, you would need to look that up.

Now it's important to define net profit, or income from your business, because you pay tax on the profit, not the gross income.  You will report your income on schedule C, and you can deduct business expenses.  For home daycare, those expenses can include a portion of your rent or mortgage, a portion of your utilities, an allowance for meals and snacks, and other things.  See this for full information.

https://www.irs.gov/pub/irs-pdf/p587.pdf

So if you track and document your expenses, you can reduce your gross income by subtracting those expenses, and pay less tax overall.

[Daboa]

Thanks for the reply. Some clarifying questions:

1. Does a W-10 replace a W-9 for dependent care providers?
2. No W-10 was provided by my client's last care provider... is that going to be a problem for them on their taxes? 
3. Are quarterly installments only based on the 15% self-employment tax? Not based on estimated income tax?

[Daboa]

One more question:

4. When you say that the W-10 will trigger the IRS to look for matching income... does the IRS get a copy of the W-10? I thought I would just give it to my client.

[Opus 17]

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@Daboa wrote:

One more question:

4. When you say that the W-10 will trigger the IRS to look for matching income... does the IRS get a copy of the W-10? I thought I would just give it to my client.

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Your client is required to enter your SSN on their tax return in order to claim the child and dependent care credit.  That's how the IRS knows.

Incidentally, if you don't want to use your personal SSN, you can apply for a federal tax number for your business, using this web site. You would give the client your federal number instead of your SSN, and you would include both your SSN and your federal number on your own tax return.

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

[DianeW777]

Yes, the W-10 is strictly for dependent care providers and W-9 is for other independent contractors.

There should not be an issue for your client as long as they use the W-10 going forward.

The quarterly installments are based on the self employment tax and the personal income tax. The self employment tax is 15% and your personal income tax is graduated depending on the income. The Form 1040-ES does have the rate schedules and a worksheet.

Your client keeps a copy of the W-10 and the IRS does not get a copy unless they ask for it. It should always be kept with your client's records.

[Opus 17]

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@Daboa wrote:

Thanks for the reply. Some clarifying questions:

1. Does a W-10 replace a W-9 for dependent care providers?
2. No W-10 was provided by my client's last care provider... is that going to be a problem for them on their taxes? 
3. Are quarterly installments only based on the 15% self-employment tax? Not based on estimated income tax?

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1. Correct. W-10 is only used for day care providers.

2. That's their problem, isn't it?  Normally, the taxpayer who wants to claim a credit for childcare expenses must provide the tax ID number of the care provider.  There is a way to claim the credit without the provider's number, but it requires filing by mail (not e-filing) and is not guaranteed.  And if the credit is awarded, the IRS will come after the provider to make sure they reported the income.

3. You will owe self-employment tax AND regular income tax on your net income from the business.