How does deduction work for quarterly tax as an indivisual contractor?

[SimonJ9]

I started to work as an individual contractor on July 1st, and I'm preparing for my first quarterly tax estimate.  I assume I will pay the quarterly tax before Sept 16. I am confused by the order of calculating deductions. So if I use the following example:

income for this quarter: $10,000

Part One: Self Employed Tax

Self-employment tax: 15.3%, apply to 92.35% of total income, which is $1412.96. No question. 

Part Two: Federal Income Tax

1. Deduct half of the SE tax ($706.48). No question.

2. Standard deduction: How doe it apply to quarterly tax? (It is for the whole year?)

3. QBI: Do I qualify for QBI if I'm an individual contractor?

4. If I work in my home office, does the house rental count as business expense?

5. federal tax: What bracket should I use for this since I cannot estimate the total income for the entire year yet?

Thanks in advance!

[DashonnonH · Accepted solution]

Hi SimonJ9, I want to ensure you are applying the 15.3% to the correct amount of income. 

Part One: Self Employed Tax

Self-employment tax: 15.3%, apply to 92.35% of total income, which is $1412.96. No question.

This formula is applied to Net income. After you have deducted expenses paid for your business.

Part Two: Federal Income Tax

1. Deduct half of the SE tax ($706.48). No question. (Correct, as long as $1412.96 is the Self-employment tax owed)

2. Standard deduction: How doe it apply to quarterly tax? (It is for the whole year?)

Estimated payments are made to cover 2 different taxes; Income taxes and Self-employment taxes. 

• You will not use the standard deduction when calculating Self-employed taxes (you have that calculation shown correctly above)
• You will use the standard deduction when calculating Income Taxes
• The standard deduction must be deducted before you can fully calculate estimated taxes. 

Yes, the Standard deduction is deducted from total income for the year. If you have other income along with the self-employment income, add all income together when calculating final estimated payments.

For Example: Net $25,000 Self employment is your only income 

You will have to pay estimated taxes on the Self employment tax. Then, you must also pay estimated payments on Income tax. Although calculated separately, the estimated payment is just one payment.

Calculating income tax is where the standard deduction comes in.

EX. Total income is $25000

1. Minus standard deduction which is $14,600 for single person in 2024. 

Taxable income is now $11,400. 10% tax bracket results in $1140 Income taxes

You would make a total quarterly payment on

• Net income of $11,400 and
• Self employment tax self-employment income of $25000

3. QBI: Do I qualify for QBI if I'm an individual contractor? Yes, individual contractors qualify for QBI deduction. 

4. If I work in my home office, does the house rental count as business expense? Yes, If you use a home office for regular and exclusively for your work you may qualify for the home office deduction.

Deductible expenses for business use of your home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. In general, you may not deduct expenses for the parts of your home not used for business, for example, lawn care or painting a room not used for business.

or

You can use the simplified method of 5 per sqft.

https://www.irs.gov/newsroom/how-small-business-owners-can-deduct-their-home-office-from-their-taxes

5. federal tax: What bracket should I use for this since I cannot estimate the total income for the entire year yet? When preparing estimated taxes, you must estimate your income for the year. Once you have a total number for the entire year, you will know the your tax bracket after you deduct the standard deduction.

Ex. Total Income $25000

Minus $14,600 (standard deduction)

Taxable income is $11,400. 10% tax bracket. 

Thank you for joining us today!

[Gestalthinking]

What is QBI deduction?

[Cindy4]

Be sure to use your profit vs. your total income for the estimated taxes due. 

The deduction for half of the self-employment tax and the standard deduction come into play after your adjusted gross income is calculated using your self-employment income and any other income you have.  The same for the QBI, which you could qualify for as an individual contractor if you're not a specified service trade or business.   For expenses that reduce the profit for your business use things like advertising, vehicle expenses, insurance, office expense, supplies and materials, equipment rental, etc.  There is no exhaustive list, but you can use anything directly related to generating the income.

The home office deduction is used for an area dedicated solely to business use.  You can use the simplified method based on square footage, or actual expenses.  Square footage still comes into play for the actual expenses method, but the difference is that with the simplified method you don't have to track and enter all of your rent, utilities, insurance, etc., you just get $5 per square foot up to a maximum of 300 sq ft.

The marginal tax bracket can be tricky to calculate, but since you make payments through the year you can adjust as you go based on profit.  One way to start out is use what you know you've made so far and the time it took to make it and multiply it out based on the remaining time left in the year.  If you overpay your estimated taxes, you can get a refund or have it applied to the next year.

Hope this helps!

Cindy

[SimonJ9]

Thank you so much for the detailed information. This is really helpful.

[SimonJ9]

Hi Cindy, thank you very much for the information!

[SimonJ9]

@Gestalthinking QBI (qualified business income deduction). From what I found it's a 20% deduction for small business and individuals. I'm not an expert on this topic though, this is what I found from the IRS website: https://www.irs.gov/newsroom/qualified-business-income-deduction

[DashonnonH]

The QBI deduction aka Qualified Business Income Deduction is a 20% deduction from net trade or business income. Rental Properties may qualify for the QBI deduction if the property is considered business rather than passive income.

The deduction is not considered when calculating Self-employed taxes. The 20% deduction is taken off of your net business income before regular Income tax liability is calculated.

If you qualify for the QBI deduction, you will received the 20% deduction. If your net Self-employed income is $20000, you will get a deduction of $4000 before you pay Income taxes. 

Example without QBI: Income include $20000 from W2 and $12,000 Self-Employed. 

Total taxable income before QBI deduction $32,000

Example with QBI:

Income include $20000 from W2 and $12,000 Self-Employed. 

Minus $3000 for the 20% QBI deduction. 

Total taxable income with QBI $29,000

Additional Info on QBI below:

https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-cuts-jobs-act/qualified-business-inc...

https://blog.turbotax.intuit.com/taxes-101/qbi-deduction-83650/