I've done some consulting work over the last few years. My expenses include basic travel cost and computer laptop. The IRS is requesting payment as follows:
2007: Company A reported to IRS, $1227 (50% computer hardware / 50% labor) Company B reported to IRS, $2317 (50% computer hardware / 50% labor)
2007 Tax Increase: 996, Penalties 199, interest 98.
Proposed Balance Due: 1,293
2008: Company A reported to IRS, $2,009 (Same as above) Retirement Income Taxable (took from 401K) 1,600
2008 Tax Increase: 961, Penalties 0, interest 49.
Proposed Balance Due: 1,010
Are those numbers high? Should I just pay, or could I recalculate using the SE tax?
It's not clear to me what's going on? Are you saying you claimed depreciation for a computer but didn't have the receipts to back it up? If you claimed deductions you shouldn't have, I think the IRS will recalculate your Schedule C without the deduction, and your SE tax will go up, deduction for SE tax will go down, federal tax will go up because fewer deductions and because SE tax deduction is less.
I think he is saying, he sold equipment and labor as an independent contractor to several companies, who issued 1099-MISC. He also took a withdrawal from a 401k. He did not report any of this on his return.
Now he wonders, should he just pay the tax the IRS is asking for (based on revenue = 100% profit), or come up with the missing Schedule C and
1099-R reporting in response to their letter?
The answer is, he'll probably be better off reporting deductible business expenses to lower the taxable profit. However he must also report *all* consulting and sales income, whether a 1099-MISC was issued or not.
Will the difference be large enough to be worth the time and trouble, or "should [he] just pay"? That can't be answered without knowing more details about the rest of the tax return and the business expenses.
Eventually his state (if it has an income tax) will probably come after him for state tax as well. There may also be sales tax issues involved with selling equipment.
This is very close to what happened. Actually, I don't solely use the laptop for this business, and it's under $500. The other major expense would be consider is the gas or travel expenses, which won't account for a whole lot either, probably under $500 for those two- years.
It just seems like the IRS is requesting more than what the SE is considered, which I understand it to be 12.9%, which half can be deducted from my income.
Let me know, or I'll just seek HR Block, I don't have too much money to consult anybody else, and this message board has been very valuable.
SE tax is 15.3%, including medicare. The IRS would also be including regular income tax in their proposed assessment, based on your tax rate from your complete return. Did you actually file a return for these years, omitting this income, or did you not file at all? You haven't given us any info on your overall income, filing status, deductions, and tax rate(s).
I have only filled out a 1040. Never completed, but my income is below 55K (gross /yearly). Claim one and deduct interest from mortgage, but that's it. My expenses or deductions won't exceed 1K / yearly. Just seems like the IRS wants 900 dollars, and I'm only making 3000K for consulting. That particular year.
It's not clear what you never completed. Did something get left out?
Well, if you are doing consulting, then you have a business and are self-employed.(*)
That means that you should be filling out a Schedule C and Schedule SE to report your business income, expenses and self-employment tax. Schedule C would be where you would put any of the business expenses you have. In particular, if the 1099 forms covered hardware and labor, you will not have to pay tax on the cost of any hardware you purchased and provided as part of the consulting. Now, it may be that however paid you separated those items out, but if they didn't, you would need to account for this in your tax filing. If this sounds too complicated, then you should consider hiring a tax professional to handle this for you.
If you are reselling hardware, there may or may not also be state sales tax issues. That depends on the state and exactly what you are buying and how. (retail, wholesale). This makes it seem to me (not a tax pro, only an engineer) that you really could benefit from talking to an appropriate expert in these matters. If there are state tax issues, just paying the IRS will not make the problem just "go away".
(*) OK, there could be other ways this is structured, but if you work alone and never took any particular action to set up a different business entity, you are almost certainly self-employed.
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