Taxes Explained in 5 Minutes

taxes Jan 02, 2020
 

Taxes explained in under 5 minutes. If you get any money outside of a W2, you should know this. Even if you only get a W2, you should know this.

If you get a paycheck with taxes taken out. The employer is paying half of your social security & medicare taxes. It’s their responsibility just for having you as an employee. You work, earn your money. Your employer withholds taxes for you then you get your check to spend.

When you work for yourself, a sole proprietor, an LLC, an S-Corp, a single-member LLC, a partnership, any of those things, it’s different. You earn your money then you spend money on your business, all your business expenses. Then you pay taxes.

Your tax is based on the income you make AFTER you've invested in your business. It's a really great benefit to have for some people. But a lot of people who get a 1099 (contract workers) don’t take out expenses and don’t realize they’re responsible for these extra taxes.

It's super important, if you get a 1099, to make sure you have your business expenses recorded. Because it can be a big impact on how much you pay in taxes.

Here’s an example:

You make $50,000 as a contract worker and you get a 1099. If you take that and go get your taxes done, you're going to pay taxes on all $50,000 of income.

But if you have the $50,000 of income and you record your business expenses. (bank account fees, cost of supplies, computer programs, subscriptions, etc) Pretend you have $10,000 of business expenses. Take the $50,000 you earn, take out the $10,000 of expenses. Then you would be taxed on $40,000 of income.

This is how it affects your tax liability.

You do get a deduction for the social security & medicare taxes that you pay as self-employed.

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