If you're self-employed, and you are if you are earning money from AdSense, then yes, you have to pay SS tax.

Is AdSense your only income? If so then unless you are doing extremely well, it's unlikely you would end up paying much.

On the other hand if you are making good money you would probably need to make quarterly estimated tax payments. If you don't you get hit with interest and penalties.

Taxes are complicated and I suggest you get a basic guide at a bookstore to get you started. Many people have them done by accountants, but you can also do them yourself if you are patient and read up on the rules.

I beleive you will find that SS tax is a wee bit higher than that as you have no employer paying half of it. :)

You can get a good software that is not expensive and gives you the rules as you follow along. Do your taxes as late as possible when you use one as it is typically updated with the newest rules and forms before finalyzing the return.

With one, I know of, you can file electronically and even helps you estimate taxes for the coming year.

By all means get you a book or go to your IRS office and pick up a copy of setting up a small business booklet. Tell the cleck what you need and she/he can give you everything you need to study.

Good luck and welcome to our world. :)

Ann

Thanks for your replies!

I will definitely buy some tool like TurboTax.

How do you pay it?

Don't worry about that, the government will get a hold of you. If you have to pay, you will find out soon enough.
I don't make a lot with AdSense but I do have to pay SS tax.

Usually paid by check.

Estimated tax is paid by check and a paper is included (which IRS gives you) showing how much you need to send in for each quarter.

Ann

Take a look at Schedule SE (available from the IRS website) - its the form that covers SS payments for self-employers. (And yes, you can usually deduct half of the amount of SS tax on the 1040 itself - explained at the bottom of the Sch. SE).

Yes, you can deduct half but it is only against your income to help lower your Fed income tax but the SS tax is paid and added to your taxes in the full amount that has been shown on the SE form.

Ann

lTo reduce your worries about making quarterly payments and such, you can always check the backup withholding box on your W-9. Google will then send 28% of your check to the government the same way that an employer will withold your social security and income taxes.

I've checked in Adsense "Exempt from backup withholding".
So do I have to pay quarterly, right? When exactly?

Ann wrote: "Usually paid by check. Estimated tax is paid by check and a paper is included (which IRS gives you) showing how much you need to send in for each quarter."

Which paper IRS will give me? I'm confused... Do I have to wait for IRS to tell me when and how much to pay?

Please advice.
Thanks!

Don't worry, out of the blue they will send you the forms if you haven't been paying up. I got my letter several months ago. This year I expect to pay about 24K in taxes, not small change and penalties make it even worse. Unfortunately, I have no dependants so may consider taking in a few orphan children.

Spacey,

I am up for adoption...:)

Usually the software I mentioned can offer you the option of computing your quarterly taxes for the coming year and you will be able to print out the forms from it. The forms will tell you the amounts plus the dates each payment must be sent by.

Good luck.

Ann

I did something like that, Ann. An accountant told me how much I had to pay quarterly based on last years income but the IRS wrote and said that wasn't good enough and wanted me to fill out the long form to send in (with a check) quarterly.

Where do I sign the adoption papers?

so what would you reccomend me to do? Just wait?

Sorry for a lot of questions... I'm new with all this stuff...

and.. I just started erning money with Adsense like 3 days ago. I just don't want to screw things up with IRS

Avoid them until they come after you is probably not the best advice, so I better not comment further.

is there any kind of deductions on federal taxes for self-emplyee?

Sure, if you're running a real business. I keep my business accounts 100% separate (separate bank account, credit card, accounting software, computer, etc.). I can deduct all reasonable business-related expenses (computers, software, traveling to conferences, ISP bill, domain fees, office supplies, etc.).

I tend to avoid well-known red flags like the "home office" deduction, which wouldn't add up to much for me anyway (though, if I were ever audited and found wanting, I would certainly decide to retroactively claim that deduction). OTOH, I have not avoided the red flag of deducting computer purchases. I amortize them over the prescribed period.

If you're serious about being self-employed, you should invest the time to get familiar with this stuff. It's not rocket science, and tends to change only slowly year to year. Get a copy of "Small-Time Operator" by Kamoroff; it's the classic.

Unfortunately, I have no dependants so may consider taking in a few orphan children.

Unfortunately, dependants won't do anything to lower your SS taxes. Those taxes are based solely on your self-employment profit.

If you have $1,000 of self-employment profit, but end up with a negative taxable income (because of all your deductions not related to the business), you'll still owe taxes on that $1,000.

[edited by: LifeinAsia at 8:09 pm (utc) on Oct. 13, 2006]

I tend to avoid well-known red flags like the "home office" deduction

That one's a good one to avoid. The way it is currently set up, it will probably cost you more when you sell your house than you save in taxes.

The way it is currently set up, it will probably cost you more when you sell your house than you save in taxes.

For some people, it may cost more, but for others it will be less. As in almost all things tax-related, it depends on the situation and you should consult a tax professional about your specific situation and circumstances.

mnemonik23,

As a former bookeeper/accountant I would strongly encouarage you to consult with a CPA or an EA (Enrolled Agent) at least initially. It's very important *not* to avoid the IRS! By the time they catch up with you, you may owe penalties and interest in addition to the regular self-employment taxes (social security & medicare).

If you are comfortable using a program like TurboTax and can keep your records reasonably up-to-date (at least on a quarterly basis) with Quicken or Quickbooks, then you will probably do just fine preparing the tax payments yourself. But I would highly recommend that you have a tax professional at least help you get set up and started with the process. They can advise you on what you need to track, keep records of, and for how long. In addition, they may be able to recommend some tax-saving strategies for the long haul.

There's no need to panic if you have just started earning AdSense income, but you definitely should take a pro-active approach to getting organized and prepared by the end of the year. Hope this helps!

I saw two people here that commented that they don't want to take the home office deduction because of all the fear the IRS has created surrounding this. I am no CPA, but if the deduction is a legal deduction and you have set it up and followed it properly then there is no reason you should be scared of it.

Quite frankly this is what the IRS hopes for, they do a few high profile terrorist like tactics against some self employed individuals and bingo, people are scared to death of this deduction, creating an instant tax increase for your favorite uncle.

When I asked my CPA this very question he told me that just being self-employed was a HUGE red flag to the IRS in the first place and just by this alone you were under increased scrutiny so why not take all the legal deductions you are entitled to. I take them all and keep excellent records and a good accountant to call on, just in case.

Fortune Hunter

I was speaking to Wesly Snipes and he says it ain't no big deal not paying taxes...

But seriously,

If you create a little business the business can pay you a salary - say $30K. Everything the business makes above that will not be charged SS + medicare taxes. (You get the profits right in your pocket).

Sincerely,
#8977555
San Quentin, Rm 301

Another way to reduce your self employment tax is to set up a solo 401(k) plan. I just did this for my business and all of my contributions up to a certain limit are considered "employer" contributions, which is an expense to the company and hence lowers your net income, which is subject to self employment taxes.

My financial planner put this plan in place for $100 bucks per year through Oppenheimer funds. If anyone is self employed and makes any real amount of money doing this they should have one of these and max it out every year. After all every dollar contributed lowers your taxable income by the same dollar amount. For self employed people that is like having uncle sam finance your retirement for you! I can't think of too many things better than that.

Fortune Hunter