Introduction and Overview of Income Taxes
Marissa Danley (00:01):
All righty. So today we are talking about taxes for the self employed, which includes gig workers and independent contractors. So that might be, you know, Uber drivers, uh, Door Dash, anything that is part of the so-called gig economy. Um, again, we’ve already done some interductions, my name is Marisa Danley. Uh, I own inclusion tax services, which is located here in Portland. Um, but we are virtual at this point and I honestly have clients around the globe. So it’s not just limited to Portland, Oregon, or Oregon in general. Um, as I mentioned, I’m a licensed tax consultant. Uh, I am an enrolled agent and I do have a master’s in business administration, focusing on small business development. Here is my website.
Marissa Danley (00:53):
You can reach me here and again, feel free to send me any questions or anything that might come up and welcome again, very, very glad that you are here. So real quick, we’re gonna go over our agenda. And like I said, there’s a lot here. I’m gonna throw a lot at you. Um, if you do have questions, you’re like, what are we talking about? Feel free to get in touch. We are going to talk about how income taxes will work. We are going to talk about what self-employment actually is. We’re gonna talk about some common deductions, a few little odds and ends, and then some COVID provisions. So first thing, I like start with, um, overview of how taxes, income taxes work, because, you know, as, as we’ve said, it is kind of this scary thing. We don’t really know what we do. We just fill out this form and we say, okay, here, take our stuff.
Marissa Danley (01:57):
Hopefully we get some money back. So I like to talk about how this works at the beginning, so that when I later talk about deductions, when I later talk about what self-employment tax is, you have a little bit of context. So we’re gonna walk through what taxes are, income taxes and how they work. So here’s the deal in the United States. For the most part, we pay to tax on all income, unless it’s specifically excluded by a law. So with that, I, what, by that, I mean, things like wages from, um, a job interest and dividends from a bank account, unemployment self-employment, those things are specifically not excluded by law. So we have, have to include them just because they told us we didn’t tell us that we couldn’t. Um, so that being said, we’re, we’re paying tax on our income. Now we also get deductions for things.
Marissa Danley (03:00):
So we’re not paying tax on all of that income. And what I mean by that is, yes, I’m saying we’re taxed on income, but the government’s gonna say, well, we’re gonna give you some breaks. We’re not gonna make you pay tax on every dollar. And we’re gonna do that because we’re gonna incentivize you the tax code. So we want you to do certain things that we think are important to society. So things like, if you own a home, you’re gonna get a tax break. You maybe go to college or your kids go to college, you’re gonna get a tax break. Same thing with having a family. If you have some dependence, someone you’re taking care of, we’re gonna give you a little bit of a tax break.
Marissa Danley (03:42):
So we start with our income, we get our deductions. Then the government says, okay, so income minus deductions. We think you’re responsible for a certain amount of tax. So in Congress sets this it’s based on inflation and it’s based on marital status, a couple other things, but basically there’s a giant book that comes out with all the different tax rates and numbers each year. And so, as a, as a tax person, we look at your income minus your deductions. And then we say, okay, you have a certain amount of tax that you’re responsible for. A piece of the pie is X, Y, or Z. So in order to pay that we have our employer take tax out of our paycheck. So that’s how that gets paid. If we’re self-employed or have other types of income, we may need to make some payments to government to cover that bill.
Marissa Danley (04:40):
If we pay too much, we get a refund. When we do our return. If we pay too little, we owe when we do our return. So I, I like to put things into real world terms, cuz I’m throwing some jargon at you right now. But if you think about it like this, like say you get really ambitious one year and you are gonna pay your water bill up front. So, you know, in the past let’s say my water bill, it’s kind of expensive here in Portland. Actually let’s say my water bill is $1,500 the year before for 2021. And so January 1st, 2022, I say, well, I’ve got a little extra cash. I’m gonna get ahead and pay my water bill. So I send it to the city. I send ’em 1500 bucks. So the year goes by and turns out I only use $1,300 worth of water in 2022.
Marissa Danley (05:32):
So after that year, they’re gonna send me a check back for 200 bucks. That’s the same concept with taxes is we’re paying throughout the year. And we’re guessing what our taxes gonna be. We don’t know <affirmative> if we pay too much, they send it back. If we pay too little, we have to pay more. So hopefully we’re getting it about right. That’s what we wanna do. So let me give you an example here. And these are made up numbers. Don’t write these down. They’re not tax law. They’re just for an example. So this example is someone working as an employee. So they have a job somewhere where they’re making 20,000 bucks a year. So not self-employed working for someone else 20,000 bucks a year. So they get something. When we do our taxes, this is, this is one single person on a tax return. They’re gonna get something called a standard deduction.
Marissa Danley (06:26):
Now this is different than your business. So again, put your business stuff aside. So they’re gonna get a standard deduction, meaning they get that just for being a human being on a tax return. So they’re not gonna pay tax on $12,400 worth of income. So what I mean by that is they started with the 20. The IRS says, well, we’re gonna be nice and not tax on everything. You’re only responsible for paying tax on $7,600. <affirmative> okay. So these again are made up, made up numbers for the most part. So we’re only responsible for paying tax on that.
Marissa Danley (07:08):
Next thing we have to look at is your tax rate. So people ask me all this all the time. They say, well, what’s my tax bracket. And I say, well, you don’t really have one because it’s actually of a very confusing thing. What we more look at is your taxable income and then your tax rate, when you’re self-employed, we’re gonna talk about that in a little bit. It gets even a little crazier. Um, but in this example, we’re gonna say that this person is in the 10% tax rate area. So we’ll call it a bracket. That’s what we’re looking at. So this person is responsible for $760 worth of tax for the year. Now let’s keep going for a second. We’ve got a $760 tax bill. That doesn’t mean that they owe that when we’re doing the return, we’re just saying, that’s what they were responsible for.
Marissa Danley (08:06):
What they called a tax liability. That’s the official term. So this person had their employer withhold 1200 bucks throughout the year to prepay that tax bill. So, you know, those forms that no one ever including me so knows how to figure out those w four forms where you used to put like the 0 1, 2, 3 thing on there. Um, that’s what you’re doing when you, when you fill that out, you’re estimating how much you wanna put towards that tax bill. And in this case, this person overestimated, right? So they had 12, 1200 ticket out of their check. They only needed to have 760. So they’re gonna get a refund. They’re gonna get a $440 refund of their money. So that’s, that’s the basic example of how a return works. Of course, as I mentioned, when you’re self-employed, it gets a lot more complicated.