You asked, we answered! Due to the amazing response of tax questions that we received ahead of the podcast with Maggie Klokkenga, CPA, CFP®, we knew that we couldn’t answer them all in Mailbag. Instead, we asked Maggie to answer your questions. We have split them up by topic. So, without further ado, Maggie answers your standard deduction-related questions.
I have a W-2 job and three 1099 jobs. Are there any changes from the new tax law that affect my side hustle jobs? Can I still itemize my business expenses and take the standard deduction? At what point do I begin to pay quarterly taxes and how do I do that?
First of all, go you with all your side hustles! Let’s break this down and answer your questions one at a time.
There are a couple changes from the new tax law that affect the self-employed:
- The Tax Cuts and Jobs Act created a pass-through deduction under Section 199A that is referred to as the Qualified Business Income (QBI) deduction. Pass-through means exactly that: It passes through the entity and can be reported on your individual tax return. Up to 20% of Qualified Business Income (QBI) from a sole proprietorship, partnership, S corporation, trust or estate can be deducted on an individual tax return. The deduction is phased out, or reduced, if your overall taxable income (meaning on your individual tax return, not just your business) is over $315,000 if you’re married filing jointly or $157,500 if you file otherwise. There are other limitations, too. Fortunately, the tax filing software companies have a handle on what questions to ask you to determine if you can take the deduction; just be sure to purchase software that incorporates business income. Or, if you have a tax preparer, talk with her/him to see if you qualify.
- Other changes include an increased depreciation deduction if you use your car for your business (even partially). Meals continue to be 50% deductible, but entertainment expenses are no longer deductible.
Onto the second part of your question: Yes, you can still deduct your business expenses against your 1099 income and take the standard deduction on your individual tax return. They are two different deductions: Business expenses are typically reported on Schedule C, and the standard deduction is taken on Page 2 of your tax return.
Your final question is about when and how to make quarterly tax payments. If you expect to owe more than $1,000 in tax when you file your tax return, you need to increase your tax payments to avoid underpayment penalties. You can do this one of two ways: Increase your withholdings on your W-2 job or pay quarterly estimates.
- Increase your withholding: File a new W-4 for your employer. If you work in an income-tax-paying state, then ask for and file both a federal and state W-4. It sounds counterintuitive, but in order to increase your withholdings, you claim less exemptions on the W-4. If you want to claim the maximum amount, state that you’re filing as single, or married but withhold at higher single rate, and zero exemptions.
- Pay quarterly estimates: For your 1099 income, subtract any deductions that apply to that income first. Review the 2019 Tax Rate Schedules, which you can find on www.irs.gov, to calculate the ordinary tax liability. Because 1099 income is self-employment income, 92.35% (yes, an odd percentage) of your income is taxed at an additional 15.3%. Add the two liabilities together and divide by four to determine your quarterly payment amount.
- For example, you have $12,500 of 1099 income, but you have $2,500 of deductions that are related to that business, so your net 1099 income is $10,000. 92.35% of your self-employment income is subject to tax, so $9,235 x 15.3% is $1,413. For your ordinary tax, $9,235 is taxed at the 10% tax rate, which equals $924. Add the two together, and $2,337 is your total, divided by four equals $585 (rounding up throughout). This example doesn’t take into account any other income and deductions, which can impact the quarterly estimated tax amount.
I probably won’t need to itemize this year since the standard deduction will cover my typical expenses. Can I use last year and this year’s expenses next year to put my over the $12,000 deduction?
You can only claim expenses in the year that they were paid, so no to your question, but I have an answer for 2019 and beyond: lumping and clumping. You may also see the term “bunching.” Essentially, you lump together all your deductions in the same year in order to maximize itemizing your deductions. This includes clumping your charitable contributions. If you’re charitably inclined, you can open a donor-advised fund. You can donate cash or stock to the donor-advised fund and get the deduction on your tax return, but you can wait to make grants to different charities until subsequent tax years.
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Or have a question related to filing taxes for the first time? See Maggie’s previous Q&A.