These days it is very common for individuals to have regular income, as well as supplemental income. While regular income earned through an employer typically has taxes withheld, some supplemental income does not. If you earn supplemental income, it’s important to learn how it is taxed and when. Here is a brief overview of supplemental income tax.
What Is Supplemental Income?
Supplemental income refers to additional earnings received beyond one’s primary source of income. It typically includes money earned from part-time jobs, freelance work, investments, rental properties, or other side ventures. The purpose of supplemental income is to supplement or add to the individual’s main source of income, providing extra financial support or flexibility. Even if you only work a regular 9 to 5 job, you may still earn supplemental income through any of the following sources:
Some taxpayers do not have regular income through an employer. Instead, they may earn supplemental income through contract work or through a business. Some examples of supplemental income for these groups are:
Schedule E income
Ridesharing service
Sales made through an online shop
Direct sales
How Is Supplemental Income Taxed?
How supplemental income is taxed depends on how the income is classified. For example, income reported on Schedule E will usually consist of estates, trust, real estate rental income, royalties, partnership and S corporation income, and residual interests in real estate mortgage investment conduits (REMICs).
Estates and Trusts
Beneficiaries pay tax on the income of the estate or trust they inherit at their regular income tax rates and at capital gains rates for any capital gains they receive. In addition, if the estate or trust does not distribute all the income to the beneficiaries it will pay tax on any undistributed income.
Royalties
If you are paid royalties for the use of any of your intangible assets, you will receive a Form 1099-MISC that tells you the amount of royalties to report on Schedule E. Royalties are taxed at your regular income tax rate.
Business Income from Partnerships and S-Corps
Taxes for S-Corps pass through to shareholders. Additionally, taxes for partnerships pass through to the partner’s personal income. The tax rate will depend on personal income rates.
Real Estate Rental Income
The tax rate for rental real estate varies from 10% to 37%, depending on your filing status and taxable income.
Tax Rates
Supplemental income for employees is based on personal income tax rates. However, the amount withheld will vary depending on whether your employer pays it out with your regular wages or separately. If it’s combined with your wages, the amount withheld will typically be withheld like wages. If they are paid out separately, employers can withhold at the IRS’s flat rate of 22%. Finally, taxpayers who earn $1 million in supplemental income, it will be taxed at 37%.
You should report supplemental income earned through gig, contract, or freelance work on your individual tax return using Schedule C. In addition, if you receive any 1099 Forms, you should use these to calculate your total income through independent work.
Tax Help for Supplemental Income Earners
Tax policy can change every now and then. If you earn any type of supplemental income, you should stay up to date on all the most recent changes in taxation rules. For example, in 2024 the rules for reporting income earned through Form 1099 are changing drastically. Being unprepared for a change in policy could lead to all sorts of issues. Examples include a large tax bill to an IRS audit. When in doubt, your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. Regardless, if you need tax help, Optima and our team of experts are here.
Losing your job is stressful enough as it is. If you are offered a severance package when let go, your first thought might not be on taxes. However, even severance pay is considered income which means it is taxable. Here we will discuss what you need to know about severance packages and how they affect your taxes.
What Is a Severance Package?
A severance package is a combination of pay and benefits offered to employees after being laid off from an employer. To receive the package, an employee will typically need to sign a severance agreement that details the amount of pay to be received, as well as any benefits that will be offered. The agreement may also list terms that the employee must abide by to receive the package. For example, accepting a severance package could mean that you are not eligible to file a wrongful termination lawsuit or collect unemployment benefits. Severance packages are offered at the employer’s discretion. In other words, employers are not legally obligated to offer a laid off employee any severance pay.
Is Severance Pay Taxable?
Severance pay is taxable, similar to any regular wages or salary income you earned prior to being laid off. Severance pay is taxed in the year of payment and most employers will include your severance pay on your W-2, along with any unused accrued vacation or sick time. Employers will typically withhold federal and state taxes for you, including:
Social Security tax
Medicare tax
Federal income tax withholding
State income tax withholding (if applicable)
Federal unemployment tax (FUTA)
Are There Any Tax Deductions for Job Hunting?
As of the 2017 Tax Cuts and Jobs Act, taxpayers may no longer write off job hunting or moving expenses.
How Does Severance Pay Affect My Taxes?
In some cases, not enough taxes are withheld from severance pay. If this happens, you might owe during tax time. To avoid this, you can confirm your withholding is correct or make an estimated tax payment on the IRS website.
Another scenario can involve a large severance package bumping you up into a higher tax bracket. This could happen because your income is taxed the year it is received. For example, if you receive six months of severance pay at the end of the year, you will essentially receive 18 months’ worth of pay, which could be a drastic increase in income compared to the previous year. This could cause a change in your tax rate and disqualify you from certain credits and deductions.
If you find yourself in the above scenario, there are ways to minimize your tax bill. For example, you can contribute to a tax-deferred retirement account, add funds to a health savings account (HSA), or open a 529 plan for your child’s college fund. You can also ask your employer to have the severance payments spread out to avoid a large tax bill.
Tax Help for Those Who Received Severance Pay
If you were recently laid off and received a severance package, you should make sure enough taxes were withheld. If it’s clear that is not the case, you can still avoid a large tax bill. Your best bet is to speak to a trusted tax professional to avoid a stressful tax issue.
Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Being your own boss can feel freeing and powerful. However, with great power comes great responsibility, especially when it comes to taxes. Taking care of all business aspects on your own means you should be prepared to handle all the financial work that comes with the new adventure. Here’s a brief tax guide for the self-employed.
Get Financially Organized
There’s nothing worse than scrambling for income and expenses during tax time. Staying organized throughout the year can save you time and money. You’ll want to maintain accurate records including:
Income statements with invoices, receipts, Forms 1099, etc.
Purchase invoices
Receipts for travel, transportation, entertainment, and gifts that are business-related
A breakdown of your assets, including purchase price, cost of improvements, depreciation deductions, etc.
Employment tax records
Know Your Responsibilities
You are already responsible for the success of your business. However, you also need to know your financial responsibilities to maintain your business. This includes paying self-employment taxes and quarterly estimated tax payments. If you earned $400 or more in 2022, you need to pay self-employment taxes. The current rate for self-employment tax is 15.3% of your net earnings, which consists of social security and Medicare tax. The good news is that since in a typical job, the employer is responsible for paying half of this tax, you’ll be able to deduct 50% of your self-employment tax during tax time.
Unfortunately, you won’t have an employer to withhold tax from your self-employed income. That said, you’ll need to make estimated tax payments by each quarterly deadline:
April 18, 2023
June 15, 2023
September 15, 2023
January 16, 2024
You should make estimated tax payments if you expect to owe more than $1,000 in federal taxes for the year. If you do not make these payments, you could face underpayment penalties.
Take Advantage of Tax Deductions
As a business owner, you have the benefit of writing off expenses that most employees cannot, as long as they are ordinary and necessary for business operations. You can write off advertising costs, supplies, legal fees, repairs, vehicle expenses, business travel and entertainment, and even more if you operate your business from home. If you aren’t eligible to participate in your spouse’s workplace health plan, you can typically pay for your own health insurance and deduct your premiums.
Those who have a business loan or business insurance can also deduct the loan interest and insurance premiums. If you only take advantage of one deduction as a business owner, you should consider the one for self-employed retirement plan contributions to an SEP-IRA, SIMPLE IRA, or 401(k). These accounts can reduce your tax bill at tax time and help you accrue tax-deferred investments gains in the future. Be sure to look into all tax deductions available so your taxable income is reduced.
Tax Help for the Self-Employed
Running a business, whether small or large, has immense opportunities for financial success. However, all of that hard work and prosperity can be taken away if you do not file your taxes correctly. In the worst-case scenario, owing the IRS taxes and not being able to pay can result in a tax lien, which can shut down your business. If this is your first year as a business owner, start off right by knowing your tax responsibilities. If you’ve had your business a while but need tax help now, we can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here, we will continue to review some of the most common life transitions that can affect your taxes.
Buying or Selling a Home
There are several tax benefits to becoming a homeowner. For example, homeowners can deduct expenses like mortgage interest, real estate taxes, mortgage points, and insurance premiums. In addition to these deductions, new homeowners can also take advantage of penalty-free IRA withdrawals used to pay for the down payment on their home purchase.
On the other hand, selling a home can mean turning profit, especially in a seller’s market. However, homeowners should stay mindful of capital gains taxes. Single filers who sell their home after owning and living in the house for at least two of the last five years before a sale can avoid paying taxes on the first $250,000 of profit from the sale. Married couples filing jointly in the same scenario can avoid paying taxes on the first $500,000 of the profit from the sale. Any excess profit will be subject to capital gains taxes, which can be a hefty and unplanned expense.
Accepting an Inheritance
If you receive an inheritance a loved one passes, you might wonder if any of it is taxable. In general, money inherited is not taxable. If you receive property, things are a little more complicated. You will receive the home at its fair market value determined on the date of inheritance. If you sell the property for more than the fair market value, you’ll be taxed on those gains only. If you inherit an IRA account, the rules of taxation vary depending on your relationship to the original account owner. Generally, you’ll likely be taxed on any distributions taken from the account.
Retiring
If you currently save for retirement, you might already know that you are eligible for certain tax breaks, like deducting contributions to your 401(k) or traditional IRA accounts. On the other hand, when it comes to taking distributions on these accounts, you will have to pay income tax on your withdrawals each year. You will not owe taxes on Roth IRA withdrawals since your contributions were made with after-tax dollars.
Dealing With Taxes After Death
Many taxpayers are unaware that after death, one final tax return will need to be filed in your name. If you’re married, your spouse will be able to file a joint return one last time. Your spouse, or other named representative, may even need to file an estate tax return, which summarizes the assets of the deceased.
Tax Help for All Life Transitions
You may not be at an age to begin worrying about how these life transitions could affect your taxes. However, being unprepared is what can lead to financial mishaps. So again, plan for the year ahead so you are not blindsided by a large tax bill in the future. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here are some of the most common life transitions that can affect your taxes.
Getting Married
While a wedding will bring many types of joy, newlyweds can also celebrate new tax breaks. Once you are married, you and your spouse will have the benefit of filing jointly. This filing status can offer lower tax rates and a higher standard deduction. Married couples filing jointly also have extra tax perks to look forward to. For example, if you are not working, you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses.
Having a Baby
Having a baby, or growing your family in other ways, can significantly reduce your tax liability. Claiming dependents can grant access to new tax credits and deductions. The Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Credit, Adoption Credit, the Credit for Other Dependents, and higher education credits are just a few examples of credits available for those who can claim dependents.
Education Expenses
If you have recently decided to go back to school, or if you have a dependent who will be attending college soon, you might be able to take advantage of some education-related tax breaks. There are tax credits available to students to help offset qualifying expenses. Credits like the American Opportunity Credit and the Lifetime Leaning Credit can help. If you have already graduated and are now paying student loans, you can deduct up to $2,500 of your student loan interest during tax time.
Moving Out of State
Sometimes new opportunities come from out-of-state and moving states can affect your tax bill. Aside from moving expenses, you’ll need to figure out if you’ll be paying less or more taxes in your new state of residency. States like California and New York have much higher tax rates compared to others. Some states do not have any income tax. It’s important to factor this into your budget before you decide to make the big move.
Accepting a Promotion at Work
After properly celebrating a job well done, you might want to consider how your new role at work can affect your taxes. A bump in pay can also bump you up into a higher tax bracket, which means more taxes owed. For most, the tradeoff is worth it, but either way you should do the math to be prepared for tax season. To help offset any additional costs during tax time, you can also adjust your W-4 withholding.
Tax Help for All Life Transitions
The best thing you can do is prepare for the aftermath of each of these changes. Plan for the year ahead so you are not blindsided by a large tax bill next filing season. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
