If you’ve been following us for the past few months, you’ve heard us say many times that Lili’s tax tools are here to help you save time and money on your taxes. It does look great on an ad. But what looks even better is when we actually deliver on our promise. So, let us show you exactly what we mean.
Step 1. Sort and categorize all your transactions from 2019
Step 2. Download your Income & Expense Report from the Lili app
Go to Statement & Documents in the menu and download your annual Income & Expense Report
Step 3. Determine your self-employment taxes
Self Employment taxes are simple: it’s a flat 15.3% of your gross income (circled in green). This rate consists of two parts: 12.4% for Social Security and 2.9% for Medicare. Your gross income is all the money you have received from clients this year for your work. Make sure not to count any funds you transferred from another account or money you received from friends and family!
So, let’s say you made $85,000 this year, your self-employment tax for 2019 will be $13,005.
Remember that number, since you are able to deduct 50% of your self-employment tax (so $6,503) when calculating your taxable income at step 4.2.
Step 4. Determine your income tax
Step 4.1 – Standard deduction or itemize?
Now you need to calculate your total business expenses for the year. With Lili, it’s easy! Just add up all the totals for each business category (circled in purple).
When it comes to deduction, the IRS offers a simple option which is to deduct a flat amount depending on your filing status, called the Standard Deduction.
For 2020, the Standard Deductions are
- Single: $12,400
- Married filing separately : $12,400
- Married filing jointly: $24,800
- Head of household: 18,650
But if the sum of your business expenses ends up being higher than the Standard Deduction that corresponds to your filing status, then you should itemize your deduction, meaning report your own number.
For example, as a single filer, if you have $15,000 of business expenses this year, you should choose the Itemized Deduction method, since the standard deduction is a lot less.
Step 4.2 – Determine your taxable income
This is where making sure you’re including ALL your business expenses from the year can save you some real money. We can now easily calculate your taxable income:
Gross Income – (Business Expenses + 50% Self Employment Tax) = Taxable Income
85,000 – (15,000 + (50% x 13,005)) = $63,498
Step 4.3 – Determine your tax bracket
Including all the deductions you’re eligible for when you file, can make you go from one bracket to the next. With a gross income of $85,000, you might think you will end up in the 24% bracket. But once you deduct all your business expenses and 50% of your self-employment taxes, your taxable income is actually $63,498 so your maximum bracket is now 22%.
Step 4.4 – Calculate your income tax.
Now keep in mind the US tax system is progressive, meaning you won’t pay 22% on ALL your taxable income, only the top dollars. You always pay the tax percentage that corresponds to each portion of your income (as shown here).
So with a $63,498 taxable income, you’ll calculate your income tax like this:
10% x 9,700 + 12% x (39,474-9,701) + 22% x (63,498-39,474)
= 970 + 3,573 + 5,285
And there it is! With a $63,498 in taxable income, you would owe $9,828 of income tax for 2019.
Now let’s say you didn’t keep very good track of your expenses and forgot about a few purchases throughout the year, and you end up accounting for only $12,500 of business expenses.
Let’s calculate your taxable income in this scenario:
85,000 – (12,500 + (50% x 13,005))
And let’s look at your income tax then:
10% x 9,700 + 12% x (39,474-9,701) + 22% x (65,997-39,474)
= 970 + 3,573 + 5,835
With a $65,997 taxable income, you would owe $10,378 of income tax for 2019 so $550 more.
And that’s how Lili Banking can help you save money on your taxes. You’re welcome.
This blog is for educational purposes only and some elements were simplified for the sake of the example. You should always refer to the IRS website and official forms to determine what you actually owe.