Does this sound correct?

[Carol1862]

I was offered a freelance job which can easily be done in the home. Because I did not anticipate this I got a healthcare plan with a subsidy. If I take the job it’ll put me over the cliff. I’ll have to pay an additional $5500.

I informed the company that they would have to pay this amount or it’s not feasible for me to do the project. I went online, plugged in some numbers, and came up with the amount of $11,000 they would have to pay

Breakdown: on $11,000 federal taxes (22%) $2420, fica $682, Medicare $160, State taxes $770 and self employment tax $1430

Taxes=$5462. $11,000-$5462=$5538

It kind of seems unreal that they need to pay me double to get me to clear the $5500 I’d owe. Please verify I did this correctly. Thank you

 

[niven]

No, that doesn't look right. I don't see how you could qualify for an ACA plan with subsidy and be totally in the 22% Federal tax bracket, but I may be wrong about that. Also, self employment taxes pay both halves of the social security and medicare taxes, so do not take out your half again.

 

[RunningBum]

I suppose it could be correct. You don't say what your filing status is, current income, etc, needed to do a full verification. The subsidy cliff can indeed be a steep one.

If it is correct, why would you work for $11,000 just to break even on taxes? That would be basically working for nothing.

Also, could you give a more descriptive thread title than one that gives absolutely no indication of what you are asking us about? It could help you get more responses, and it certainly helps anyone who might have a similar question find this thread for answers. Thanks.

 

[Sunset]

I don't have ACA, but wonder can the income be lowered by doing IRA/401K contributions so ACA still applies ?

 

[Carol1862]

Not sure how to change the title but will play around and see if I can. In the meantime, I file jointly and our income, if I take this on, will increase to a point that even with IRA contributions we will be over the cliff. Interest, dividends, rent money from a rental unit we own plus my income will put us over.

I spoke to the company and explained that if I took the job they’d have to pay me the amount I’d owe to ACA, which is the $5500. They’d pay it as a bonus and will have to add all of the taxes on so I clear the $5500.

 

[Dtail]

If you don't need the money, how about they pay on a deferred basis next Jan 1st?

 

[Carol1862]

If you don't need the money, how about they pay on a deferred basis next Jan 1st?

They did suggest this, but that’s a long time off and I just don’t think it’d be a prudent decision.

 

[braumeister]

Not sure how to change the title but will play around and see if I can.

You can always ask any of the mods to change a thread title.

 

[SecondCor521]

If it is correct, why would you work for $11,000 just to break even on taxes? That would be basically working for nothing.

I think they're working for $X, will end up having to pay $5500 in extra cliff-related taxes, and are asking the company to reimburse the $5500 net, so grossed up for taxes which becomes the $11K. After all that washes out, they'd still get paid $X for doing the work itself.

 

[pb4uski]

I was offered a freelance job which can easily be done in the home. Because I did not anticipate this I got a healthcare plan with a subsidy. If I take the job it’ll put me over the cliff. I’ll have to pay an additional $5500.

I informed the company that they would have to pay this amount or it’s not feasible for me to do the project. I went online, plugged in some numbers, and came up with the amount of $11,000 they would have to pay

Breakdown: on $11,000 federal taxes (22%) $2420, fica $682, Medicare $160, State taxes $770 and self employment tax $1430

Taxes=$5462. $11,000-$5462=$5538

It kind of seems unreal that they need to pay me double to get me to clear the $5500 I’d owe. Please verify I did this correctly. Thank you

If you receive money as a free lancer, you'll pay federal and state income tax and self-employment tax.... but I don't get FICA and Medicare tax that you include... those are already in the self-employment tax.

If the federal marginal tax is 22% and self-employment tax is 15.3% and state income tax is 7% that is 44.3% in taxes... so $5,500/(1-44.3%) is $9,874.

Income......................................$9,874
Federal income tax @ 22%............-2,172
Self-employement tax...................-1,511
State income tax at 7%...................-691

Net income.................................$5,500

But.... in reality it is more complex than that since self employment tax is deductible so the 22% should be 18.6% (22%*(1-15.3%)) and assuming that state income tax is based on federal taxable income then that rate would be 5.9% (7%*(1-15.3%)). That would make the calculation as follows:

$5,500/(1 - 15.3% - 22%*(1-15.3%) -7%*(1-15.3%)) = $9,146

Income......................................$9,146
Self-employement tax@ 15.3%......-1,398
Taxable income.............................7,748

Federal income tax @ 22%............-1,705
State income tax at 7%...................-542
Rounding..........................................-1

Net income.................................$5,500

Since there are so many moving parts it might be best to do a pro forma 2020 tax return with and without the freelancing income and solve for the added freelancing income to make you whole for the loss of the ACA credits.

Also, the What-If Worksheet in Turbo Tax might be useful but that won't include the state income tax impacts... you'll have to include those separately or set up a pro forma return in a separate file.

 

[Carol1862]

If you receive money as a free lancer, you'll pay federal and state income tax and self-employment tax.... but I don't get FICA and Medicare tax that you include... those are already in the self-employment tax.

If the federal marginal tax is 22% and self-employment tax is 15.3% and state income tax is 7% that is 44.3% in taxes... so $5,500/(1-44.3%) is $9,874.

Income......................................$9,874
Federal income tax @ 22%............-2,172
Self-employement tax...................-1,511
State income tax at 7%...................-691

Net income.................................$5,500

But.... in reality it is more complex than that since self employment tax is deductible so the 22% should be 18.6% (22%*(1-15.3%)) and assuming that state income tax is based on federal taxable income then that rate would be 5.9% (7%*(1-15.3%)). That would make the calculation as follows:

$5,500/(1 - 15.3% - 22%*(1-15.3%) -7%*(1-15.3%)) = $9,146

Income......................................$9,146
Self-employement tax@ 15.3%......-1,398
Taxable income.............................7,748

Federal income tax @ 22%............-1,705
State income tax at 7%...................-542
Rounding..........................................-1

Net income.................................$5,500

Since there are so many moving parts it might be best to do a pro forma 2020 tax return with and without the freelancing income and solve for the added freelancing income to make you whole for the loss of the ACA credits.

Also, the What-If Worksheet in Turbo Tax might be useful but that won't include the state income tax impacts... you'll have to include those separately or set up a pro forma return in a separate file.

This is AWESOME. Thank you so much for the detailed explanation that I can understand. Really appreciate the time and effort you gave.

 

[Carol1862]

I think they're working for $X, will end up having to pay $5500 in extra cliff-related taxes, and are asking the company to reimburse the $5500 net, so grossed up for taxes which becomes the $11K. After all that washes out, they'd still get paid $X for doing the work itself.

Yes, exactly