For simplicity, let’s assume that I earn $100 working full-time and pay $50 in taxes each year. This leaves me with $50 in my pocket.
Now let’s say that in addition to my income, I start a YouTube channel reviewing perishable widgets costing $1.
Ignoring any other costs and expenses, if I spent $5 reviewing 5 widgets this year and have $45 left in my pocket, assuming any income the channel earns me will also be taxed at 50%, how much money will I have in my pocket after tax season if the channel earns me:
1) $0
2) $5
3) $10
4) $25
Thanks!
In: 2
The correct way to do this is to calculate the business taxable income. Then add that to your existing income and apply your tax rate. So lets assume the tax rate is a constant 50% and that there’s no other tax deductions or credits.
So example 1, $100 in employment income, 50% tax rate means tax payable of $50 and after tax income of $50.
1. $0 in business revenue with $5 in expenses means a taxable income (loss) of -$5.
2. This example has $5 of revenue and $5 of expenses for a business income of $0.
3. I’ll skip the details and just say that 10-5 is $5 of business income.
4. $20 of business income.
SO now you take the employment income ($100) and add the business income to get the total taxable income. Then we apply the 50% tax rate.
1. $100 – $5 = $95. Pay $47.5 in taxes, keep $47.5 in your pocket.
2. $100 + 0 = $100, $50 in tax, $50 in pocket.
3. $100+ $5 = $105, $52.50 in taxes and same in your pocket.
4. $100+$20=$120, $60 in your pocket and the same to the tax man.
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