‘What is going on with America?’: Independent contractor from California got a tax bill that costs more than her student loan. How to make sure this doesn’t happen to you

Tax season is right around the corner, but it’s not exactly a welcome time for some people. In fact, for many, it’s downright anxiety-inducing.

A TikToker who goes by WestCoastFairy went viral after she posted a video about a tax bill that costs more than her student loan.

The 25-year-old independent contractor and startup founder says she made $100,000 last year — and owes $26,000 in taxes. Nearly $18,000 of that amount goes to the federal government, while the leftover $8,000 goes to the state of California, where she lives.

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WestCoastFairy says her tax bill comes to nearly the same amount as her student loan of $27,000.

“What is going on with America?” she says. “I don’t know what to do. It’s so scary.”

However, WestCoastFairy admits in a follow-up video that there’s a lot she didn’t realize about filing her taxes.

Here’s what you can learn from her mistakes — and ensure you don’t get a surprise tax bill this year.

Her tax bill

WestCoastFairy’s tax bill isn’t actually that out-of-whack. In fact, her accountant probably did quite a bit of handiwork to get it reduced.

For the 2023 tax year, the IRS charges a 24% federal tax rate on incomes between $95,376 and $182,100 — which would be around $24,000 for WestCoastFairy’s $100,000 income. However, she was only charged $18,000, so she technically got a $6,000 break.

The California tax rate can be a bit more complex to figure out, but it would probably come in at a rate of 9.3% for $100,000 income (around $9,300). So, her $8,000 state tax bill adds up.

As one commenter says about WestCoastFairy’s tax bill: “Sounds like a bargain.”

30% rule

However, the reason that WestCoastFairy is reduced to tears in her video is not because she has to pay the bill. It’s because she thought she knew how much she’d have to pay and saved for that specific (albeit incorrect) amount.

As many commenters point out, a good way to avoid this situation is to save 30% off each paycheck. Even personal finance celebrity Dave Ramsey backs this advice for individual contractors or business owners like WestCoastFairy.

If WestCoastFairy had put aside 30% of her income, she would have $30,000 saved — $4,000 more than what she needs to pay off her tax bill.

It’s pretty common for people like WestCoastFairy to not know how much to set aside for taxes when they start their own businesses or independent contract work. Anyone with an employer has tax taken off their paycheck without them even knowing. So, it’s quite an adjustment.

The fact that WestCoastFairy already started taking money aside every month to pay off her taxes is a good start — she just needs to put aside a bit more for next year.

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Health write-offs are key

WestCoastFairy is stunned by her tax bill because she paid around $10,000 for health insurance and another $10,000 for out-of-pocket health costs, including an ER trip and prescription drugs.

She says none of these expenses count toward a tax deduction.

As commenters point out, a health-savings account (HSA) would offset these costs and lower her tax bill.

An HSA is a type of savings account that allows you to set aside money for certain medical expenses. If you have an employer-sponsored HSA, you’re able to stow away money and withdraw it tax-free, as long as it goes toward qualified expenses. If you deposit money outside your payroll, those funds are tax deductible.

There is a maximum amount that you can put in your HSA every year. The 2024 maximum amount is $4,150 for an individual and $8,300 for a family, according to the IRS.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.