[quote]Even though my tax bracket is at 25% -- my effective tax rate ended up being about 13%. So for this additional job I would have to apply the higher 25% rate and 15%?
Your "marginal" tax rate is the rate at which the next dollar of income would be taxed. If that is 25%, then that's what the additional income will be subject to (or higher, if it is sufficient to put you in the 28% bracket, which starts at $85,650 of taxable incone for 2012). Plus, of course, the separate 15.3% SE tax.
Your "effective" tax rate is simply the average ... total tax divided by total income ... and is pretty much meaningless for planning purposes.
[quote]If I convert an extra room into an exclusive office would I be delusional to think I could lower this rate via deductions?
You can prorate utilities, rent (or interest/taxes if you own, plus depreciation deductions), using the guidelines in IRS Pub 587.
[quote]Finally, if the company is simply sending out a check and not reporting to the IRS -- what stops me from simply not reporting the income at all?
Look directly into the tiny camera that is embedded in the upper right hand corner of your monitor (It only looks like a scratch, but it is really a tiny lens), which just saw you suggest committing tax fraud. The IRS is sending out its flying monkeys as we speak ... :)
OK, I'm kidding. Yes, some people do get away with not reporting income. And many others don't get away with it, and regret having done it, since the penalties and fines the IRS can come up with (not to mention the hassles) can come to several times what the original tax would have been. I do not recommend it.
[quote] Would I face a lower rate if I incorporated?
First of all, unless they agree to hire the corporation instead of you (which is unlikely), it would not be the corporation's income, but still your personal income.
Also, corporations cost money to form, to maintain (in some states, as much as $800 a year, BESIDES whatever income tax it pays), and to close when you no longer want it. You would become an employee of the corp, and would have to pay federal and state employment taxes, including unemployment taxes, in case you ever decide to fire yourself. It creates many layers of complexity and additional (and avoidable) costs that will NEVER (in most cases) be justified by any kind of savings. Bad idea.
Consider that, on your current job, you are paying income tax at a 25% marginal rate (you said), plus they are taking out (usually) 7.65% in employee Social Security and Medicare taxes, for a total of 32.65%%. All that happens if you are self-employed is that 7.65% tax doubles, since you are considered both employer/employee. That's the cost of making money, paying taxes on it. Many people out there right now wish they had that opportunity.