Paying taxes as a contract employee
September 28, 2011 9:52 AM Subscribe
Until this year, my wife and I have been salaried employees with large organizations. This year, she has become a contract employee for the first time, and neither of us knows much about the process of paying taxes (Social Security, Medicare, and income) in that mode.
We've talked with other self-employed people about income taxes, and have gotten responses like, "my CPA takes care of that," "never pay quarterly estimated taxes," and "always pay quarterly estimated taxes or you'll be audited." How are Social Security and Medicare taxes paid? Do you have any other suggestions for SE newbies?
We've talked with other self-employed people about income taxes, and have gotten responses like, "my CPA takes care of that," "never pay quarterly estimated taxes," and "always pay quarterly estimated taxes or you'll be audited." How are Social Security and Medicare taxes paid? Do you have any other suggestions for SE newbies?
So she is not a W-2 contractor, but a 1099 contractor ? Is anything taken out of her paycheck ?
If she is a 1099, then yes, you want to pay quarterly estimated taxes. There's plenty of info on the IRS web site for self-employed/contractor types.
You'll also want to really keep good records for what she can deduct.
posted by k5.user at 10:08 AM on September 28, 2011
If she is a 1099, then yes, you want to pay quarterly estimated taxes. There's plenty of info on the IRS web site for self-employed/contractor types.
You'll also want to really keep good records for what she can deduct.
posted by k5.user at 10:08 AM on September 28, 2011
I work as a freelancer so I know a little bit about paying taxes being self employed. I'm no expert but I do my taxes on turbo tax and it's no problem. I would probably recommend doing your taxes with an accountant the first time so you can see how things work as self employed. It also helps so you can start to understand deductions and write offs for being self employed which will save you money when paying taxes. But turbo tax works well for me. I know that money from my taxes goes into social security and medicare as part of the self-employment tax as Zsasa said. Technically your supposed to pay quarterly taxes. If you don't, you end up paying a penalty fee, which I've had to pay for not paying quarterly. I've never been audited. Your chances of being audited go up more so because of lots of write offs, making a ton of money, or simply not filing your taxes. I'd say that the most important thing is to keep good track of all your paperwork and receipts. Save tax returns for about 5 years. This way, if you ever do get audited you'll be prepared. Just follow what turbo tax or your reputable accountant says and you'll be fine.
posted by ljs30 at 10:13 AM on September 28, 2011 [1 favorite]
posted by ljs30 at 10:13 AM on September 28, 2011 [1 favorite]
If you don't do it, you'll wind up paying a penalty.
If you don't do it you can wind up paying a penalty, but not always. But in any case, it's a good idea to do it. If this is your first year with the 1099s, just make sure you're setting aside about 25% of your income to cover taxes. I use TurboTax to do my taxes [I have regular W-2s and a bunch of 1099s] and it steps me through it just fine. It will also explain how to pay estimated taxes for next year. For this year as long as you're not screwing yourself by not setting aside money for taxes you should be fine but it's not a bad idea to pay them. I have erratic 1099 money coming in and I don't pay quarterly but I wouldn't recommend this to anyone.
The basic deal with self-employment is that you're paying your own Sociail Security and Medicare which is why it seems like such a large chunk goes right out the window. Usually your employer would be paying this. However, unlike W-2 employment, you cn deduct a ton of stuff [possibly a home office, and a lot of other expenses] and so the amount you wind up paying taxes on could be less. So here's a crude example
- I make $30K in 1099 money
- I have $4K of deductions such as home office expenses, postage and a laptop that I use 75% for work
- I wind up paying taxes on $26K
You'll also want to look into doing some sort of an IRA that works favorably with this set-up (depending how much you're earning it may be better to make tax free contributions now or have tax free withdrawal later) and getting a clear idea of what sorts of thing might be dedictible under this new scenario [health care costs? home office? home internet to the percentage that you use it for work? mileage to/from job sites?] the system is complex but once you've been around the block with it a few times it starts to make a decent amount of sense. There are good books outlining how this sort of thing works as well and you might want to thumb through one at your local library.
posted by jessamyn at 10:13 AM on September 28, 2011
If you don't do it you can wind up paying a penalty, but not always. But in any case, it's a good idea to do it. If this is your first year with the 1099s, just make sure you're setting aside about 25% of your income to cover taxes. I use TurboTax to do my taxes [I have regular W-2s and a bunch of 1099s] and it steps me through it just fine. It will also explain how to pay estimated taxes for next year. For this year as long as you're not screwing yourself by not setting aside money for taxes you should be fine but it's not a bad idea to pay them. I have erratic 1099 money coming in and I don't pay quarterly but I wouldn't recommend this to anyone.
The basic deal with self-employment is that you're paying your own Sociail Security and Medicare which is why it seems like such a large chunk goes right out the window. Usually your employer would be paying this. However, unlike W-2 employment, you cn deduct a ton of stuff [possibly a home office, and a lot of other expenses] and so the amount you wind up paying taxes on could be less. So here's a crude example
- I make $30K in 1099 money
- I have $4K of deductions such as home office expenses, postage and a laptop that I use 75% for work
- I wind up paying taxes on $26K
You'll also want to look into doing some sort of an IRA that works favorably with this set-up (depending how much you're earning it may be better to make tax free contributions now or have tax free withdrawal later) and getting a clear idea of what sorts of thing might be dedictible under this new scenario [health care costs? home office? home internet to the percentage that you use it for work? mileage to/from job sites?] the system is complex but once you've been around the block with it a few times it starts to make a decent amount of sense. There are good books outlining how this sort of thing works as well and you might want to thumb through one at your local library.
posted by jessamyn at 10:13 AM on September 28, 2011
A CPA is worth far more than what they cost, especially in your first year. You want somebody to walk you through what you need to do going forward; don't wait until next year to ask for help sorting it all out.
Yes, you can learn all this yourself, but make sure you also understand any state and county implications and learn all about expenses or you'll pay more taxes than you should.
We screwed up our first year's taxes and the penalty was not horrendous, but the income in question was not anywhere near a year's salary.
I love our tax guy. I'm sorry we didn't run out and get one the moment my husband started freelancing.
posted by Lyn Never at 10:18 AM on September 28, 2011
Yes, you can learn all this yourself, but make sure you also understand any state and county implications and learn all about expenses or you'll pay more taxes than you should.
We screwed up our first year's taxes and the penalty was not horrendous, but the income in question was not anywhere near a year's salary.
I love our tax guy. I'm sorry we didn't run out and get one the moment my husband started freelancing.
posted by Lyn Never at 10:18 AM on September 28, 2011
Response by poster: k5.user: Nothing is deducted from her paycheck. And she's excellent at keeping records (mileage, expenses, etc.)!
I hadn't considered hiring a CPA but it sounds like a good investment as we get started.
posted by davcoo at 10:21 AM on September 28, 2011
I hadn't considered hiring a CPA but it sounds like a good investment as we get started.
posted by davcoo at 10:21 AM on September 28, 2011
Everyone I know who earns a self-employed income on the scale of a normal salaried job absolutely swears by professional accounting and tax advice. It gets complicated fast and a good professional will save you money in found deductions and avoided penalties.
posted by nanojath at 10:57 AM on September 28, 2011
posted by nanojath at 10:57 AM on September 28, 2011
Hire an accountant, at least for the first year so the accountant can explain what's deductible, how to make quarterly payments, etc.
Anecdotal: the first year that I became a freelancer, my accountant told me not to make quarterly payments, but to set aside income to pay taxes when we filed. He said the IRS won't charge a penalty if you underpay taxes the first year, but that in subsequent years they might, so I made quarterly payments after the first year. It was also much easier to estimate what the quarterly payments would be after the first year.
posted by bedhead at 12:22 PM on September 28, 2011
Anecdotal: the first year that I became a freelancer, my accountant told me not to make quarterly payments, but to set aside income to pay taxes when we filed. He said the IRS won't charge a penalty if you underpay taxes the first year, but that in subsequent years they might, so I made quarterly payments after the first year. It was also much easier to estimate what the quarterly payments would be after the first year.
posted by bedhead at 12:22 PM on September 28, 2011
also check to see what your local requirements are. does your city/town require her to get a business license and pay business taxes? (philadelphia does).
you don't definitely need an accountant. turbo tax hasn't steered me wrong lo these many years.
you definitely need to pay quarterly taxes after your first year. you will owe a lot of money all at once, plus penalties if you don't. it's super dumb to not do the quarterlies. be sure to set aside X% of EVERY PAY CHECK into a separate tax savings account that you empty out every quarter to pay taxes.
posted by misanthropicsarah at 3:37 PM on September 28, 2011
you don't definitely need an accountant. turbo tax hasn't steered me wrong lo these many years.
you definitely need to pay quarterly taxes after your first year. you will owe a lot of money all at once, plus penalties if you don't. it's super dumb to not do the quarterlies. be sure to set aside X% of EVERY PAY CHECK into a separate tax savings account that you empty out every quarter to pay taxes.
posted by misanthropicsarah at 3:37 PM on September 28, 2011
also, don't just blindly set aside 25%. set aside your state amount, plus your federal amount, PLUS the 15.3% self employment tax, plus any local taxes. for me that's significantly more than 25%.
posted by misanthropicsarah at 3:39 PM on September 28, 2011
posted by misanthropicsarah at 3:39 PM on September 28, 2011
I've got an accountant, and he is worth is weight in gold to me, but thankfully charges me significantly less. I hand over my receipts record, mileage, and invoice totals and two days later he's saved me thousands in write-offs. Seriously. I'm sure there are intelligent people far more financially savvy than I who can do their 1099-MISC taxes and get the same level of deductions, but the piece of mind and tax savings (he knows all the deductions, red flags, etc.) is worth a few hundred bucks once a year to me. YMMV.
posted by smirkette at 6:59 PM on September 28, 2011
posted by smirkette at 6:59 PM on September 28, 2011
This thread is closed to new comments.
The "never pay quarterly estimated taxes" advice is baffling. If you don't do it, you'll wind up paying a penalty.
posted by zsazsa at 10:00 AM on September 28, 2011