Tell me about being an independent contractor (US)

November 18, 2017 9:32 AM

I'm thinking of doing some locums work for an agency and would thus become an independent contractor (1099). I understand this means I will have to pay my own social security and Medicare taxes. It sounds like I also have to pay taxes quarterly--how does that work? Is there an additional self-employment tax I'm required to pay? I am married to a non-resident alien so I always file 1040 married separately, can I still do that? What else is there to know, and what else is there to watch out for?

I would sign a contract for a fixed salary and hours for a few months. The pay rate is a bit lower than what I'm used to in my state, but I said I would "consider" the higher salary they offered, as it is on par with national averages and the cost of living in the place I would live is fairly low. The staffing company would pay for my relocation/travel, rental car, housing, and malpractice insurance. In my mind, this would be great because I could save a pile of cash to throw at student loans and/or to build up a bit of savings. I would need to buy my own health insurance, but otherwise, this deal seems almost too good to be true. Also possibly relevant is that I would then live overseas for the remainder of the year--is any income I might earn abroad also subject to US taxes, or vice-versa? My annual income would be below the threshold for taxation in the US (<$100K).

What else should I consider? What might I be missing? Is it accurate than any work-related expenses (e.g., meals, gas/mileage, uniforms, licensing fees) would also be deductible as a 1099?
Is there much room for negotiation of the salary? On my phone interview, they sort of threw the figure out as a ballpark, so I wonder whether I should push for more. Do you have any recommendations for first-time independent contractors, or any resources I should check out?

NB: I am also investigating tax consultants to go over the particulars of my situation, but would appreciate any insights or tips you might have about being a 1099. Thanks!

posted by stillmoving to Work & Money (6 answers total)

You've got a complicated situation, so yes, talking to a tax guy is the right thing.

You don't need to change your filing status. You do need to file additional forms—you'll need to file a Schedule C (profit or loss from business), and a Schedule SE (self-employment). Also, during the year, you'll need to file quarterly estimated tax deposits. Your self-employment taxes will add about 15% to your tax rate, so bear that in mind when negotiating.

Any expenses you incur as part of your contracting work that someone else isn't reimbursing you for can be claimed as a deduction, so save those receipts. Your tax guy may want to put capital expenses (eg, a new computer) on a depreciation schedule, so you don't get to claim the full amount all in one year. And remember that deduction are not credits: if you're being taxed at an effective rate of 25%, and you claim a business deduction of $100, that means your taxes are reduced by $25, not $100 (there's some additional complexity about travel & entertainment expenses).

So in your negotiations, you should bear in mind what you'll be paying for healthcare, your out-of-pocket operating expenses, your additional tax burden, and whatever downtime you would reasonably be expected to have after this contract ends while you look for the next thing, and make sure that the amount they're offering will cover all that.

Income earned abroad is a whole 'nother subject that I'm not going to get into.
posted by adamrice at 9:53 AM on November 18, 2017 [1 favorite]

Yes, most of your expenses you can deduct. It can get complex when you start talking about having a home office, if that's applicable, so tax help is definitely recommended. But do keep in mind that, for you to itemize, your SO must do so as well (even though you're filing separate), which could be a heavy hit on their tax liability if you both currently don't itemize.

For reference on all the additional taxes and benefits, at my org we put together a compensation comparison for prospective contractor-to-hires that put a contractor salary at about 125% of a FTE salary to maintain the same level of benefits. (We do this to show that taking a 20% pay cut to become an employee isn't as bad as it seems when you factor in benefits.) However keep in mind that this is based on the salary ranges of my team; that percentage goes up as the salary goes down since things like health insurance cost the same regardless of salary, and they take a bigger percentage the lower the salary.

On re-read, I didn't originally catch that there's an international aspect to this. Yes, tax consultant. Not only to safeguard you from mistakes but they can help maximize your deductions as a contractor.
posted by SquidLips at 10:01 AM on November 18, 2017

Response by poster: Thank you for the replies thus far--very helpful! One more question: as I would have only US income for 4/12 months, how do refunds work? Or can I annualize my payment somehow? (i.e., my annual income will be stuffed into two quarters, am I still eligible for a refund later on?)
posted by stillmoving at 10:10 AM on November 18, 2017

I had previously been under the impression that you should figure your total tax deposits for the year, divide that by 4, and make 4 equal payments in that amount. But my current tax guy has told me that you can make your tax deposits your current income, and even make more than 4.

Just so you don't spend money you should be saving, it probably makes sense to make your quarterlies reflect your most recent quarter, not the year as a whole.

Your eligibility shouldn't be affected by how you break up the payments as long as the IRS regards it as fair (and even if they don't, they'll ding you for interest and penalties, maybe, but won't make you ineligible for a refund).
posted by adamrice at 10:56 AM on November 18, 2017

The IRS web site has very good instructions and publications: take a look at the tax form and Publication 505.
posted by yclipse at 12:11 PM on November 18, 2017

Remember state income taxes. You will want to send them something quarterly.

When I was a computer consultant in CT, I had to collect sales taxes. You have to get the permit, then file monthly. Sales taxes were not charged for most consulting services, but computer programming was an exception.
posted by SemiSalt at 1:23 PM on November 18, 2017