Getting paid via 1099 in Boston. What does this mean?
February 13, 2010 9:36 AM Subscribe
Getting paid via 1099 in Boston. What does this mean?
I recently got offered a job as an independent contractor working for a firm that builds websites and digital content. The position is for 11 elements with an option to renew the contract.
I've never worked this way before and I am a bit lost over what all of this really means. I understand the job does not offer benefits but how much do I have to take out for taxes and what can I possibly write off at the end of the year? Do I have to register myself as an LLC?
Thanks for your help. I'm just trying to figure out how much will I actually make and what percentage of my pay do I need to axe away for taxes.
I recently got offered a job as an independent contractor working for a firm that builds websites and digital content. The position is for 11 elements with an option to renew the contract.
I've never worked this way before and I am a bit lost over what all of this really means. I understand the job does not offer benefits but how much do I have to take out for taxes and what can I possibly write off at the end of the year? Do I have to register myself as an LLC?
Thanks for your help. I'm just trying to figure out how much will I actually make and what percentage of my pay do I need to axe away for taxes.
Don't forget you'll also be paying the full (17%) Social Security, and when the contract ends you may not qualify for unemployment insurance. Oh and in MA You MUST have health insurance or pay a fine.
posted by Gungho at 10:00 AM on February 13, 2010
posted by Gungho at 10:00 AM on February 13, 2010
IRS Publication 334 and Topic 554 give you the official explanation.
The rule of thumb seems to be that you should squirrel away between a quarter and a third to cover self-employment tax (Medicare and Social Security) and federal/state income tax, and keep good records of your work-related expenses. Whether you're working on-site or from home matters, too, and if the latter applies, the rules governing the home office deduction are worth noting. The question of quarterly estimated taxes shouldn't arise until next year, but if you end up contracting long-term, it may be worth talking to an accountant -- not necessarily for incorporation purposes, but to establish the kinds of records you should be keeping for tax purposes.
And jon1270's right to mention the difference that should exist between contract and employee pay.
posted by holgate at 10:02 AM on February 13, 2010
The rule of thumb seems to be that you should squirrel away between a quarter and a third to cover self-employment tax (Medicare and Social Security) and federal/state income tax, and keep good records of your work-related expenses. Whether you're working on-site or from home matters, too, and if the latter applies, the rules governing the home office deduction are worth noting. The question of quarterly estimated taxes shouldn't arise until next year, but if you end up contracting long-term, it may be worth talking to an accountant -- not necessarily for incorporation purposes, but to establish the kinds of records you should be keeping for tax purposes.
And jon1270's right to mention the difference that should exist between contract and employee pay.
posted by holgate at 10:02 AM on February 13, 2010
IANAA either, but I'm not sure if your 17/60 counts since the 43 that is additional for charging clients not only accounts for taxes and benefits, but also operational costs of the business, profit, etc. You should get paid more than a typical full-time employee, but I wouldn't expect to get the billable rate, or the company would have no real incentive for you to do the work.
posted by CharlesV42 at 10:04 AM on February 13, 2010
posted by CharlesV42 at 10:04 AM on February 13, 2010
I'm not sure if your 17/60 counts since the 43 that is additional for charging clients not only accounts for taxes and benefits, but also operational costs of the business, profit, etc.
He will have operational costs (much additional paperwork, registering and maintaining an LLC, etc.) He will also incur additional risks, which suggests he should reap some extra benefit, i.e. profit, to make the risks worthwhile.
I wouldn't expect to get the billable rate, or the company would have no real incentive for you to do the work.
Not necessarily so. Among other likely legitimate benefits, contractors are far easier to hire/get rid of as needed.
posted by jon1270 at 10:19 AM on February 13, 2010
He will have operational costs (much additional paperwork, registering and maintaining an LLC, etc.) He will also incur additional risks, which suggests he should reap some extra benefit, i.e. profit, to make the risks worthwhile.
I wouldn't expect to get the billable rate, or the company would have no real incentive for you to do the work.
Not necessarily so. Among other likely legitimate benefits, contractors are far easier to hire/get rid of as needed.
posted by jon1270 at 10:19 AM on February 13, 2010
You do not have to register as an LLC. You can operate much more simply as a "sole proprietorship" which you can google. I wouldn't worry about all this stuff about being sued. No one ever sued a web designer for malpractice.
You may have to register with your state and city as a business, but your business will be a sole proprietorship. These licenses may cost $25 or so. Google your state and city government sites for business licenses.
You do not get health insurance, 401k matching, holiday pay, or vacation pay. You must pay your own social security, both the employer half and the employee half. It is not unreasonable to charge approximately double per hour that you would as a regular employee.
You will be responsible for paying quarterly estimated taxes to the IRS. You should plan on setting aside between 1/4 and 1/3 of your income for taxes which you should pay each quarter during the year. When doing your taxes you will fill out a Schedule C to determine the net income for your business. This business income then transfers over to your 1040 for taxes. You will also fill out a Schedule SE for self-employment taxes. All of this can be done using TurboTax to walk you through the issues.
You can set aside approximately 20% of your business earnings in a tax deferred retirement play, e.g. a SEP. This is in addition to your regular IRA.
If you are working from home, you can deduct expenses for a home office and for certain other items like computers and software. You can deduct car mileage if you work in your home but have to travel occasionally to your client's office.
posted by JackFlash at 2:49 PM on February 13, 2010
You may have to register with your state and city as a business, but your business will be a sole proprietorship. These licenses may cost $25 or so. Google your state and city government sites for business licenses.
You do not get health insurance, 401k matching, holiday pay, or vacation pay. You must pay your own social security, both the employer half and the employee half. It is not unreasonable to charge approximately double per hour that you would as a regular employee.
You will be responsible for paying quarterly estimated taxes to the IRS. You should plan on setting aside between 1/4 and 1/3 of your income for taxes which you should pay each quarter during the year. When doing your taxes you will fill out a Schedule C to determine the net income for your business. This business income then transfers over to your 1040 for taxes. You will also fill out a Schedule SE for self-employment taxes. All of this can be done using TurboTax to walk you through the issues.
You can set aside approximately 20% of your business earnings in a tax deferred retirement play, e.g. a SEP. This is in addition to your regular IRA.
If you are working from home, you can deduct expenses for a home office and for certain other items like computers and software. You can deduct car mileage if you work in your home but have to travel occasionally to your client's office.
posted by JackFlash at 2:49 PM on February 13, 2010
Being an independent contractor means you are a business, not an employee. JackFlash is right on that there's no reason not to be a sole prioprietorship, and you may or may not have to register locally to get a business license. Some places there is a minimum amount you need to be earning annually before you even get charged for this license.
The thing that's great about being your own business is that while you're going to be paying twice the amount of social security taxes, the amount that will be taxed will be from your net income, not gross. Any expenses you have get filed on a Schedule C, and it's like you never earned that money at all. You need to buy a new computer to run your independent contracting business? Boom, it's equipment purchase, and for tax purposes, it's like you never made that money. Home office? You get to deduct a percentage of your rent from your taxes, etc.
So, ultimately, if you itemize properly on the Schedule C, you end up paying WAY less taxes. These expenses have to be legitimate, and they have to be used for work, but it's a great way to go. I've worked as an independent contractor for over a decade, and other than benefits, it's definitely better. Also, if you haven't been 1099-ing in the past, you don't really need to worry too much about quarterly filing until you've already paid taxes once as a business. Then the next year, you should file quarterly what you paid the year before. As I understand it, if you pay 10% above what last year's taxes were, in spite of however much you make the next year, you won't be penalized. It's an estimate, after all.
Companies will often hire this way when the work is project-to-project. That way they aren't firing you or laying you off at the end of the project, the contract has simply ended.
posted by MythMaker at 4:24 AM on February 14, 2010
The thing that's great about being your own business is that while you're going to be paying twice the amount of social security taxes, the amount that will be taxed will be from your net income, not gross. Any expenses you have get filed on a Schedule C, and it's like you never earned that money at all. You need to buy a new computer to run your independent contracting business? Boom, it's equipment purchase, and for tax purposes, it's like you never made that money. Home office? You get to deduct a percentage of your rent from your taxes, etc.
So, ultimately, if you itemize properly on the Schedule C, you end up paying WAY less taxes. These expenses have to be legitimate, and they have to be used for work, but it's a great way to go. I've worked as an independent contractor for over a decade, and other than benefits, it's definitely better. Also, if you haven't been 1099-ing in the past, you don't really need to worry too much about quarterly filing until you've already paid taxes once as a business. Then the next year, you should file quarterly what you paid the year before. As I understand it, if you pay 10% above what last year's taxes were, in spite of however much you make the next year, you won't be penalized. It's an estimate, after all.
Companies will often hire this way when the work is project-to-project. That way they aren't firing you or laying you off at the end of the project, the contract has simply ended.
posted by MythMaker at 4:24 AM on February 14, 2010
... if you haven't been 1099-ing in the past, you don't really need to worry too much about quarterly filing until you've already paid taxes once as a business.
This is not correct. If you have income that is not subject to withholding you must pay estimated taxes to cover it. The safe harbor is to pay 100% of the total you paid last year for taxes, split 1/4 for each quarterly payment. If you do that, you don't have to worry how high your actual taxes are. You won't owe a penalty. If you think you will be earning significantly less than last year and your taxes will be lower, you can work through the estimated tax forms each quarter and reduce your quarterly payments. You can include taxes withheld from a regular W-2 job as part of your payment.
Also one important deduction you can take is 100% of your health insurance premiums. This can be quite valuable since you will probably be paying a lot for your own health insurance.
posted by JackFlash at 9:41 AM on February 14, 2010
This is not correct. If you have income that is not subject to withholding you must pay estimated taxes to cover it. The safe harbor is to pay 100% of the total you paid last year for taxes, split 1/4 for each quarterly payment. If you do that, you don't have to worry how high your actual taxes are. You won't owe a penalty. If you think you will be earning significantly less than last year and your taxes will be lower, you can work through the estimated tax forms each quarter and reduce your quarterly payments. You can include taxes withheld from a regular W-2 job as part of your payment.
Also one important deduction you can take is 100% of your health insurance premiums. This can be quite valuable since you will probably be paying a lot for your own health insurance.
posted by JackFlash at 9:41 AM on February 14, 2010
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It means you get cash, and nothing else. No workers' comp. No unemployment insurance. No 401K or health insurance. No benefits of any kind.
The amount you'll have to pay into taxes will depend on the amount you earn. If it's a significant amount of income then you'll have to pay quarterly estimated taxes instead of just once a year.
To be equivalent, the amount they pay you should be A LOT MORE than they would pay as a wage for similar work done by an employee. Take, for instance, a business that bills its customers $60 an hour but pays it's employee $17 an hour. You should be getting the $60, not the $17, because you have to pay for (or do without) all the stuff that the $43 difference normally covers.
The main purpose of establishing an LLC is to protect your personal assets. If you operate without incorporating, then you can be sued for something you screwed up and lose your personal assets (car, house, savings, etc.).
Many businesses that treat workers as independent contractors do so illegally, and do not pay an amount to make the job equivalent to normal employment. The do this solely to save money. If that's the situation you find yourself in, then the main benefit you get is that you can start earning now instead of continuing to look for work; in such a case, you're not just being paid differently -- you're being paid less.
posted by jon1270 at 9:54 AM on February 13, 2010