Do you know your independent contractor business expenses? If not, see my eBook: 7 Things Every Small Business Owner Needs to Know for additional information on expenses. I will review below a few expense categories and taxes that I believe are common with self-employed individuals.
This is the fourth installment of
Independent Contractor Taxes…Know Your Options.
It can be downloaded from our eBook library.
Ordinary business expenses including rent for an office, utilities for said office, supplies and equipment needed to run the business are deductible 100% against income earned. I’m not going to go into much detail here because if used only for the generation of the income it’s considered an ordinary expense.
If you are filing a Schedule-C on your personal form 1040 estimated taxes are due on a quarterly basis:
★ April 15
★ June 15
★ September 15
★ January 15 (of the following year).
If you have always had a W-2 with taxes withheld from your earnings, this area will be where you get yourself in trouble. When you are an employee the following are deducted from your payroll check each pay period:
★ Social Security (6.2%)
★ Medicare (1.45%)
★ Federal withholding (based on your W-4)
★ State tax (if applicable) are deducted from your payroll check each pay period.
As a self-employed individual you are responsible for the payment of these taxes, not only your portion but also the employer’s match of:
★ Social Security (6.2%)
★ Medicare (1.45%)
tax which is an additional 7.65%. Therefore each dollar that is considered taxable income (after expenses) will first be taxed at 15.3% (Social Security and Medicare) Self-Employment tax, plus any income tax that is due on your personal tax return, form 1040.
As you can see depending on your personal situation, tax due from being an independent contractor can add up very quickly. The sooner you have a tax professional review your individual situation the less painful it will be when it comes time to file that first return after becoming a self-employed individual.
If you employ any individuals that should be paid as employees, the same rules will apply to your business when it comes to independent contractor’s vs employee decisions. If it is determined you will pay individuals as an employee, have a payroll service prepare the payroll checks and quarterly filings.
In my 20 plus years of helping small businesses, preparation of payroll and paying/filing of quarterly taxes and forms is where business owners predominately get into trouble. The penalties alone for making the wrong deposit can quickly add up to an additional 25% of the amount owed. Payroll services are cheap compared to the problems that most likely occur if you try and do payroll yourself.
If it is determined that the individual will be treated as a sub-contract/independent contractor before issuing the first check get a signed W-9 to cover yourself when it comes time to issue 1099’s at year-end. Penalties for not issuing 1099’s when they are required can be up to 50% of the amount paid to the individual that the 1099 was not issued.
Download my FREE eBook: Independent Contractor Taxes…Know Your Options for more information about the options you have as a independent contractor. If you have further questions contact me online, or call my Naples office (239) 384-9688 or Fort Myers office (239) 768-5008.
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-Mark
This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.
LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.
