Never doubt that the government is going to get its share of your money. Independent contractors get hit with the full force of payroll taxes. In a typical work environment, the employer will foot half of the taxes usually referred to as FICA. An independent contractor is the employer and gets to pay double.
The Federal Income Contributions Act includes payments for Social Security and Medicare. The contributions are deducted from gross income and are around 15.3% of that income amount.
Independent contractors (and all self employed individuals) will also be required to pay income tax on everything over $400 earned during the year. Because taxes are not withheld from the income, many states and the federal government often require the self employed individuals to make quarterly estimated tax payments.
The first step
all independent contractors should take is to make an appointment with a tax professional. The tax code can be complicated and it helps to have someone give guidance and explanations along the path. Payments to an account will usually be deductible on future tax returns.
The next step
is to set up a savings account to house the payroll taxes until it is time to file taxes in April. This account should receive at least 15% of all income. It might also be wise to set aside an additional 15% for income taxes if those are not being paid quarterly. This set up allows an independent contractor to earn interest on the money instead of allowing the government to use it for free.
A word of caution: all tax payers are required to pay 100% of last years taxes or 90% of this years taxes before the end of the year. That means that after the first year of being an independent contractor most people will likely be required to estimate taxes or pay penalties for underpayment.
The third step
is all about organization. It is important to keep good records on all expenses for the services of the independent contractor (mileage, conferences, office supplies and other items). A folder with multiple pockets can serve as a divider for the different categories. Receipts should be kept in order in the folder. This helps to make the tax preparation easier and more complete.
The final step
comes when it is time to file taxes. Self-employment taxes are calculated under the Schedule SE using the net income. Payment must be sent with the income tax return (or before April 15th). Late payments will likely result in penalties.
Anytime the government is brought into the mix it is a good idea to make sure all of the rules and regulations are followed to the letter. Getting a professional to assist with the payroll taxes for independent contractors is one of the most important (and most logical steps) to help insure what needs to be paid is paid on time and in the correct manner.
