[OT] What does a contractor have to pay?

[Heretic Apostate]

I've picked up some contract work to tide me over until I get a job. The only trouble is, I'm practically broke, so I can't hire an accountant. I don't want to get in bad with the Feds and the Franchise Tax Board (California).

I know I have to pay the Self Employment Tax (both employer and employee portions of Social Security and I think Medicare). I have to pay Income Tax--Fed and State, and I think I have to estimate them. What else? And HOW do I pay them?

 

[RyanL]

Do you have to pay Social Security? Hope I don't get arrested for posting this.

Seriously, I worked as an independent contractor for a few years in IT. The company I was contracting for 1099'd me to the state and feds so I just filed my taxes normally based on the 1099 rather than a W2. According to my Social Security statement, I never paid Social Security during those years.

-Ryan

 

[Heretic Apostate]

Well, you're supposed to file the self-employment taxes. I think. But INAA (I'm not an accountant)....

I'm searching irs.gov, to see if I can find anything about it.

Edit: Best I could find.

http://www.irs.gov/taxtopics/page/0,,id=16248,00.html

Now, if only I were working abroad, most of my searches on irs.gov would be relevant. Grrrr...

 

[lastelias2]

Contractors And Blood Suckers

oooopppss! I meant the venerable tax agencies who I love....please do not visit your wrath and pain on me for my earlier subject line.

Anyways, I am also an IT contractor in California. However, I am not an accountant so I can only speak from experience. You are supposed to pay the self-employment tax with your other taxes.

The answer to your question depends on the nature of your "company" status. Single proprietors and partnerships pay taxes as individuals. Therefore, I think any income you get is a 1099 and you pay annually as part of your normal tax bill. Corporations (LLCs, S-Corps, Incs.) pay tax quarterly (at least I have to as an LLC), and the tax structure depends on the nature of the corporation. There is also an $800 annual fee on top of taxes for California that one has to pay for the honor of working in this state (I don't know if sole-proprietors pay this fee).

There are lots of books on the subject, and computer programs like Quicken, can help. I would visit your local book store, it is probably your best non-accountant source. There are lots of books on running a "small" business aimed at consultants.

Also, you can also work for a while, and worry about the tax situation after you have some cash in your pocket. If you get an accountant later you can always take care of any tax burden then. I would work, get some cash so you can have the important things like food and shelter. Worry about the tax burden later when you clear the spider webs from your wallet.

 

[Shard O'Glase]

Yes IIRC I had to pay both sides of the social security tax, and then income tax. And that's it, I currentlywork through an agency for my contract work so they deal with all the crap, so I can't rememebr how it went, sorry.

 

[lastelias2]

One other thought

As far as saving for the eventual tax bill. My accountant recommends putting aside 35% of income for the tax bill. In practice I put away about 30%. The marriage penalty + self-employment tax + federal + state can be pricey. Although at the end of the year it tends to be less than I have saved. However, better safe than sorry.

If you can afford it, consider putting 25%-30% away for the tax man when you get paid on your invoice. However, food, shelter, and family come first - so if you need to I reccomend feeding your family first and worrying later.

 

[Chris Tavares]

For what it's worth, I just finished a year of contract work. After self-employment tax, regular taxes, and interest charges, I ended up paying almost exactly 33% of my income.

You should consider paying quarterly estimated taxes. Basically, this replaces the witholding that would have been done if you were working on a W2. Without the quarterly estimates, you'll get slammed for interest & penalties for underwitholding. That's what happened to me - I paid the quarterly estimates, but the estimates were too low and I got shafted.

If you're only going to work a month or two on contract, don't worry about it - it won't add up to enough to cause you a big problem. If you're going to be on contract for a while, then save up a few bucks and get an accountant. He'll tell you what you need to do. You don't need to start paying the estimates immediately, but it really helps to get some professional advice on this.

And make SURE you put that 33% of your earnings in the bank. You'll need it come April 15th.