Ever been on Form 1099?

Question

Has anyone went on Form 1099 as an independent contractor? What was your experience like during the tax season? I just found out about horrendous tax liability of being on 1099 and considering to terminate the contract.

I've been doing independent contracting for only a month. How do I start paying this "quarterly tax"?

Answer 1

You are supposed to pay estimated taxes quarterly. In addition there are the double social security and medicare taxes.

You should report your nonemployee compensation on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business. You also need to complete Form 1040, Schedule SE (PDF), Self-Employment Tax, and pay self-employment tax on your net earnings from self-employment, if you had net earnings from self-employment of $400 or more. This is the method by which self-employed persons pay into the social security and Medicare trust funds..

Answer 2

The first link below is An IRS page titled 'Small Business and Self-Employed "Filing Season Central"' The second is an IRS FAQ about Quarterly Estimated Tax Payments. It includes a link to form 1040-ES which is used to send quarterly payments.

Your tax liability as an independent contractor is actually not much more than as an employee. The main difference is that you must paid self employment tax. This is the same amount as the Social security tax an employer would normally withhold plus the equal payroll tax they would have paid. The base on which the tax is based is lower because you pay only on your profit not your gross. Profit is you gross earnings minus you business expenses.

Violet Pearl said you must form a legitimate business. In the eyes of the IRS, taking a job as an independent contractor is forming a business.

Answer 3

The income tax is the same either way, 1099 or W-2, and with a 1099 there might be expenses that you can subtract.

Half of the social security tax is what you'd pay anyway if you were on a W-2 - your employer would deduct it. So the only real extra you're paying by being 1099 is half the social security, 7.65%.

It's just that usually you don't see three months of taxes all at once and have to write a check - if they're deducted from your paycheck, you don't notice how much it is.

Answer 4

Don't worry. Don't panic. A lot of taxpayers are paid with 1099s instead of W-2s. If you are an employee of a company, they must pay you on a W-2. If you are an independent contractor, they pay you on a 1099.

So, why the 1099 for contractors? A contractor is not part of the company. The company is not responsible to pay for many things one would normally associate with an employee like medical insurance, office supplies, transportation expenses, etc. Since a contractor sometimes incurs these expenses, they are allowed to write them off against their income before taxes, including social security taxes, are taken into consideration. If a regular worker incurs unreimbursed expenses, they don't get to write it off against social security and they are limited in how they can write it off for federal and state income taxes. So, in that regard, it is better to be a contractor.

However, payroll (social security and Medicare taxes) is a different story. When a normal employer pays an employee, the employee sees on his paycheck that 6.2% of his salary was withheld for social security and 1.45% for Medicare. What the employee doesn't see is that his employer pays an additional 6.2% plus 1.45% on behalf of the employee to social security and Medicare. Half of the amount comes from the employee and half from the employer for a total of 15.3%. When you are a contractor or whenever you are paid on a 1099, you must pay the entire 15.3% yourself. This is on top of what you pay for federal and state income taxes.

Quarterly payments: As an employee, your employer withholds the perfect amount of social security and Medicare each paycheck. They also withhold federal and state taxes from each paycheck in accordance with what you put on your W-4. As a contractor, you are responsible for paying the IRS and state (if applicable) the withholding you would have had, had you been an employee. These are due 4 times per year on April 15th, June 15th, September 15th, and January 15th.

A big problem 1099 contractors have is figuring out how much to pay each quarter. Essentially, you have to do a mini-tax return for the year based on what happened that quarter and divide by for:

Take your gross income for the quarter for being a contractor and subtract your expenses. Multiply the net profit by 4. Then add in any other income you will declare for the year (interest, capital gains, your spouse’s income, other W-2 income). Then, subtract your exemptions (the number of people you support times $3,300), deductions (either the standard or schedule A), and other adjustments. Among the adjustments you need to subtract is the 1/2 of the payroll taxes you would normally not have to pay if you were an employee. This final number is your estimate of what your taxable income would be for the year. Figure out your taxes on this amount, and subtract any withholdings from your other W-2 jobs or your spouses W-2 jobs. Add in your payroll tax, and then divide the grand total by 4. That is how much you need to withhold each quarter.

Sound complicated? It is. I think most people take a swag at it and hope for the best. If you are in your 2nd or 3rd year doing the same thing and your income or expenses don't change much, most people use their prior year's totals to determine their current year estimated payments. However, people who want to pay the correct amount without paying too much or too little need to see a professional. You don't have to go all the way to a CPA, but at least confer with someone who knows taxes well.

Bottom line: Don't fret that you are being paid on a 1099. On one hand, you can write off all expenses. On the other, you pay more in taxes. Most contractors get paid more than regular employees because they cost the employer less. If you get paid $10 per hour, it costs the employer $10 per hour. If you are an employee and get paid $10 per hour, it may cost the employer $15 per hour when everything else is included. Therefore, most contractors get paid more than a regular employee. That extra pay usually makes up for the extra taxes. If you are getting paid the same as regular employees, you are getting the shaft.

One last thing, social security is only taxed on the first $94,200 for 2006. If you earn more than that, the payroll tax on the amount beyond $94,200 is only Medicare or 1.45% + 1.45% = $2.9%.

Hope this helps :)

Answer 5

Yes, but you need to have formed a legit business in order to use deductions. Get an accountant.

Answer 6

you have to pay quarterly taxes. If you don't you'll have a lot to pay in April.