Getting paid as an Independent contractor?

Question

I work as an independent contractor doing computer tech support. I've never been paid before as a contractor so i'm not too sure about the whole tax thing. My main question is this. A few months back I got a federal tax ID for a business I wanted to start. Well would it be more financially benifical to me to have my employer pay me directly as an independent contractor or should he pay me under my company name and federal tax ID number?
Which one would give me more deductions?
Also what percentage would I want to deduct to cover taxes if I was in the $30K-$40K and $40K-$50K a yr pay range, being single, no assets, no property, 1 child not claiming as a dependent.

Answer 1

If you are an employee, you are NOT an independent contractor. If your services are being provided to a single "customer" who provides your workspace and tells you what your work schedule is then you are an employee by definition. Just because this firm is trying to avoid paying payroll taxes by calling you an "independent contractor" does NOT make it so.

To dispense with that, get a copy of Form SS-8 from the IRS website and submit it to the IRS for a status determination. Do this NOW; do NOT wait until tax time next year or the delays will severely affect your finances!

If it is determined that in fact you are an independent contractor, it will not matter how your customers pay you as far as your tax liability is concerned. Whether they cut the check to you personally or your company's name makes no difference at all in the end.

If you are an independent contractor you will need to start making quarterly estimated tax payments using Form 1040-ES. You can dowload the package from the IRS website. Use the worksheets to estimate your income and the resulting tax burden. Don't forget that you will be paying self-employment tax at 15.3% on all of your net income. That will be on top of your income tax burden. (This is one reason you want to file that Form SS-8 and get the determination.)

Your tax burden will depend upon your net income from your business. A very rough estimate for $50k in net income would be: Income Tax: $6,736. Self-Employment Tax: $7,650. Total: $14,386 With those numbers, you'd need to make quarterly estimated payments of $3,596.50. Failing to make the required quarterly payments will cost you penalties and interest for underpayment of estimated taxes.

If your state has an income tax you will also need to start making quarterly estimated tax payments to the state as well. Check your state's department of revenue website for the forms and procedures.

Answer 2

There is no financial benefit to having your pay under your company name and federal tax ID number. Whether you do this or are paid directly, you are a sole proprietor.

You will use Schedule C to record your revenue and expenses. You can deduct equipment, supplies, and mileage.

You will not have taxes deducted from your pay. You can pay estimated taxes to cover the taxes that you will owe, which include federal income tax as well as Social Security and Medicare. If you send in 30% of your net as estimated taxes you should be fine. Use Form 1040ES which you can print from irs.gov.

If you do not pay estimated taxes, set aside 30% so you have it available. If you end up owing more than $1,000 there may be a penalty assessed if you have not paid estimated taxes.

Keep track of all your expenses in a log so that you can document your deductions. Refer to Schedule C below to see a summary of allowable deductions.

http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Answer 3

Your taxes will be the same whether he makes the check out to you or to your company. You'll owe self-employment tax of 15.3% of your net, plus whatever your income tax is. For the ranges you mention, federal income tax will probably be 10-15% of your net. Depending on where you live, there might also be state and/or local income taxes. Net is your total income minus any eligible deductible expenses.

You'll need to file quarterly estimated payments for federal using form 1040ES, and possibly quarterly state and local estimates also.

It would most likely be worth your time and money to talk to a CPA as soon as possible to find out what items you can deduct. He or she would probably save you more in taxes than you spend for their fee. Do it now, so you know what records to keep and receipts to save. If you wait until your taxes are due next year, will be too late to take advantage of some of the deductions because you won't have the needed records.

Answer 4

If your making 30K-50K in a business you need professional tax help. Either under your business or as a contractor the taxes will be the same and reported the same, on schedule C. You will be paying both income tax and self-employment tax. You will want to be sure your getting all your deductions because the combined tax rate for the two taxes is approximately 30%. ( 15% income tax and15% self-employment.) Without professional help, you could owe big bucks. Call a CPA today.

Answer 5

It doesn't matter whether you get paid under your business name or your name, the money you receive through them will be reported to the IRS, just make sure you report all of your earnings on Sch C on your personal return. Also, make sure that you keep track of all the expenses that were paid by you that were related to your business. You might want to make an estimated pmt between $3,500 to $5,000.