I have started my job as a contractor on 1099...where do I pay taxes?

Question

I just started my job as a contractor in san Jose, CA. The mid client said they will pay me on 1099. Can anyone tell me how do I get taxes deducted then? I know they have to be paid monthly or quarterly. Shud I go to a Tax consultant right away? Also is 1099 better or W2.

Answer 1

You will file your return between January and April 15, 2008 for 2007. You'll put your 1099 income and any allowable associated expenses on a schedule C or C-EZ, and use a schedule SE to figure your self-employment tax (for social security and medicare). The numbers from the bottom of the two schedules will transfer to a form 1040. Any other income you had will also go on the 1040, and you'll figure your total tax there.

They won't deduct taxes from you. Quarterly, you'll file a form 1040ES and send it in with your estimated taxes on the income you made that quarter. You'll also need to file an estimated CA return quarterly.

A 1099 is better for the company than a W-2, because they don't pay employer taxes. You'll pay twice the amount for social security and medicare as you would on a W-2, and won't be covered by workers comp or for unemployment. Legally, the company can't just decide to pay you on a 1099 - it depends on the work you are doing and your working conditions. Some companies illegally classify workers as contractors rather than employees to get out of paying the employer taxes.

Answer 2

I suspect you should be treated as an employee and have a canned explanation to apparently clueless independent contractors:

Some employers try to get around paying employment taxes (social security and unemployment) and other employee benefits like workers compensation insurance by improperly classifying employees as independent contractors. The basic issue is the amount of control the employer has over the worker. If you are required to show up for work--personally--at a particular time, punch the clock, use the employers equipment and are paid an hourly rate, you are an employee. If you didn't understand the difference when you posed your question, I would be even more convinced that you are an employee. What is your preference, Slotted or Phillips? Complete an IRS Form SS-8 to get an official ruling on your status. This will help you get unemployment if you get fired. When you file your income tax return, you can attach Form 8919 Uncollected Social Security and Medicare Tax on Wages and only pay the employer's half of social security. You will still have to cough up all the income tax. IRS and the states are stepping up enforcement in the abuse area.

Answer 3

If you don't feel like doing the above calculations, plan on putting aside 40-50% for taxes. Federal could run you $30-40% and the state of California could want another 10%. Even if you win the SS-8 argument, that would only reduce the tax bill by to 33-43%.

While you may not be required to put all of the money in as estimated tax payments (did you work last year?), it's a good idea to get in the habit and do so before you spend the money.

The typical self-employed taxpayer fails to put enough aside and then files for an extension. Come October 2008, he discovers that he owes a lot for 2007 (plus penalties and interest since the money wasn't in the system by 4/15) and probably more for 2008. If he doesn't have the money, he goes onto a payment plan with the IRS and that becomes a vicious cycle. At the same time you are trying to pay off 2007, plan for 2008, it's difficult to put money aside for 2009.

By putting 40-50% aside, you are more likely to get a refund.

Answer 4

1. W2 -- you are an employee. From your income social security and medicare taxes are withheld at 7.65%. You normally can't claim expenses associated with the job unless you itemize your deductions. Also your business related (job related) expenses are subject to 2% AGI limit.

2. 1099 -- you are independent contractor. On your income, you will pay social security and medicare taxes at 15.3%. If you have expenses associated with this job, you file Schedule C on which you record your income and expenses.

3. With 1099, the employer does not have to pay their part of employment taxes of 7.65% and some other taxes. They save headache of keeping another person on their payroll.

4. If this is your first year of job, then you need not worry about paying advance taxes. Make sure to file your 2007 tax return before April 15, 2008. With your tax return you will complete schedule C (Form 1040). On your income on schedule C, you will pay SE tax at 15.6%. For this you will also complete schedule SE (Form 1040).

Answer 5

Employers pay you on a 1099 because they do not want to have additional tax liability... The IRS mandates that you make quarterly estimated tax payments based on your income. Now, here is the easiest way to do this..

Estimate what your yearly income will be.. Unless you make over 106,000 a year, you should be okay with the 28% tax rate as a guideline. I do not have the specific tax tables in front of me, but you should be safe there..

Here is the argument you need to consider in the 1099 versus W-2. Your employer is trying to avoid having to pay FICA on your wages (social security + medicare taxes)... If they do not pay it, guess what.. YOU DO!!!! You already pay 7.65% of your salary to this regardless, but the employer must match this dollar for dollar.. If they do not, then you are required to pick up those additional monies.. So, in essence, if you earned 100K in gross wages from a contracting job, you will have to fork over 15,300 in FICA taxes as well..

Now.. I would urge you to review the IRS publication regarding contractor versus employeee.. Many companies try to use the "contractor" shield to make the consultant pay more out of their pocket.. Many people do not realize that they can actually challenge this determination with the IRS... There is a question set which you have to answer that will indicate if you are truly a contractor or a company employee.. If you are a company employee, then the company must pick up their portion of FICA liability (7.65%)

So, of course a W-2 is better.. I would recommend you not seeing a tax consultant, but a licensed CPA specializing in tax. Tax consultants (not licensed CPA's) have been coming under investigation lately for some of their practices.. One important note.. This does not speak to all tax consultants, but the government is going after that group of people in general..

Hopefully that helps...

Answer 6

You will need to file a form 1040-ES for your estimated taxes. If you think that you are going to make $50K a year, then set aside 15% for Self-employment tax and another 15% for Federal Income tax. Also, set aside whatever your state tax rate is. If you want better information, you can read IRS Publication 15 and the similar publication for the state that you live. When you file your Federal Income Taxes, you will report your gross earnings on Schedule C along with any related deductions for expenses incurred with your job. Commuting doesn't count as a business expense. Read IRS Publication 334 to get a good idea of what you can write off as legitimate business expenses.

Answer 7

will i get a return if i file 1099 because i am my own contractor

Answer 8

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