Learn what taxes you will pay as a contractor or as employee.
PRESENTED BY YOUR ONLINE PAYSTUB MAKER 06-28-2019
As self employees or small businesses owners, you have to run their businesses on their own. They have to know about many aspects of their work. Producing, selling, marketing, networking, procurement, and finances, all this must be correctly managed by you if you want to succeed with your works or business. The taxation is essential because you can pay too much tax and lose money or make a mistake and get the authorities to penalize you.
Employees vs. Independent Contractors
If you read this article as an independent contractor or a regular employee, you will see a huge difference in the way the tax authority Income Revenue Service IRS deal with these two tax-payer classes. There is a difference between the two types of workers.
Independent contractors have no obligatory working days and hours like regular workers that must present themselves every day for eight hours at the workplace of the employer. Self-employed workers are contracted to do a specific job that may be subject to a time to be finished or delivered. Contractors are independent in the way they pay their taxes, health insurance, and save money for their pension plans.
The employees have a routine to follow, eight working hours a day or 40 hours a week. They have some paid vacation days per year. They are mostly paid a weekly or bi-weekly paycheck. A pay stub describes the gross salary and the deductions for taxes — the revenue and withholding for health insurance and social security.
Independent contractors will have to pay 15.3 percent for social security and Medicare expenses, and it is called formally “self-employment taxes.” It is calculated to be paid from the first dollar gained. With no brackets, for higher revenue. The employees will see a deduction of half of the taxes for health insurance and social security on their pay stub, and the employer will pay the other half of this.
Tax Return, Your Possible Deductions
The IRS treats an independent contractor more like a business than as an employee. If you are a contractor, you have to act like a mini business. As a business, you have to see what was your revenue, and after that, you have to deduct the costs that are related to your work and get the year net income after. You pay tax on what you gained for the tax year you are reporting. Employees get it all on the pay stub and have no annual tax return. Contractors will have the car mileage and other deductions that are their cost of production.
The Deduction of Home Office Costs
If you are an independent contractor. You have a separate space at home or rent a cubicle in a shared space office. You should deduct the cost of it from your gross income. You have to be a writer or programmer that works on a computer or other type of contractor that uses office, to justify the home office. If you work out of home, you may have the millage of the vehicle and other materials as a cost of your production.
20 Percent Deduction
The 2017 job act brought tax cuts and changed the way that you, as a contractor or self-employed, should manage the tax return.
You can deduct 20 percent of your earnings as a Pass-through income. Follow the guidelines of the IRS to make sure that you will enjoy this rule and not make a mistake while you apply it to your tax return and pay fines.
All the expenses that are related to your contractor’s work or small business activities are deductible. You need to keep the documentation of these expenses. Make sure that your costs are at a reasonable proportion to your revenue. Otherwise, you may bring the IRS to look carefully into your numbers.
Keep All the Records
Keep your records complete and organized, first of all for yourself but do not forget the big brother IRS, at some point, you can get an audit by the IRS. Chances for an audit are low, but you better be prepared by having your records in hand. You will need to have the receipt as proof of expenses, up to the last cent of costs and income you declared to the IRS. Your bank statements will need the backup of documents like your invoice for jobs you have done and the receipts for the checks you withdrew from your bank account.
A cup of coffee at a business meeting must have its receipt in your records or it will be counted as your benefit and will be on the taxable amount. Car millage will need its millage book and gas and service receipts. Your contracts, orders, or any service that you gave to your clients, should have its purchase order, invoice, and the related pay stubs. It all has to be shown in your bank statement too. You can get a 1099 form from your clients, in the case, it is not like this, you can make a pay stub your self
It May be Easier Ask For Help
If you are useful as a professional expert in your field, think about the professionality you need for tax reporting. Do not hesitate, look for the help of a specialist on taxation. If not all year around consultant, someone for the tax season that will see that you do not make mistakes that will cost you money and headache.
Estimated Payments For 2019
When the tax season is coming, you start to think about the unnerving issue, how much-estimated taxes you will have to pay. Contractors can have a very fluctuating income. It may be hard to predict their income and get reasonable pay for estimated taxes. It is vital to know, about 1,000 dollars of taxes you already need to pay some estimated tax. Not paying the estimated tax will bear a penalty by the IRS. If you have a steady income, for example. You work every day under a contract, and your client pays you the same every week you will be able to estimate your tax payments. Estimated taxes
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.
Withholding or paying, a too small amount for estimated tax will bring you to the end of the tax year to get penalties by the IRS. The same will happen if you pay your estimated tax too late, no matter if at the end you will have funds to be refunded to you by the IRS.
The IRS words about penalties:
Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
If you conclude paying you tax before April 15, the IRS will still have you penalized. The IRS goal is to get your money along the year and not having to get a big chunk of money and then disburse you a big refund.
A simple way to avoid this kind of problem is to set aside 15 percent of your income for taxes. You will need to keep more money for the local taxes too. If you are making more money, you may need to put aside up to 35 percent of your income for taxes. If this is the situation, you better pay more for estimated taxes.
Tax Season As An Independent Contractor
An independent contractor has to treat the tax paying as an all year matter, not last meant rush to resolve it. A good record discipline will make it easier. Monthly report of expenses and income and setting aside enough money for the taxpaying will make the contractor’s life easy as I wrote below about consulting. I will mention it again, only recommending you to have constant contact with an expert on taxes. Get one for the all year not only at the tax season when all the industry is busy with the tax fiver.
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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney and the content on the site is not given as legal advice. The website has readers from all US states which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only and never as