Once Upon a Time, there was no such thing as an independent contractor. Then, in a down economy, many of the out-of-work and cash-strapped began to look for alternative forms of employment. At the same time, employers looked for alternative (read cheaper) ways to employ. These two employment soul mates met in the middle with a little thing called an independent contractor agreement. Harps played, little woodland animals frolicked, and most importantly employers got work done that needed to be done while employees got a pretty hearty paycheck deposited in their bank accounts. I suppose I should rephrase that: independent contractors got a pretty hearty paycheck paid to them temporarily tax-free.
When April rolled around for these contractors, many fresh out of college or laid off of a previous job, there would not be any more frolicking in the land of Independent Contractorship. These new contractors would find they owed a lot of money—most likely in the thousands. The money that these contractors would owe was self-employment tax owed to the federal government and state taxes. These contractors were getting what seemed to be high paychecks, but they merely seemed to be high. In reality, the paychecks were simply pre-tax.
The truth is, this isn’t just a story of a down economy. It is the story of the current economy and thousands are living this tale every year. When a company hires you as an independent contractor, this means that they will issue you a 1099 for your taxes instead of a W-2. This is good for them, but bad for you. Sure, it gives you a job and an income. On the other hand, you’ll be paying taxes at a higher rate than you should have. The employer usually pays part of these taxes in a normal employee-employer agreement.
So what steps should you take if you are thinking of becoming an independent contractor? Here are a few suggestions:
Know what you’re getting into when you’re becoming an independent contractor
Many people who work as an independent contractor have no idea what it means. They sign the agreement like they would any offer of employment or work for a client that pays them over $600 not knowing that a 1099 is likely to come in the mail. Not knowing what it means to be an independent contractor is possibly the worst mistake an independent contractor can make.
Use Basic Accounting Software
As an independent contractor you need to be especially aware of how much you’re taking in, how much is going out, how much you should be withholding, and what your expenses are. This will help you around tax time and could potentially save you in an audit. Getting something even as simple as Quicken can save you a lot of heartache and time later.
In certain cases, an independent contractor needs to file Quarterly Estimated Taxes. Failure to do so can result in penalties and interest charged by the IRS. A person is typically required to file Quarterlies if they expect to owe over $1000 in taxes. The rules here get tricky, so it is probably best to talk to a tax expert about your individual case in this instance.
Ask for More Money
Employers are saving a lot of money by hiring you as an independent contractor. Don’t let them trick you. Before you sign an Independent Contractor Agreement make sure that you’re making enough money to cover the extra expenses.
Talk to a Tax Expert
This might not be your favorite course of action, but it could be the most important thing you do in becoming an independent contractor. It’s better to talk to an expert about your taxes before you’re in trouble than a year later when you’re swimming in a sea of tax debt. Talk to someone who can help you know how to take care of your taxes and help you avoid any pit-falls. Remember that if you do find yourself drowning in tax debt, an enrolled agent like Tax Help MD can help you. Tax Help MD has been solving tax problems for over 35 years and is known as the C.S.I of tax due to their relentless investigation and research uncovering the best solutions available while also giving clients the attention they deserve at a cost they can afford.
Looking for a tax doctor? Need some professional help in dealing with your IRS tax concerns? My Tax Help MD offers professional and state-of-the-art consultancy regarding all kinds of IRS tax issues. We can provide you complete guidance for the purpose of tax resolution and tax settlements.