Independent Contractor and Taxes

[LinCella]

This is a question for the independent contractors out there. I just signed on to do some contract work, I won't be earning much, let's say enough for some nice lunches and to pay a few small bills every month. I have to take out for SS and Medicare and I assume I will have to do estimated taxes. However, can I file this as a business and not connected to my income from my pension?

 

[UtahSkier]

Your income will be reported on a Schedule C (1099 income) and the profits will flow onto your 1040.
You will get to deduct all kinds of expenses and even some health insurance premiums. You can even shelter a bunch of it into a I401K if appropriate.

Get a tax program (turbo tax or HR tax cut ) and learn how to use it.
Pay your estimated taxes quarterly (35% of quarter income) should get you in the ballpark. You will settle the final amount when you file.
Your estimated tax goal is to pay 100% of last year's tax or 90% of what you will actually pay.

 

[Bamaman]

Real world suggestion: Get paid in cash and keep a low profile if it's truly just a small amount of $.

 

[UtahSkier]

>> Get paid in cash


But you never know if the payer is going to file paperwork with the government to claim their deduction. Once you file a w-9, it is game over for reporting...


Furthermore, its my understanding, that you can be very aggressive with the deductions. If you are wrong then the IRS will make you pay the difference and some interest.


However, not claiming income is fraud and the penalties can be substantial.

 

[LinCella]

The amount is about $400 a month before taxes and it cannot be in cash, this is a big company. I'm also trying to figure out of if it is worth my time, it's one hour a day of online work. It's about 1/4 an hour of what I used to make in my real job. I would get a on-call job doing the work I used to do but state pension rules have made that impossible.

 

[frayne]

If you get a 1099 MISC. and go the Schedule C route, keep good records of your related business expenses. I would usually tell people to use 25% as a good number to either hold back or make as quarterly estimated payments to cover your SS, Medicare, and tax liability but it really depends on your overall taxable income.

 

[target2019]

It's 1099 income. It gets reported on your 2016 Fed 1040 form and your state form.
If it's agreeable, take the money and pay estimated taxes.

Watch the Contract terms. Don't sign something that's open ended. Get 3 or 6 months, and raise your rate after that, or walk away if it wasn't what you wanted.

 

[aaronc879]

Hope this isn't considered thread hijacking but I have a related question. I am not fired and my sole income is about $17K/yr AGI from work as a independent contractor. I only pay about $1000 in Fed and State income tax but I pay over $2000 in FICA. That leaves me with less than $14,000 in net income which is not much to live on even for me. Is there a legal way to not pay FICA. Can I not pay and just have the earnings not count toward my future SS payment? I've been paying the last 3 years but I know others who do what I do who haven't paid FICA and i'm wondering if that's legal or not. I think they just file it under "other income" rather than self employment income.

 

[LinCella]

Thanks everyone!

 

[target2019]

Hope this isn't considered thread hijacking but I have a related question. I am not fired and my sole income is about $17K/yr AGI from work as a independent contractor. I only pay about $1000 in Fed and State income tax but I pay over $2000 in FICA. That leaves me with less than $14,000 in net income which is not much to live on even for me. Is there a legal way to not pay FICA. Can I not pay and just have the earnings not count toward my future SS payment? I've been paying the last 3 years but I know others who do what I do who haven't paid FICA and i'm wondering if that's legal or not. I think they just file it under "other income" rather than self employment income.

It's a voluntary system, I heard. I would not want to be in a tussle with the IRS. If there is a way to legally avoid these taxes, I'd like to know about it.

 

[pixelville]

Hope this isn't considered thread hijacking but I have a related question. I am not fired and my sole income is about $17K/yr AGI from work as a independent contractor. I only pay about $1000 in Fed and State income tax but I pay over $2000 in FICA. That leaves me with less than $14,000 in net income which is not much to live on even for me. Is there a legal way to not pay FICA. Can I not pay and just have the earnings not count toward my future SS payment? I've been paying the last 3 years but I know others who do what I do who haven't paid FICA and i'm wondering if that's legal or not. I think they just file it under "other income" rather than self employment income.

Since you pay FICA on the "profit" from the business, if you have adequate business expenses you can end up paying 0 FICA. Other than that there is no legal way that I am aware of.
"Other Income" would be incorrect way to report and could be subject to audit. From what I have heard, IRS is more likely to look at those closely.

 

[Al in Ohio]

I have been a self employed LLC before. I would not suggest you can get "agressive" with expenses. That kind of advice will flag an audit. Legit expenses are defined and I certainly never had enough to negate more than maybe 5-10 percent of profit thereabouts. Your talking paper, supplies for the actual work, printer ink, a set amount for travel ( if applicable) etc.


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[aaronc879]

Since you pay FICA on the "profit" from the business, if you have adequate business expenses you can end up paying 0 FICA. Other than that there is no legal way that I am aware of.
"Other Income" would be incorrect way to report and could be subject to audit. From what I have heard, IRS is more likely to look at those closely.

You pay FICA from dollar 1, right? So if you have enough expenses to get FICA down to zero that means your income is zero. I'm very frugal but I can't live on $0. This year I expect to make $18,500 gross and $14,000 AGI(after expenses)
That means I have to pay FICA on the entire $14,000, right?

 

[target2019]

You pay FICA from dollar 1, right? So if you have enough expenses to get FICA down to zero that means your income is zero. I'm very frugal but I can't live on $0. This year I expect to make $18,500 gross and $14,000 AGI(after expenses)

That means I have to pay FICA on the entire $14,000, right?

Correct. Some businesses have startup costs, and in the first years you might show very little profit. It would be difficult to justify when you are online one hour each day and that is your business.

If you need a computer system, that could be a significant cost. You may need a system that is dedicated to this work. Large monitor, battery backup, desk, etc. you could expense all of that if it is 100% business use.

 

[pb4uski]

...Is there a legal way to not pay FICA. ...

If the amounts were small and irregular then miscellaneous income might be an option but $17k is too much to go that way IMO.

I suppose you could create a C corp, run the $17k of income through that, pay yourself a lower salary (which would lower your SS), pay 15% corporate income tax on the profit and then dividend profits to yourself (and pay 0% or 15% or more depending on your tax situation) but I'm not sure you would come out ahead and it would be a lot of hassle to avoid a relatively small amount of SE tax.

 

[Al in Ohio]

Correct. Some businesses have startup costs, and in the first years you might show very little profit. It would be difficult to justify when you are online one hour each day and that is your business.

If you need a computer system, that could be a significant cost. You may need a system that is dedicated to this work. Large monitor, battery backup, desk, etc. you could expense all of that if it is 100% business use.

Ask your tax accountant or consult IRS publication 583 and 587. The IRS cracked down hard on those trying to expense a new computer for home businesses. You have to prove its use is now solely to run your business and was bought after you started your LLC. I looked into it after I started my biz and determined I could not take a deduction on my Computer even though more than half its use was business related ( I also already had it before I registered my LLC).


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[Al in Ohio]

A few things I considered in my rate: I had to pay almost double taxes since you will be paying essentially both the employees and employers share of FICA plus you front your own healthcare insurance, vacation and sick time off. That's overhead. That's why you need to charge two to three times your previous internal wage rate. I charged over $90 per hour which was certainly higher than my employee rate and they didn't even blink. Why? They just tack on 10% and pass it all on to their clients. Your internally off their books at that point and your cost no longer may come out of the same project budgetary pot. Mine was reallocated as " subcontractor" and passed on as a separate cost.


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[target2019]

Ask your tax accountant or consult IRS publication 583 and 587. The IRS cracked down hard on those trying to expense a new computer for home businesses. You have to prove its use is now solely to run your business and was bought after you started your LLC. I looked into it after I started my biz and determined I could not take a deduction on my Computer even though more than half its use was business related ( I also already had it before I registered my LLC).

No problem. You are correct.

I have two computers. Actually, maybe a dozen? Some are exclusively for business use, others not. Some were expensed 179, some depreciated. Never a doubt in 30 years of sole proprietorship.

What I wrote was true, but obviously doesn't encompass 100's of pages of IRS this and that. Crackdown? Those happen every year. Just steer a straight and honest course.