The differences between being an employee and being an independent contractor, otherwise known as being self-employed. This is a summary of info on irs.gov and should not be taken as personal tax advice. It is important to pay proper taxes when having self-employment income
Introduction to 2015 (2016) Payroll Taxes and Self-Employment
All wage earners in the United States are required to pay three types of federal taxes: FICA Social Security, FICA Medicare, and Federal Income Tax. When a wage earner is an employee, these taxes are withheld from paychecks, then sent on to the IRS by the employer in the form of wage withholding. The employer pays half of the FICA taxes, and the other half is withheld from the paychecks of the employee. The employee will then pay all Federal Income Tax on wages from the
2015 Payroll Taxes and Being Self-Employed
When a taxpayer accepts a job with an employer, one of the first matters of business should be determining if the wage earner will be an employee, or a contractor. Employees have their taxes withheld from paychecks, and the employer will pay half of them. On the other hand, a self-employed contractor will be responsible for the entirety of the FICA tax due because there is no employer paying the other half. This is called Self-Employment tax. It’s comprised of FICA-Social Security and FICA-Medicare.
What are 2015 FICA taxes?
The current FICA-SS tax rate is 12.4% – 6.2% for the employer, and 6.2% for the employee, or 12.4% for the self-employed WE. The FICA-M is 2.9% total, or 1.45% for the employer and 1.45% for the employee. The FICA-SS tax has a wage ceiling of $113,700 in 2013 and $117,000 in 2014. When your income is over these amounts, your FICA-SS will not increase.
There is no ceiling for FICA-M. All wages earned are subject to this tax. There is a new Medicare tax of 0.9% relating to the Affordable Care Act for some wage earners. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately and $200,000 for all other taxpayers
Picking Independent Contractor or Employee?
It is essential that a worker is classified correctly as an employee or independent contractor for many different reasons. The IRS uses several factors that will override whatever the employer or the employee think they are. It is very important to have the correct employment status because there are hugely different tax consequences of being classified an independent contractor rather than an employee.
The IRS contractor test:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? How much can the worker decide what to do?
- Financial: Are the business aspects of the worker’s job controlled by the payer?
- Type of Relationship: Are there written contracts or employee type benefits ? Will the relationship continue and is the work performed a key aspect of the business?
In general, if the employer provides the employee with supplies, gives the employee a mandatory schedule, and provides benefits, the worker is an employee. If the worker provides his own supplies, can work at his own pace or turn down projects completely, and is not provided any kind of benefits, he is likely an independent contractor and will taxed as that.
Deducting Business Expenses as Independent Contractor:
Both independent contractors and employees are given the opportunity to deduct (or “write-off”) their un-reimbursed business expenses. For the employee, these expenses are deducted as part of their Itemized Deductions. If the worker’s un-reimbursed business expenses – including mileage, supplies, insurance, materials, uniforms, etc – total more than 2% of the Adjusted Gross Income, everything above that 2% will be added to the Itemized Deduction form (Schedule A). If the employee does not itemize, the IRS is assuming that the standard deduction ($6100 in 2013) will cover the cost of said expenses. Thus, the employee will not be able to deduct these expenses individually on their tax return.
For the independent contractor, all legitimate expenses can be deducted from their tax returns if they are related to earning income. Self-employment is reported on form Schedule C. The Schedule C totals all income, all expenses, and calculates Net Profit or Loss. The Schedule C is used for sole proprietors and some LLCs. Corporations and Partnerships are reported on their own tax form to report income and expenses to the IRS. A wage earner could be an independent contractor who works under their own corporation.
Popular Schedule C Deductions for Business Expenses
- Cost of goods sold,
- car and truck, c
- ommissions and fees,
- contract labor (paying other independent contractors),
- employee benefit programs,
- insurance (other than health),
- interest paid,
- legal and professional services,
- office expenses,
- pension or profit sharing,
- rent or lease,
- repairs or maintenance,
- supplies (not included in cost of goods sold),
- taxes and licenses,
- travel, meals and entertainment,
- wages (paying employees),
- and other (including telephone).
It is essential to keep an accurate record of these business expenses in order to deduct them.
The order of the Schedule C looks like this: Total Income -minus- Cost of Goods Sold =equals= Gross Income -minus- expenses =equals= Net profit or loss. Net profit or loss is then reported on the first page of your 1040, and this number is used to calculate the self-employment tax (15.3% of net profit).
Estimated Tax Payments for Self-Employed
After all other aspects of your tax return are put in, your self-employment tax will be added to your income tax, increasing your total tax due.. If a tax payer is entirely self-employed, he should have made quarterly estimated payments based on the amount of tax that was due the previous year. Not making quarterly payments leaves the wage earner subject to penalties.