Experience with 1099's?

[skater]

I'm currently accepting two jobs. Both involve regular pay checks, but one does not withhold taxes. From what I'm reading online, that means I am also responsible for a self employment tax. Does that tax include FICA and unemployment insurance? I'm also wondering about workman's comp and if I would need to purchase that as well?

 

[rchristiansen]

We've been 100% 1099s for about 6 years now and we do not pay workman's comp or unemployment insurance. However, each state has different rules about the workman's comp and unemployment insurance. It may be required if you are going through an agency, but not if you aren't. We don't have an agency - we are paid directly.

You will be required to pay all of the self employment tax which is about 15% up to about $100K and then around 2.5% after that. That is on top of your regular income tax bracket. So if you are in the 25% tax bracket, then your taxes are essentially 40% - not including your state income tax.

However there are many ways around that. If you pay for your own health insurance, that is taken of the top prior figuring out all your deductions. Also you can contribute up to about 20% of your income to a SEP retirement plan that reduces it as well. And finally 1/2 of the self employment tax is taken off the top --- then that can lower your actual tax bracket. But you still need to pay that 15%ish self employment tax.

So make sure you set aside that much to pay your taxes in April next year. MANY self employed people have been surprised with HUGE tax bills. Also don't be surprised if next year you are required to pay estimated taxes throughout the year.

I have no idea if you can even claim unemployment if your self employed.

 

[rchristiansen]

One more thing - what's really neat about the SEP retirement plan is you have up until April of the NEXT year to contribute to it. So for 2010, we have until April 15, 2011 to max out the contributions, then lowering our taxes. It's nice because you don't have to guess throughout the year what your total self employment income will be.

 

[skater]

Thanks! I guess I have to decide if its worth it for a part-time job . It also only pays a little more than the other job offer, so I'm going to try to calculate that into my decision.

 

[rchristiansen]

I really like this online calculator for figuring out that stuff. The equations get to be too bulky when you try and do it yourself:

http://www.dinkytown.net/java/Tax1040.html

In that calculator, when you click on the income button, don't enter the self employment part into "wages" - enter it in the Business Income.

 

[Pakey]

The self employment tax is actually half of 15.3%, not 15%. One half is normally paid by the employer and the other half by the employee. When you are self employed, you pay both portions. So through 2010, that means that if you are self employed, you pay 7.65% more in FICA/Medicare than you would pay if you were employed by someone else.

For 2011, the employee portion of FICA was reduced by 2% so if you are self employed, in 2011 the rate will be 13.3% instead of 15.3%. However, you do deduct the self employed portion from the income on which you pay income taxes.

 

[dejr_8]

Remember,you will need to make quarterly tax payments to cover your income and FICA taxes. Make sure you do this for your State as well (if they have an income tax).

 

[rchristiansen]

The self employment tax is actually half of 15.3%, not 15%. One half is normally paid by the employer and the other half by the employee. When you are self employed, you pay both portions. So through 2010, that means that if you are self employed, you pay 7.65% more in FICA/Medicare than you would pay if you were employed by someone else.

For 2011, the employee portion of FICA was reduced by 2% so if you are self employed, in 2011 the rate will be 13.3% instead of 15.3%. However, you do deduct the self employed portion from the income on which you pay income taxes.

Yup! I forgot about the reduction for 2011. I wonder if that is included in my estimated tax calculation for 2011. I'm gonna go check! Woot.

 

[Cheshire Figment]

I would also suggest going to www.irs.gov and order the following publications which will probably help a lot.

334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
463 - Travel, Entertainment, Gift, and Car Expenses
535 - Business Expenses
551 - Basis of Assets
552 - Recordkeeping for Individuals
560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
583 - Starting a Business and Keeping Records
587 - Business Use of Your Home
946 - How to Depreciate Property

And also, if the time can be spared and at and minimal cost take a first semester Principles of Accounting course at a local Community College. Not necessarily to keep the books, but to get an understanding of what the business is doing.

Note that most small business fail within the first few years not because the owner did not know his subject but because they did not understand the accounting.

Mike (CPA Retired)

 

[CPT Tripss]

The PP reminding about the need to make quarterly estimated tax payments was right on target. There may be penalties if you fail to do this.

 

[dngnb8]

I'm currently accepting two jobs. Both involve regular pay checks, but one does not withhold taxes.

This needs more clarification. If you process as an employee, you get a paycheck. If youre contracted, and payed via finance, then youre 1099

From what I'm reading online, that means I am also responsible for a self employment tax. Does that tax include FICA and unemployment insurance?

Its your FICA counterpart. You have no unemployment insurance. Youre self employed.

I'm also wondering about workman's comp and if I would need to purchase that as well?

Nope. But you might want to consider Disability Insurance or Income Replacement Insurance.


For tax purposes, you will be filing Schedule C. This opens up a whole new world of deductions for you. I HIGHLY suggest you get a Tax Planner (not a preparer) to work with you. You will be amazed at what you can do.

Schedule C is the best form to file!

 

[scrapquitler]

Before you accept a job where they pay you as an independent contractor, you should make very sure that you are actually being treated as an independent contractor rather than an employee. If you are classified incorrectly, there can be big implications for you and the 'employer'.

You might want to read this:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

 

[becauseisaid]

Personally, I'm curious as to what type of job you're talking about. A lot of times that can determine what sort of deductions you have to look forward to at tax time as well as whether you will be required to supply worker's comp/liability insurance (which, btw, does NOT cover you as the "owner" of the policy).

My husband delivered pizzas for many years as a 1099 contractor (yes, this is correct - it was how the contract was set up and executed). He had to report ESTIMATED tips but was not required to provide proof. No w/c-liability insurance required. Able to deduct mileage, cell, car repairs on taxes.

Currently my husband is a drug runner. He couriers medical supplies. W/C-Liability not required. Able to deduct mileage (over 100k miles at .50/mile, thank YOU IRS.) and cell.

I am the office manager for a flooring company and provide the 1099s to our flooring installers. They ARE required by our state (TN) to provide W/C-Liability insurance which is based off of what income they earn. They are allowed to deduct mileage, tools, and cell phones on their taxes.

So the job makes a world of difference. Becky had one GREAT piece of advice. (Well, she had several, but one in particular. ) If you ever go 1099, open a savings account strictly for taxes and put aside at least 10% of every check into it. This should cover your taxes after deductions. For a part time job, I seriously doubt you will be getting into the quarterly payment realm.