Anyone understand 1099 Contracting Taxes?

[bump]

I’ve recently started a 6 month contract as an IT professional after being laid off from a full-time job.

My hourly rate is almost exactly my previous salary divided by 2080 (# of work hours in a year).

I’ve figured out my income tax, fica and medicare hourly rates for my previous job via my check stubs.

Since my gross pay rate is just about the same, in order to roughly estimate my total taxes, should I double my Income tax withholding and leave the FICA and Medicare amounts the same, or should I leave the income tax the same, and double the fica and medicare?

I’m more than a little bit confused by some of websites out there purporting to explain this.

[Frank]

@bump

Since my gross pay rate is just about the same, in order to roughly estimate my total taxes, should I double my Income tax withholding and leave the FICA and Medicare amounts the same, or should I leave the income tax the same, and double the fica and medicare?

Leave your income tax the same, and double the FICA and medicare.

[SlickRoenick]

FWIW, my brother is an accountant with American Express Tax & Business Services and he said this:

Are you trying to avoid paying tax come April 15, 2005? If that’s the case, don’t bother with FICA and medicare. Doubling them will only be a waste of your money. You can’t claim them as deductions on your 1040 unless you make more than the ceiling amount for 2004. I believe it is $87,900. After you have made this much, the government stops deducting them out of your pay.

The contracting job employer does not have to withhold taxes from your pay. If they give you the option, claim an exemption or two depending upon what you have figured based on your previous job.

If you are afraid that you will owe additional taxes once you receive your W-2 from your previous job and the W-2 or 1099-Misc from the contractor, make an estimated payment before the end of the year. You can go to the IRS website and print out what is called an estimated payment voucher. Or file for a federal extension before April 15 and pay some money with the extension to reduce the tax liability, if there is one.

[Frank]

@SlickRoenick

FWIW, my brother is an accountant with American Express Tax & Business Services and he said this:

Well, what your brother said may be fine for tax avoidance, but bump still has to pay FICA and medicare. I just did this in April. He will have to pay both his portion and the employer’s portion. So he should (if he’s smarter than me) set aside 15 odd % of his income for including them when he does his taxes next year.

[InternetLegend]

It’s a good idea to estimate your taxes as closely as you can and pay them quarterly. If you estimate wrong and underpay by what seems to me to be a fairly small amount, you’ll be hit with a penalty at the end of the year. You have the advantage, of course, of knowing exactly what your income will be for the next six months, so you should be able to estimate with confidence. And, as This Year’s Model points out, you will need to pay 15% for FICA and Medicare (I believe it’s referred to in many publications as “Self-Employment Tax”).

[Voodoochile]

My advice, though it kills me to say it, is to find yourself a CPA or some other tax specialist, and set up an account with them to handle it for you. It doesnt cost very much at all if you look around, but yes youre probably (almost definately) going to have to make quarterly payments. You can do all the research yourself etc, but if you apply your hourly rate to the time you spent doing research, thats more expensive than it would be to have a CPA or someone do it for you. They can also be invaluable in avoidence ideas/issues and in ways you can save yourself money. Ive been contracting for 4 years and Ive known quite a few fellow contractors who gotten seriously reamed by the IRS for what amounts to not crossing the correct Ts and dotting the correct Is.