Some friends have recently started an internet business doing resume packages, and have hired me as an independent subcontractor. Because they’re just getting started (although we have a TON of paid work already coming in, and I expect a paycheck this week), they don’t have an accountant to do payroll yet, so they’re paying me as an independent subcontractor. And I need to file my own taxes until they get the payroll going because I’m still being claimed as an employee (I hope this makes sense…I’m not a tax-savvy person).
So what I need to know is what do I DO to file these taxes? What forms do I need? And how often should I file? I’ll be paid weekly, and I’d like to put aside money from each check for my taxes because I don’t want to get hit with a large lump sum later. Can I file monthly or quarterly? What’s the best course of action to take in regards to doing this?
Your best bet is to talk to an accountant now. Figure out how much you will be making and start making the payments. You don’t really have to pay it to the IRS til the end of the year, but it’s a good idea to at least stick it in a savings account so you’ll have it. There is more than just Fed tax too, you’ve got Social Security, Medicare tax, and state taxes you need to figure out and get put away.
If you’re being paid as an independent contractor, that makes you self-employed. Self-employed individuals need to file payments wit the IRS (and stae revenue department, if applicable) quarterly, so don’t wait till the end of the year. Your accountant will have all the forms.
My dad did this a few years ago, and I’m in the middle of figuring it out right now. The IRS considers money paid to you as a subcontractor self employment income. Because of this, you have additional schedules to the regular Form 1040 that need to be filled out.
Form 1040 Schedule C (or Schedule C-EZ) shows your income as profit or loss from a business. This is where you show the money paid to you by the company (they should give you Form 1099 at the end of the year instead of a W2) and your expenses. This money is what you have to pay taxes on.
In addition to the regular income tax, you’re also responsible for paying the Social Security and Medicare taxes that your employer normally withholds and pays. This is done with Form 1040-SE, and it can take a sizable chunk out of your earnings - make sure you know this when you’re talking about how much you’re getting paid. In an employee/employer relationship, the employer withholds this money from the employee’s check, but also has to contribute a matching amount. As an independent contractor, you’re going to be liable for the entire amount - Social Security withholding of 12.4% and medicare of 2.9%.
If you’re making more than just a couple of bucks as an independent contractor, you’ll probably have to pay estimated tax every quarter. You do this through Form 1040-ES, and the payments are due on the 15th of April, July, October, and January. You need to have an idea of how much income you’re going to have for the year to get these payments right, but you can base it on the tax you paid last year and avoid a penalty.
The IRS web site has some pretty good information here, as well as links to all the forms and instructions for the whole process. If you’re really not a tax savvy person, I’d follow P_T_'s advice and see an accountant (or tax attorney). Good luck!
When you are a subcontractor, you are effectively a small business. Though, without knowing more information on your situation, the business could possibly get in a bit of trouble (penalties) if they are incorrectly classifying you as an independant contractor. The differences are here: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
As for your State’s requirements, check your State’s Department of Revenue website
Consult with and engage the services of a tax accountant to do your taxes.
This will save a lot of heartburn and the consequences of a mistake on your part.
In addition to the advice given, my own experience is related to frequency of work and independence.
I own a construction company, and employ the services of several other companies as subcontractors. All of these folks have their own vehicles, tools, insurance, and work for other contractors besides me. As such, they are independent contractors, and receive a 1099 form every January.
Were I to contract the services of XYZ Sitzbath to work on my jobs such that they held no contractural agreements with another, it could be properly argued that they are employees of my firm, and should not be addressed as subcontractors.
You don’t have to file those quarterly, that is just to keep from having a huge debt at the end of the year. Not that I don’t recommend doing it, it’s a great idea, you just don’t HAVE to.
P.S. I was a sub for 4 years, I know what I’m talking about here.
To address the employee/Sub classification, a person has to work more than 50 % of thier total work with you for them to be considered an employee. If you get more than 50% of your income from these people, you are their employee. Whether or not you want to push that issue is up to you, as long as neither party complains, it’s usually not a problem.
Just a couple of things I noticed (Mr. Legend has been self-employed for the past four years, and we’ve been winging it with success so far).
The “quarterly” payments are actually due on the 15th of April, June, September, and January. Why? They’re the government; they don’t have to tell us why.
According to this IRS publication and everything I’ve been told, you can either pay quarterly or pay it all at the beginning of the year. If you don’t, they’ll hit you with a penalty.
Thanks for the info. I’m trying to find out what kind of employee they’re classifying me as so that I can talk to my dad this weekend (he’s good at taxes and files his own self-employment taxes). We’re trying to make sure everything is on the up-and-up with the business.