[IMAGE CREDIT: IMAGES OF MONEY, ARTICLE CREDIT: BONNIE CONRAD]
While looking for a job, a potential employer may offer you a position as an independent contractor. Working as an independent contractor can be rewarding, but the tax implications are quite different than a traditional job. With a traditional job, you can rely on your employer to withhold the proper amount of taxes. But when you work as an independent contractor, you are responsible for tracking your own tax liability and making sure the tax agencies receive their money on time.
Social Security Taxes
Independent contractors are considered both employee and employer by the IRS. What that means from a tax standpoint is that they must pay both sides of the Social Security tax. As of 2011, employees pay 4.2 percent of their wages to Social Security, while employers pay 6.2 percent. The 4.2 rate for employees is slated to go back up to 6.2 percent when the temporary reduction expires in 2012, making the total Social Security levy for independent contractors 12.4 percent instead of the current 10.4.
Medicare Taxes
When you work as an independent contractor, you must pay both the employee and the employer share of the Medicare tax. As of 2011, the tax rate for employers and employees was 1.45 percent of earnings. That means that independent contractors must pay 2.9 percent of the money they make in the form of Medicare taxes.
State and Local Taxes
Since no state and local taxes are withheld from your independent contractor earnings, you need to pay those taxes on your own. Some states may require that you pay taxes quarterly, while others allow you to pay once a year. The amount you have to pay depends on the tax rate in your state and municipality. You can find tax rate information by contacting the state revenue department or local tax bureau directly.
Estimated Taxes
As an independent contractor, your clients are not responsible for withholding taxes from the payments you receive. That means you must carefully calculate how much you owe and make sure the IRS gets paid on a timely basis.
When you work as a freelancer or independent contractor, you may be required to make estimated quarterly tax payments if you expect to owe more than $1,000 when you file your taxes. If you work with a tax planner or CPA, that individual can help you determine how much you need to pay each quarter to remain in compliance with the tax laws.
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