Have you ever heard of the 1099 worker? If your answer is no, you’re lucky to have come across our article because it may become a game changer. The 1099 worker means you’re a private contractor and have access to all the freedoms a traditionally employed worker cannot boast. You can choose the location from home or your employer’s office; you are free to set your own schedule – the main thing is to get everything done before the deadline.
However, there is the other side of the moon – tax responsibility. Like self-employed individuals, private contractors must know all the intricacies of tax filing, including the proper amount of money and the deadlines they must meet. In case of a minor setback, the implications might cost you hundreds or thousands of dollars. This is not the best scenario for a newbie, isn’t it? To help people avoid mistakes at the very beginning, we decided to reach out to experienced tax pros and make a guide with valuable tax tips on tax issues. Thus, newly-minted private contractors and freelancers can breathe a sigh of relief and enjoy their freedom without any obstacles. Let’s delve into it!
Table of Contents
The first step you have to take in your new life is to define the differences between the traditional W-2 work and the 1099 worker approach. Once you’ve done it, it will be easier for you to manage your taxes without any losses. Just bear in mind from now on, you’re the one who is responsible for paying estimated taxes and your social security payments. Yes, you may be used to knowing that your employer usually did it for you. Still, you must adjust as fast as possible – nobody but you will do it on your behalf anymore.
You should also keep records regarding your quarterly income tax payments. Also known as “estimated taxes,” they used to be quarterly, but now there is an option to pay them monthly. Also, thanks to the IRS, one is able to pay through their website instead of mailing.
This type of tax has the right to be called confusing, but only at first sight. According to the United States tax code, self-employment tax comprises FICA payments, which are cash contributions to the nation’s Medicare and social security treasuries.
Being a W-2 worker, you tend to divide the FICA, which is 7.65 percent, with your employer and pay 50/50. Luckily, these payments are made automatically. However, becoming self-employed requires you to pay the total price, which is 15.3 percent. Paying 7.65 percent by habit may end up with penalties at the end of the day.
Dealing with so many innovations, you might wonder how to estimate your income correctly and tax payments based on it. The good thing is that you’re not alone. If it’s your first year as a 1099 worker, the IRS’ Self-Employed Individuals Tax Center is your way to success. With their help, you can learn how much you have to pay and how to estimate it.
Usually, this sum depends on your income for the past 3 months. To identify the amount of money you have to pay as a tax, you must fill out the 1040-ES form. It usually takes 10-15 minutes to make all the calculations.
Saving money is always a good idea. You may have both good and bad days as a freelancer, but taxes are to be paid despite everything. You must stick to your tax payments quarterly and at the end of the year. The “pay-with-the-next-check” approach may entrap you quickly and lead to a debt hole.
Try to steer clear from this slippery slope from the very beginning – open a separate saving account to deposit money aimed at paying taxes only. 25-30 percent of your monthly income will do perfectly. It’s better to end up over-estimating your payments rather than dealing with a lack of money or, which is even worse, fines.
We understand that only some freelancers or private contractors can afford to buy tax software or pay a tax professional. However, we must admit that doing so will save you tax-related time, stress, and energy each month. Isn’t it a worthy investment?
As a professional in your specific sphere, you should be overwhelmed with your direct responsibilities rather than dealing with tax issues. It’s better to ensure that you have enough work and will be paid; this is the main sign of your professional success and development as a freelancer. Spraying on such issues as tax payments might distract you from your core responsibilities and influence the quality of your work. Therefore, using specific accounting software makes billing, accepting online payments, and tracking expenses much easier and more pleasant. Furthermore, knowing your income will simplify estimating the amount of money you have to pay as a tax.
At the same time, we understand those people who tend to avoid all the accounting processes. Why bother yourself with tax subtleties if you’re an artist or a tutor? It takes a lot of energy and resources, which could be spent on creativity instead. Should you be one of such people, consider hiring a tax professional. Not only will it set you free from tiring figures, but it will also save your energy and nerves. Anyway, it’s up to you to decide what tactics to stick to. If you are open to any type of knowledge and skills, and have enough time and resources for that, you are highly welcome to dig into tax issues and deal with them without the help of third parties.
