By Sandra Taylor-Sawyer: Everybody’s Business
Who is an independent contractor? According to the Internal Revenue Service, they are people who have an independent trade, business or profession in which their services are offered to the public and they perform a job in which they determine how the task is accomplished is an independent contractor.
Money received from work performed are subject to self-employment taxes, which is where many independent contractors’ tax troubles begin.
The IRS requires any IC who receives income for services to claim the amount for tax purposes. If the IC’s income from any one entity is $600 or more within a year, a completed IRS Form W-9 “Request for Taxpayer Identification Number and Certification” must be completed.
The entity that hired the IC must maintain the W-9 Form, and no later than Jan. 31, the IRS Form 1099 “Miscellaneous Income” must be prepared and mailed to the IC. All Form 1099s received for the previous calendar year along with any other income received are used to report the total income for the calendar year.
Independent contractors are required to pay self-employment tax if their net profit is $400 or more. Net profit is computed by subtracting allowable business expenses from total income (which is the totals from Box 7 of all Form 1099s received and other income from services rendered).
The self-employment tax rate is 15.3 percent of net profit. In order to avoid a large tax liability on April 15, an IC should make estimated payments.
The best method to compute estimated payments is to use the previous year’s tax return or previous quarter’s profit-and-loss statement. The self-employment rate of 15.3 percent is multiplied by the net profit; the product is the tax due.
For example, Bill is an IC who is hired by Z Publication Company to write weekly articles for their magazine. Z Company pays Bill $200 for each article. Bill also writes a monthly newsletter for T News Company and receives $500 per article. Bill determines his allowable expenses are $400 per month. Bill should make quarterly payments to the IRS of $413.11.
The computation of total income received, $1,300, minus $400 for expenses yields a net profit of $900. The monthly tax obligation is $137.70, (net profit of $900 multiplied by 15.3 percent). The quarterly amount is computed by multiplying $137.70 by 3 (number of months).
The estimated payment is just an estimate … a little bit of something is twice better than a little bit of nothing. If more taxes are paid than required, after filing the annual tax return a refund is received. If the taxes paid are less than the required tax obligation, the IC owes the IRS the difference.
The above scenario covers an isolated case and does not include other tax obligations that may be required. It is always wise and highly recommended to seek professional tax advice.
Sandra Taylor-Sawyer is director of the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.clovis.edu/sbdc.