Contract workers and Taxes

acealmighty13

I have no idea where else to put this, it's been on my mind awhile now and hope I could get an answer or two on the topic.  I would like to add that I'm a US citizen.  Forgot that part.  Ha ha!

I currently work full time contract with a university on an educational game.  It'll be a year in November and I've been doing my best to pay my taxes quarterly.  I have fallen behind, I know there's a penalty but a car transmission isn't going to repair itself.  This is my first job where I have to focus on paying my own taxes.  I've always received a W-2.  Will I receive a sheet in the mail that tells me what I paid in taxes for that year?  I've tried looking up information and trying to understand it all but so much jargon.  I'm sitting here, working and my brain brings up taxes and it won't go away.  Ha ha!  So, if there's anyone that can help me understand what to expect, what to do, etc. I'd be very grateful.

Eric Chadwick

I recommend meeting with an accountant. My wife and I have used one for the last 10 yrs or so, we send them all the receipts etc. and they fill in all the tax forms. Well worth the expense, unless your financials are very simple.

commador

Since you mentioned a W2 I assume you're in the US. You should receive a 1099 form in January that will highlight your income. You are correct that quarterly estimate taxes are the way to go. This requires you stay on top of your income however. Also, don't forget to document any expenses you have outgoing as you are technically self employed, and those are tax deductible. In any case, Eric is right. Consult a CPA. They will be able to give you accurate information and create a plan.

Marshkin

Seconding the accountant. You failed to mention what country you are from, which makes this difficult to answer. 

acealmighty13

Mine are pretty simple.  I rent, I don't have any children, and I'm single.  My taxes over the years have been pretty easy to get by with what I've got and hasn't changed much since I switched over to contract work. 

acealmighty13

commador said:

Since you mentioned a W2 I assume you're in the US. You should receive a 1099 form in January that will highlight your income. You are correct that quarterly estimate taxes are the way to go. This requires you stay on top of your income however. Also, don't forget to document any expenses you have outgoing as you are technically self employed, and those are tax deductible. In any case, Eric is right. Consult a CPA. They will be able to give you accurate information and create a plan.

So far, I've kept receipts for the new computer, and any software I've needed for the job and plan on using them.  Email makes it pretty easy.  Ha ha!

Eric Chadwick

This thread has some gold:
Freelancing Help USA

acealmighty13

I contacted my girlfriend's mother's CPA via email, talking about my situation and getting it straightened out.  If I gotta pay him, I gotta go that route.  The fact it's still new to me, I'm letting it overwhelm me and all that I'm doing on top of it, I think talking to someone else may be of use to me.   Reading the different percentages for what I owe on what I earn is freaking me out. 

Since I keep track of my own hours, I figure the math for what I owe near the end of that quarter and use %15.3(or whatever it is, I have to keep looking for it) and paid that amount for the first quarter.  Seeing 30 and 35 percent is freaking me out.  I'm not thinking clearly and those last two numbers are just a suggestion for what I should put away but we all know how the brain works.  Ha ha!  I need to sleep on this and relax.

EarthQuake

I save 35% for taxes but never pay that much after deductions (more like 18% or so). I own my house so there are more deductions I can make but even renting you should have some significant deductions, such as rent, utilities (gas, electricity, even internet), and the obvious ones like software and hardware.

If you don't pay quarterly, or miss a quarter it's not a big deal. You will pay a fee when you file, usually about $100 or so. I have friends who also work from home and pay yearly because they can invest the money during the year and make more than the late payment penalty.

You should get a 1099 misc or something similar from any company your work with throughout the year.

Consulting an accountant or a tax professional is a good idea, but paying taxes yourself is something that any reasonable intelligent person with enough time to do a bit of research can do. For a few years I ran an eBay store and had to manage inventory and buying/selling costs for thousands of items in addition to art freelance work, and I was able to figure out the taxes just fine. Filing as a normal contractor is a walk in the park by comparison.

cgBrad

You made a good first step contacting an accountant. They can be a little pricy but I promise you that a good one will save you money. 

You  are probably way underpaying. I payed around 30-35% when I first started. Last year I was only around 25% due to higher earnings, maxing my HSA, etc...

You have to remember as self employed you pay more in taxes mostly because a "normal" employee has part of their taxes payed by their employer. 

If you plan to continue freelancing you should make sure you incorporate as an LLC, and then set it up to get taxed as an S Corp. This will save you on taxes. Your accountant should be able to help you out with that as it will depend what state you are in. 

You should be paying in every quarter. In my state at least there are some conditions where you may be required to pay monthly. Consult your accountant. 

As others have said, if you underpay you will likely have to pay some kind of fine. They are typically not terrible (like a few hundred per $10k) but your goal should be to MINIMIZE your tax bill legally. Get your shit payed up ASAP.  There is no reason to pay more tax than you owe. If you do you are really bad at math or just poor as shit.

Rurouni Strife

Even if you fall behind and under pay, which I have done for the past two years (yay...), pay estimated anyway. As long as you pay something, your penalty usually will be minimal if any. 

I haven't used an accountant or tax prep service but I will this tax year. In general 1099 work has been fairly straight forward for me and I keep track of my income and expenses pretty closely. The difference this year is the amount of on-site freelance I've been doing plus it being in New York. So. It's going to be a pain that I don't want to deal with.