1099 employees, whether they work in the office of their employer or at home, have access to much greater freedom and flexibility than traditional forms of employment. At the same time, this freedom comes with more responsibility, particularly when it comes to taxes. Both self-employed people and contractors must familiarize themselves with their employment status, and how their taxes should be filed, as a failure to do so could lead to steep fines and other penalties.
They Must Pay The Self Employment Tax
The self-employment tax can be somewhat confusing at first, since many think it is merely a tax that is incurred for self-employment. In reality, this tax includes FICA payments that are financial contributions which are made towards Social Security and Medicare. For W-2 workers, their employer will cover half of FICA, which is approximately 7.65 percent, whereas the employee will pay the remainder. As with income taxes, the FICA of both employers and employees are performed automatically. Individuals who are self-employed however must pay the complete 15.3 percent, since they function as both employer and employee.
Establish A Robust Savings Plan
Most tax experts recommend putting together a solid savings plan so that sufficient cash is available to manage your tax requirements every quarter, as well as at the conclusion of the year. Many contractors and self-employed individuals make the mistake of having a “next check payment” mentality, where they put off setting aside money for taxes and instead procrastinate, promising themselves they will do it when they get their next pay roll. Instead, it is best to open a savings account and remove the necessary tax funds from each payment so you aren’t hit with one large sum at the end of the year.
Income Taxes Must Be Paid Quarterly
There is a difference between 1099 and W-2 tax payments. Regular 9 to 5 employees have a certain amount of their funds withheld each time they get a paycheck, which is used for taxation. Once a person becomes self-employed however, withholding is not automatically performed. Instead self-employed individuals are expected to pay their taxes quarterly. It is also possible to do it monthly.
Use Tax Software Or Hire A Professional
Filing taxes can be a real hassle, especially as the business grows and you begin hiring employees. It is important to remember that tax laws are also subject to change and it is your responsibility to keep abreast of them. Those who are self-employed must track their client appointments, while performing work and ensuring they get compensated for it. Using tax software is a great way to save time while simplifying the process.
By monitoring your income automatically, it is much easier to determine how much you owe, as well as to calculate the payment quarterly. Those who are self-employed also have much better tax benefits than regular employees, but only if they’re familiar with them, which is why hiring a tax professional can prove to be an excellent return on investment.