Independent Contractor

[Mr Pickles]

How bad of a tax hit should I expect to see if I changed jobs and became an independent contractor? The pay is better, but I've heard that the taxes are so bad that you need to make sure you can cover for them.

 

[IHateMyJob2004]

What additional taxes would you have?

 

[ElFenix]

Originally posted by: IHateMyJob2004
What additional taxes would you have?

he'd have to pay the employer's share of the payroll taxes out of his own pocket, for one.

 

[Pacfanweb]

You mean like a 1099 worker? Don't know about your state, but there are a lot more deductions available, depending on your line of work. My taxable income is a lot less now than when I was a regular W2 employee, making the same amount.

 

[Mr Pickles]

Originally posted by: Pacfanweb
You mean like a 1099 worker? Don't know about your state, but there are a lot more deductions available, depending on your line of work. My taxable income is a lot less now than when I was a regular W2 employee, making the same amount.

So you think if I played it smart and made sure that I made full use of my deductions at the end of the year I'd be ok?

 

[txrandom]

You are taxed on what you would pay for all those benefits you are missing out on.

 

[bctbct]

you have to pay the extra 7.3% social security

 

[pmoa]

i'd say about 37%

 

[TheoPetro]

umm why not figure it out for sure before jumping into it? Just a silly idea, I know, but it may be so crazy that it works!

 

[BoomerD]

Originally posted by: bctbct
you have to pay the extra 6.2% social security
and 1.45% medicare tax

Fixed for accuracy...


That means at the end of the year, you have to pay 12.4% of your gross up to 106,800 (current cap) and 2.90% on your income.
As has already been mentioned, the fringe benefits (if any) that you get from the employer will now have to come out of your after-tax dollars.
YOU are responsible for the income tax, and depending on your income, you MAY be required to make quarterly deposits and/or AMT.

I'd definitely recommend consulting with a tax professional...such as ATOT's "Tax Thread".

 

[OCGuy]

You'll be fine. (Coming from a 1099 worker that does fine for himself). Just educate yourself, and life is good.

 

[boomhower]

Don't overlook the fact you will have to cover your own insurance which is, to be kind, not cheap.

 

[SearchMaster]

Everything said above is true. You should bill no less than 150% of your current salaried rate to help make up for the extra taxes (7.65% as Boomer pointed out), the loss of benefits (health insurance is expensive, along with many of the other benefits paid by the employer), and extra risk (if things get slow, you don't get paid).

There are positives too. The tax writeoffs can be nice - my wife writes off things like computers and printers even though we use them for both personal and business use (shhhhh, don't tell Uncle Sam!). You can potentially write off part of your rent and mortgage if you use a particular room for only business use, but that can get messy later down the road and raises red flags with the IRS.

I did it for several years. I probably wouldn't do it again at this point in my life but at the time I enjoyed the flexibility.