Question about self-employed vs independent contractor taxes

R

Restless

New Member
I hope someone can help me with this question. Our daughter, age 22, just got a temporary job thru November with a non-profit polling organization. She gets paid $2500 a month. She had to sign some sort of a contract when she started. The organization takes nothing out of her pay check for taxes apparently.

How in the world does she determine how much she will owe in taxes? In previous jobs she was paid this way too, but it was called a stipend. Her taxes were figured at the time of filing them. Does she have to pay quarterly taxes now? A co-worker who is also on the same contract told her that he thinks they are considered independent contractors. She has also been told that she is self-employed. All I know is that she isn't making much money and is afraid of how much money she will owe!!

I wish we had an easier tax system. This is nuts!
 
luvmygdaughters

luvmygdaughters

Well-Known Member
Restless said:
I hope someone can help me with this question. Our daughter, age 22, just got a temporary job thru November with a non-profit polling organization. She gets paid $2500 a month. She had to sign some sort of a contract when she started. The organization takes nothing out of her pay check for taxes apparently.

How in the world does she determine how much she will owe in taxes? In previous jobs she was paid this way too, but it was called a stipend. Her taxes were figured at the time of filing them. Does she have to pay quarterly taxes now? A co-worker who is also on the same contract told her that he thinks they are considered independent contractors. She has also been told that she is self-employed. All I know is that she isn't making much money and is afraid of how much money she will owe!!

I wish we had an easier tax system. This is nuts!
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Not too sure, but, I believe she will have to file a 1099. As for what she will pay...You can go on MDtaxes.com and it fill figure what your tax rate is, I would think the Federal government would have something similar on their website.
 
Tilted

Tilted

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She can probably get away with not paying estimated (quarterly) taxes the first year. The fines for not having paid enough in estimated taxes depend in part on whether you'd underpaid taxes in previous years. So, if she didn't underpay estimated taxes for last year, she probably won't have the fines for not paying enough in estimated taxes this year - she'll just have to pay them when she files. (I'm referring to federal income taxes.) You should of course let a professional advise you if you want to be sure.

But she will likely owe taxes on that money, and it could be a fair bit because she will likely owe self-employment taxes. Those are for Social Security and Medicare, and she'll in effect have to pay both sides of those taxes - the employees' and the employers' portions. That should be a little more than 14% (92.35% * 15.3%) of her income (minus allowable offsetting expenses), unless there's some special exemption that applies. Without any offsetting expenses that should be about $4,200 on $30,000 of income.

How much other tax she'll owe will depend, possibly among other things, on whether she has a lot of deductions. Assuming she doesn't have a lot of itemized deductions, she would subtract the standard deduction of $6,400 and the personal exemption of $4,000 and half of the total self-employment tax (about $2,100) from her income. That leaves here with about $17,500 in taxable income. The first $9,000 or so is taxed at 10%, the rest is taxed at 15% - that means around $2,200 in income taxes. Combined with the self-employment taxes (for SS and Medicare), that's something like $6,400 in federal tax liability.

That's all based on her being single and without kids. If she's married or has kids that would change things considerably. And there are plenty of reasons why that estimate could be way off, things that I don't know about her situation. So she really would need to talk to someone who could go through her circumstances more carefully if she wanted to have an estimate she could be fairly confident in.
 
R

rhenderson

Guest
IRS and MD both have numerous bulletins, instructions, forms, regulations on line that can be down loaded. In some instances there may be on-line calculators/forms that can be used to do the actual math. Also, don't forget she needs to pay her own Social Security payments as well.
 
R

Restless

New Member
Our daughter has no kids, isn't married, just got out of college. She was thankful that she got a job, even if temporary. Now I'm not so sure. Ugh. Thank you for your help. Poor kid thought she would finally make some money to save. She shares an apartment so she has to pay rent, plus student loans, utilities, etc. This is really gonna hurt her saving any money besides for taxes.
 
Tilted

Tilted

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Restless said:
Our daughter has no kids, isn't married, just got out of college. She was thankful that she got a job, even if temporary. Now I'm not so sure. Ugh. Thank you for your help. Poor kid thought she would finally make some money to save. She shares an apartment so she has to pay rent, plus student loans, utilities, etc. This is really gonna hurt her saving any money besides for taxes.
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You're welcome.

I should add a big clarification. Those quick estimates I just did are for a full year of making $2,500 a month. If she's only going to be working 4 months or so this year, even if there aren't other things going on that would significantly affect the numbers, she would likely owe much less. The income tax portion, e.g., might just be based on $10,000, in which case her standard deduction and personal exemption would leave her with no taxable income. Even if she made a little more - say, $12,000 - her income tax liability would be very small. Only a tiny piece of it would be taxable.

The self-employment tax would still apply, but it would be based on far less annual income - e.g. 14.13% of $12,000 income is only about $1,700. And she may even qualify for the earned income tax credit which would lesson that amount.

In future years, if she had similar employment for the full year, she might face the kind of tax liability I estimated in the previous post. But since this year she'll only be making that income for part of the year, she'll likely owe far less.
 
R

rhenderson

Guest
I would advise her to work at this but continue looking for a better opportunity. There is nothing wrong with the contractor route but the amount you earn under the contract is not the same as a salary and cannot be compared to it with taking into consideration all the expenses and benefits of each.
 
PeoplesElbow

PeoplesElbow

Well-Known Member
Depends, there is a threshold for paying taxes each quarter.

My mom cashed out a life insurance policy and got his with a penalty for not paying estimated taxes in that quarter.
 
GURPS

GURPS

INGSOC
PREMO Member
edited ... Tilted did a fine job





Adjusted gross income:$10,000
Deduction for exemptions:-$3,950
Standard or itemized deduction:-$6,200
Taxable income:$0


Read more: http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx#ixzz3gZ2tYi3h
Follow us: @Bankrate on Twitter | Bankrate on Facebook



still looks like a negative number .... but this does not seem to account for self employment



yrs ago I did some cash work and received a 1099 at the end of the yr,

I computed taxes owed with the 1040 tables, wrote the IRS a check
.... MD was worse with the county piggy back tax
 
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GURPS

GURPS

INGSOC
PREMO Member
Tilted said:
You're welcome.

... The income tax portion, e.g., might just be based on $10,000, in which case her standard deduction and personal exemption would leave her with no taxable income. Even if she made a little more - say, $12,000 - her income tax liability would be very small. Only a tiny piece of it would be taxable.
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:yay:
 
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