Independent Contractors…Are You Paying too Much?
Iindependent contractors must pay their own taxes.
The beauty of the situation is you have left the “W-2 tax system” where taxes are withheld from your check before you get it and crossed over to the tax system that self employed people enjoy.
The best thing about being an Independent contractor is you pay taxes on the profit from your work AFTER subtracting all of your expenses.
This is different from the W-2 system because those people pay taxes on their income before they pay their expenses.
The first major problem contractors face is figuring out what business entity to use to file their taxes. If you do not form a corporation or an LLC, you are considered a sole proprietor. This means your income and expenses from work are reported on a Schedule C, the IRS’ most audited form. If there is a profit after you subtract your expenses from your income, you will pay self employment tax. This is an additional 15.3% of the profit.
For those two reasons alone, you should consider using another business entity to file your taxes. Another viable alternative is the S-corporation, since the S-corporation is not subject to self-employement tax.
Any of the other entities–corporation, LLC or partnership–would be more effective in business income filing than the schedule C.
Another reason to consider changing your business entity is because sole proprietors are subject to additional scrutinyby the IRS. Just because you have a schedule C on your return, the IRS examines your information a little closer than all the rest. This is because more fraud has been discovered on schedule C than anywhere else on the individual tax return.
Learn the best way to file your taxes as an independent contractor and how to choose the right business entity for your business in chapter 3 of my ebook, “Pay Yourself Instead of Uncle Sam.”
