There's nothing wrong with contracting work. The problem
I had was with not doing my homework when contracted.
I was an independent contractor for a home remodeling
business. I did not take the time to learn about the tax laws
reguarding Self-Employment tax and how it is to be paid.
I assumed that I would just be paying the normal 25% on
my adjusted gross income in april being in that bracket.
I filed my taxes as I assumed the should be and in June
of this year I recieved a suprise. The IRS informed me
that I failed to file correctly to the tune of $2500. Good
thing business wasn't better that year (2004).
I had no idea that I was supposed to be doing the Estimated
payments. Nor did I know that I was responsible for an
extra 15% self-employment tax. I failed because I didn't do
my homework. So now when I think about self-employment
I take into consideration those things.
Ruff estimate of what the paticular $.25/minute job will pay
after taxes for me is:
.25 x 60 = $15.00/hr (Gross hourly rate)
15 x .15 = $2.25/hr (15% Self-Employment tax on all income below $94,200 then $0 on everything after)
15 x .25 = $3.75/hr (25% Federal income tax, I am in the 25% bracket after my Full Time job earnings)
half of this amount will be deductable from Adjusted Gross income when filing Federal taxes.
15 x .034 = $0.51/hr (Indiana state income tax)
15 x .01 = $0.15/hr (County income tax)
Total Tax I need to withold = $6.66/hr
Spendable income = $8.34/hr or $.139/min
So if I worked 10 hours a week for them I would need
to bank $66.60 each week(all taxes expected to be owed
when I file my tax return) and make Estimated tax
payments of $292.50 every 4 months from it unless I file a new
W-4 form with my Full Time employer that increases my
witholding by the estimated liability each pay period.
I only make money while I am on the phone. There is a lot
of non paid work that goes into this venture that I don't get
paid for. My $8.34/hr rate would be slightly lower when
adjusted for non-paid work preformed.
For me, I think about getting paid for talkin on the phone
part time and my mind starts chanting "easy extra cash".
Then I do my homework and think "Maybe I ought to just
put in 3 hour of OT at my Full Time job this week and
forget the hastle of dealing with the extra tax stuff.
NOTE: I am talking about me and the way I view my own
situation. I based my findings off of the following 2 links.
I may be wrong and am open to corrections.
Self-Employment TaxEstimated tax paymentsI found myself completely unprepared for the $2500 tax bill
I recieved and wrote the previous to forewarn anyone who
reads this of what can happen. Hopefully it will avoid one
person from ending up in my position. There is a copy of
the taxbill they sent me on my loan request at prosper which
can be located in my signature. This is the sobering reality
of my not taking personal responsibility and doing proper
research on something I knew nothing about. Lesson learned.
I hope you guys do well with your ventures!
Gary