How much are independent contractors really taxed?

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Derivative
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How much are independent contractors really taxed?

Post by Derivative » Fri Feb 24, 2017 5:08 am

How much are independent contractors really taxed? If you are a self-employed independent contractor, what % of your income goes away as tax?

Let's say an independent makes $35,000 for the year. Then:

"Then to elaborate on the SE tax percentage, it is only 15.3% on the first $113,700 of income."

Income tax: 10% on first $9,325. 15% up to $37,950.

So to make it simple, can we say that about 30% of an independent contractor's income will go to tax?


My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?
Last edited by Derivative on Fri Feb 24, 2017 12:35 pm, edited 3 times in total.

strafe
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Re: How much are independent contractors really taxed?

Post by strafe » Fri Feb 24, 2017 6:13 am

Total taxes are the same when you are an employee, but the full tax amount is hidden from your view because part is paid on your behalf by your employer. Consequently, your salary accounts for only 70-75% of your total compensation as an employee (including other fringe benefits). You can't compare salary directly to self employment income without adjusting for this.

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JoMoney
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Re: How much are independent contractors really taxed?

Post by JoMoney » Fri Feb 24, 2017 6:27 am

When I was living in California, I was looking at doing some part time work as an independent contractor in addition to my normal day job that already put me at the top of the 25% federal tax bracket.
For each additional dollar I earned it would have been

25% Federal Tax +
15% Self Employment (FICA/Med) +
9% California State Income Tax

I would have had to form an LLC to do the independent work, because the people most of the work would be coming from would only deal with a company (would not deal with an individual to avoid being construed as an employer). The LLC meant I would have had to pay a California 'Franchise Fee' annually. There were other fees, and potentially even a business license required. There was extensive amounts of other paperwork involved to keep everything on the straight and narrow, and additional tax complications.

When I realized that more than half of each additional dollar I made was going to be going to the 'government', and all the cumbersome paperwork and tax complications, I decided the additional work wasn't worth it to me. It doesn't pay to work too hard in California.
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nps
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Re: How much are independent contractors really taxed?

Post by nps » Fri Feb 24, 2017 6:45 am

Self-employed pay the same tax rates as everyone else on all sources of income.

strafe wrote:Total taxes are the same when you are an employee, but the full tax amount is hidden from your view because part is paid on your behalf by your employer. Consequently, your salary accounts for only 70-75% of your total compensation as an employee (including other fringe benefits).


Employers don't pay any of the employee's income taxes. They only pay their share of Social Security and Medicaid. In many cases fringe benefits are simply not taxable. This includes things like health insurance, life insurance, and dependent care.

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Re: How much are independent contractors really taxed?

Post by corysold » Fri Feb 24, 2017 8:26 am

At least in my case, while I have to pay both parts of the social security tax, my income is reduced quite a bit by allowable deductions. I'm not sure how many of those are available to a W2 employee making the same base wage. 1/2 of the FICA tax is also tax deductible.

Further, my job is only available as an independent contractor. So while it might not be the most tax advantaged option, in my case, it is the only option and better than no job.

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Re: How much are independent contractors really taxed?

Post by MN Finance » Fri Feb 24, 2017 8:59 am

As said, the total tax means nothing in this question.

The total difference in tax between contract work and employment is probably 7.65%. That said, if you are actually choosing between two jobs, they are probably vastly different in both total economics and work life, so the comparison is very individual, not general

Derivative
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Re: How much are independent contractors really taxed?

Post by Derivative » Fri Feb 24, 2017 12:36 pm

MN Finance wrote:As said, the total tax means nothing in this question.

The total difference in tax between contract work and employment is probably 7.65%. That said, if you are actually choosing between two jobs, they are probably vastly different in both total economics and work life, so the comparison is very individual, not general


How is the total difference in tax between contract work and employment 7.65%? I don't get where you get this number from.
Last edited by Derivative on Fri Feb 24, 2017 12:43 pm, edited 1 time in total.

adamthesmythe
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Re: How much are independent contractors really taxed?

Post by adamthesmythe » Fri Feb 24, 2017 12:41 pm

> My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?

The idea is that you charge more to compensate for (1) taxes (2) the cost of replacing benefits (3) retirement savings and (4) the convenience for the employer of being able to terminate you at his convenience.

There's a lot to be said for a steady job at a megacorp.

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Re: How much are independent contractors really taxed?

Post by livesoft » Fri Feb 24, 2017 12:50 pm

I have self-employment income, so one could consider me an independent contractor. If I was paid $35,000, then I would put $24,000 in to my 401(k) leaving me with $11,000. I would pay the FICA/medicare tax of $5355, leaving me with $5645. I can exclude (above the line on Form 1040) half of that $5355 or $2677 from my income. That would leave me with $2968 adjusted gross income. Then I would get a standard deduction of $6350 leaving me with less than zero. And I haven't even taken my personal exemption yet.

So I would pay $5355 in taxes on $35,000. I could probably figure out a way to get some tax credits, so that I would not have to even pay that much in taxes.

I have to say that people should fill out their own tax returns for all such scenarios whenever they have questions like this. They would find out how to avoid taxes eventually. One will always be financially handicapped by not knowing how to fill out IRS Form 1040.
Last edited by livesoft on Fri Feb 24, 2017 12:54 pm, edited 1 time in total.
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nps
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Re: How much are independent contractors really taxed?

Post by nps » Fri Feb 24, 2017 12:54 pm

Derivative wrote:How is the total difference in tax between contract work and employment 7.65%? I don't get where you get this number from.


I can tell you where the number comes from. It's the employer share of SS and Medicare, which self employed people must pay themselves. It's a little misleading because it also gets deducted above the line on the 1040 so the full rate is not paid.

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Re: How much are independent contractors really taxed?

Post by corysold » Fri Feb 24, 2017 12:54 pm

Derivative wrote:
MN Finance wrote:As said, the total tax means nothing in this question.

The total difference in tax between contract work and employment is probably 7.65%. That said, if you are actually choosing between two jobs, they are probably vastly different in both total economics and work life, so the comparison is very individual, not general


How is the total difference in tax between contract work and employment 7.65%? I don't get where you get this number from.


A 1099 employee needs to pay both haves of the social security/medicare tax. The employer would usually pick up the employer portion, which is 7.65%. Otherwise, the taxes should be very similar as they are based on the income, whether that is 1099 or W2 income.

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Re: How much are independent contractors really taxed?

Post by Peter Foley » Fri Feb 24, 2017 1:00 pm

Looking at income taxes and SS taxes is only part of the picture. There are a lot of deductions an independent contractor can take including health insurance. And, there may be some employment expenses - commuting comes to mind - that can be avoided or written off.

If one is an independent contractor one has to consider all financial aspects of such employment when bidding on a job or setting a hourly rate for services.

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Re: How much are independent contractors really taxed?

Post by MP123 » Fri Feb 24, 2017 1:04 pm

The tax savings appear at higher income levels.

An IC that bills his client $100k and pays himself a salary of $35k avoids paying SS and medicare (15%) on $65k that would otherwise be taxed if he was paid as a W2 employee of the client directly.

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Re: How much are independent contractors really taxed?

Post by staythecourse » Fri Feb 24, 2017 1:04 pm

adamthesmythe wrote:There's a lot to be said for a steady job at a megacorp.


Depends on your occupation. I'm a physician and am now independent and previouly a W2 at is is DEFINTELY much better independent. There is no middleman taking their cut, there is no one to answer to, my schedule is whatever I want it to be, I can have as little or as much vacation as I want, no issues changing my whole schedule if kids get sick, can bring kiddos to work whenever I want if they have a day off from school, etc...

I would say working as a 1099 is MANY advantages. If one looks through just the glasses of taxes yeah you pick up both halfs of SS and medicare, but then again you deduct out the employers portion out of taxes. The adv. (at least for me) WLL OUTWEIGH any negatives that come from "working for the man".

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Re: How much are independent contractors really taxed?

Post by TheTimeLord » Fri Feb 24, 2017 1:07 pm

Derivative wrote:Let's say an independent makes $35,000 for the year.


If a full-time independent contractor is receiving $35,000/year there is something very wrong with their contract ($16.83/hr). But their taxes excluding SS and Medicare would like be approximately 0% since I believe they could probably contribute every penny beyond SS, Medicare and expenses to their Solo 401K.
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livesoft
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Re: How much are independent contractors really taxed?

Post by livesoft » Fri Feb 24, 2017 1:11 pm

Peter Foley wrote:Looking at income taxes and SS taxes is only part of the picture. There are a lot of deductions an independent contractor can take including health insurance. .

For a salaried employee, health insurance is usually deducted, too.
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DSInvestor
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Re: How much are independent contractors really taxed?

Post by DSInvestor » Fri Feb 24, 2017 1:19 pm

Derivative wrote:How much are independent contractors really taxed? If you are a self-employed independent contractor, what % of your income goes away as tax?

Let's say an independent makes $35,000 for the year. Then:

"Then to elaborate on the SE tax percentage, it is only 15.3% on the first $113,700 of income."

Income tax: 10% on first $9,325. 15% up to $37,950.

So to make it simple, can we say that about 30% of an independent contractor's income will go to tax?


My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?


The 10% tax rate on first 9,325, 15% up to 37,950 are for Taxable Income, not Gross Income. Don't forget the 0% tax bracket provided by deductions and exemptions.

Taxable Income = Adjusted Gross Income (AGI) - deductions - exemptions.

For now, let's focus on Federal income tax and ignore self employment tax and state income tax. If you had 35K of net business income from self employment, your AGI would be 35K.
Single Filer:
Taxable Income = 35,000 -6,350 - 4050 = 24,600
Your Fed tax = (10% of 9325) + (15% of (24,600-9325)) = 932.50 + 2291 = $3,223

Thats $3,223 in Fed Income Tax on 35K of net business income. Now add your self employment tax and state income tax. Note that half of the self employment tax shows up on 1040 line 27 which reduces your AGI and Taxable Income.

clarification: The self employment tax is calculated on net business income assuming sole proprietor (schedule C/SE).
Last edited by DSInvestor on Fri Feb 24, 2017 2:32 pm, edited 1 time in total.

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Re: How much are independent contractors really taxed?

Post by corysold » Fri Feb 24, 2017 1:30 pm

DSInvestor wrote:
Derivative wrote:How much are independent contractors really taxed? If you are a self-employed independent contractor, what % of your income goes away as tax?

Let's say an independent makes $35,000 for the year. Then:

"Then to elaborate on the SE tax percentage, it is only 15.3% on the first $113,700 of income."

Income tax: 10% on first $9,325. 15% up to $37,950.

So to make it simple, can we say that about 30% of an independent contractor's income will go to tax?


My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?


The 10% tax rate on first 9,325, 15% up to 37,950 are for Taxable Income, not Gross Income. Don't forget the 0% tax bracket provided by deductions and exemptions.

Taxable Income = Adjusted Gross Income (AGI) - deductions - exemptions.

For now, let's focus on Federal income tax and ignore self employment tax and state income tax. If you had 35K of net business income from self employment, your AGI would be 35K.
Single Filer:
Taxable Income = 35,000 -6,350 - 4050 = 24,600
Your Fed tax = (10% of 9325) + (15% of (24,600-9325)) = 932.50 + 2291 = $3,223

Thats $3,223 in Fed Income Tax on 35K of net business income. Now add your self employment tax and state income tax. Note that half of the self employment tax shows up on 1040 line 27 which reduces your AGI and Taxable Income.


But isn't the FICA on net income of the independent contractor? So isn't it accounted for before taking out all of the standard deductions?

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Re: How much are independent contractors really taxed?

Post by corysold » Fri Feb 24, 2017 1:32 pm

TheTimeLord wrote:
Derivative wrote:Let's say an independent makes $35,000 for the year.


If a full-time independent contractor is receiving $35,000/year there is something very wrong with their contract ($16.83/hr). But their taxes excluding SS and Medicare would like be approximately 0% since I believe they could probably contribute every penny beyond SS, Medicare and expenses to their Solo 401K.


But you assume everyone who is an independent contractor can afford to do so.

I work 35 hours a week delivering the paper for $25,000/year. I deduct some miles and things, but it isn't like I can afford to just put 15k into a Solo 401k.

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Re: How much are independent contractors really taxed?

Post by Watty » Fri Feb 24, 2017 1:33 pm

There are also things like the phase out of the child tax credit that you would also have to consider.

The best thing to do would be to make a copy of a recent tax return in your tax software and add the self employment income and any deduction you might take to the return to see the overall affect on your state and local taxes. It will not be exact because it is using last years tax laws but that should give a pretty good idea.

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Re: How much are independent contractors really taxed?

Post by vitaflo » Fri Feb 24, 2017 2:07 pm

Derivative wrote:
My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?


It's worth it because the general "rule" is that if you're an independent contractor your income should be twice what a salaried person would receive to pay for all of the things you now need to pay for as an indie contractor.

This goes beyond the employer portion of FICA. As an indie contractor you do not get all the benefits many employees do. You don't get paid vacations, you don't get employers paying part of your health care premiums, you don't get employer match 401k contributions, you don't get worker's comp or unemployment, etc. You have to pay for your own equipment, office space, etc (yes these are deductible but they are still out of pocket expenses).

As you can see a salaried employee's total compensation is much higher than just the salary they receive. As an indie contractor you need to account for this and add it to your bill rate. That's how it's "worth it".

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Re: How much are independent contractors really taxed?

Post by freebeer » Fri Feb 24, 2017 2:30 pm

vitaflo wrote:
Derivative wrote:
My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?


It's worth it because the general "rule" is that if you're an independent contractor your income should be twice what a salaried person would receive to pay for all of the things you now need to pay for as an indie contractor.

This goes beyond the employer portion of FICA. As an indie contractor you do not get all the benefits many employees do. You don't get paid vacations, you don't get employers paying part of your health care premiums, you don't get employer match 401k contributions, you don't get worker's comp or unemployment, etc. You have to pay for your own equipment, office space, etc (yes these are deductible but they are still out of pocket expenses).

As you can see a salaried employee's total compensation is much higher than just the salary they receive. As an indie contractor you need to account for this and add it to your bill rate. That's how it's "worth it".


As someone who's just made this switch (from employee to contractor) I think the 2x salaried income "rule" is oversimplified and perhaps too high although the general point about additional expenses is correct. More nuanced calculations are available online e.g. https://www.linkedin.com/pulse/20140520 ... contractor.

And the details will depend on the arrangement. In the tech world there are many companies where contractors and employees have same status and even same vacation policies... even some big tech employers no longer offer explicit paid time off but rather "flexible" vacation (i.e. whatever you and your manager agree on) and some contractor arrangements provide the same thing (i.e. there's a monthly bill rate that is not adjusted downward if you take time off as long as it's agreed with your supervisor).

My take is that 2x is probably about right if you are hanging out your own shingle and will be paid hourly if and when you work, and will have to spend at least some unpaid time on business development. But if you are a "captive" contractor on a long-term engagement on a full-time basis with same vacation/holiday expectations as employees, 1.5x may be closer and depending on your situation 1.25x could be enough to make it worthwhile.

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Re: How much are independent contractors really taxed?

Post by DSInvestor » Fri Feb 24, 2017 2:31 pm

corysold wrote:
But isn't the FICA on net income of the independent contractor? So isn't it accounted for before taking out all of the standard deductions?

Yes, self employment tax is calculated on net business income for sole proprietors (Schedule C). The OP didn't seen to include the deductions and exemptions which would have significantly decreased the fed income tax liability.

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Re: How much are independent contractors really taxed?

Post by vitaflo » Fri Feb 24, 2017 2:41 pm

freebeer wrote:My take is that 2x is probably about right if you are hanging out your own shingle and will be paid hourly if and when you work, and will have to spend at least some unpaid time on business development. But if you are a "captive" contractor on a long-term engagement on a full-time basis with same vacation/holiday expectations as employees, 1.5x may be closer and depending on your situation 1.25x could be enough to make it worthwhile.


I would agree with this. Note, I am the former, indie contractor paid hourly who does my own biz dev. Most of the people in my network are the same, thus everyone is (at least) 2x multiple. We have to be to make it make financial sense.

But yes a long-term contractor at some large company should expect less. In essence there's less risk and more benefits for them. At the end of the day though stuff needs to get paid for and it should be all accounted for in total compensation regardless of the arrangement, otherwise there's no point in doing it.

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Re: How much are independent contractors really taxed?

Post by TheTimeLord » Fri Feb 24, 2017 3:08 pm

vitaflo wrote:
freebeer wrote:My take is that 2x is probably about right if you are hanging out your own shingle and will be paid hourly if and when you work, and will have to spend at least some unpaid time on business development. But if you are a "captive" contractor on a long-term engagement on a full-time basis with same vacation/holiday expectations as employees, 1.5x may be closer and depending on your situation 1.25x could be enough to make it worthwhile.


I would agree with this. Note, I am the former, indie contractor paid hourly who does my own biz dev. Most of the people in my network are the same, thus everyone is (at least) 2x multiple. We have to be to make it make financial sense.

But yes a long-term contractor at some large company should expect less. In essence there's less risk and more benefits for them. At the end of the day though stuff needs to get paid for and it should be all accounted for in total compensation regardless of the arrangement, otherwise there's no point in doing it.


Interesting. I work in IT and it is definitely closer to 1.35x to 1.5x in my area from most of the folks I know. Just to be clear how are you calculating the hourly rate of a employee with say an $85,000 salary? Does it matter to that calculation if they have 2 or 4 weeks vacation?
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Re: How much are independent contractors really taxed?

Post by vitaflo » Fri Feb 24, 2017 5:46 pm

TheTimeLord wrote:
vitaflo wrote:
freebeer wrote:My take is that 2x is probably about right if you are hanging out your own shingle and will be paid hourly if and when you work, and will have to spend at least some unpaid time on business development. But if you are a "captive" contractor on a long-term engagement on a full-time basis with same vacation/holiday expectations as employees, 1.5x may be closer and depending on your situation 1.25x could be enough to make it worthwhile.


I would agree with this. Note, I am the former, indie contractor paid hourly who does my own biz dev. Most of the people in my network are the same, thus everyone is (at least) 2x multiple. We have to be to make it make financial sense.

But yes a long-term contractor at some large company should expect less. In essence there's less risk and more benefits for them. At the end of the day though stuff needs to get paid for and it should be all accounted for in total compensation regardless of the arrangement, otherwise there's no point in doing it.


Interesting. I work in IT and it is definitely closer to 1.35x to 1.5x in my area from most of the folks I know. Just to be clear how are you calculating the hourly rate of a employee with say an $85,000 salary? Does it matter to that calculation if they have 2 or 4 weeks vacation?


Not really, it's ballpark, so $85,000/2000 hours. Thus $42.50/hour for that employees hourly rate. Contractor rate is just 2x that. Or to make it easy just employee salary/1000, or $85/hour, or $170k if full time for a year. If you're doing your own biz dev you're usually not full time the entire year of course, you're going to have downtime between gigs, and you're going to have several gigs per year. Last year I had 5 different clients for example.

My rate is around 2.5x and I've averaged around 35hr/week for the last 7 years. It's all variable of course. I've done 3 months stints billing 80 hour weeks and have also had 3 month time spans with zero hours billed. You gotta be willing to put up with the later to get the former.

What you're actually able to do is entirely dependent on what you do for a living, where you live and most importantly your network. I have seen a lot of guys under bill (IMO). Part of this is just fear of not getting a gig, part of it is probably a small network that doesn't help prop up their bill rates. If you want contracting to really be lucrative you gotta be willing to say no to clients who want to price gouge you. I've said no to a lot of potential clients, but I also haven't had any problems finding clients who would say yes either.

If I couldn't get more than 1.35x from your example I wouldn't bother being a contractor. I'm taking all the risk as a business owner, that needs to be compensated. I'm also usually at a client for 3 months to save their skin because they need to augment staff to reach a deadline. That also needs to be compensated. Getting paid like an employee in that situation is silly, you're better off just being an employee.

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Re: How much are independent contractors really taxed?

Post by avalpert » Fri Feb 24, 2017 6:13 pm

Derivative wrote:
My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?

The answer is really simple - my hourly rate as an independent contractor is much higher than it was as a W2 employee (even for the same firm). The only difference in taxes is the shift of the employer share of payroll taxes from them to me - those were getting paid either way and since the employer isn't paying them to the IRS paying them to me does not increase their costs.

I think the deductions are mostly a red herring - there is very little I can deduct (legally) now that I wasn't reimbursed for before by my employer. But I have a higher salary (though more risk as I need to keep myself billable), more flexibility in how and when I work and more control over my business fortunes.

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Re: How much are independent contractors really taxed?

Post by buffyuna » Fri Feb 24, 2017 7:16 pm

I made close to that amount as a contractor and I was expected to pay 9k before write offs. After my write offs I had to pay 2.5k.

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Re: How much are independent contractors really taxed?

Post by Derivative » Sat Feb 25, 2017 11:56 pm

JoMoney wrote:When I was living in California, I was looking at doing some part time work as an independent contractor in addition to my normal day job that already put me at the top of the 25% federal tax bracket.
For each additional dollar I earned it would have been

25% Federal Tax +
15% Self Employment (FICA/Med) +
9% California State Income Tax

I would have had to form an LLC to do the independent work, because the people most of the work would be coming from would only deal with a company (would not deal with an individual to avoid being construed as an employer). The LLC meant I would have had to pay a California 'Franchise Fee' annually. There were other fees, and potentially even a business license required. There was extensive amounts of other paperwork involved to keep everything on the straight and narrow, and additional tax complications.

When I realized that more than half of each additional dollar I made was going to be going to the 'government', and all the cumbersome paperwork and tax complications, I decided the additional work wasn't worth it to me. It doesn't pay to work too hard in California.

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Re: How much are independent contractors really taxed?

Post by Derivative » Sat Feb 25, 2017 11:56 pm

Derivative wrote:
JoMoney wrote:When I was living in California, I was looking at doing some part time work as an independent contractor in addition to my normal day job that already put me at the top of the 25% federal tax bracket.
For each additional dollar I earned it would have been

25% Federal Tax +
15% Self Employment (FICA/Med) +
9% California State Income Tax

I would have had to form an LLC to do the independent work, because the people most of the work would be coming from would only deal with a company (would not deal with an individual to avoid being construed as an employer). The LLC meant I would have had to pay a California 'Franchise Fee' annually. There were other fees, and potentially even a business license required. There was extensive amounts of other paperwork involved to keep everything on the straight and narrow, and additional tax complications.

When I realized that more than half of each additional dollar I made was going to be going to the 'government', and all the cumbersome paperwork and tax complications, I decided the additional work wasn't worth it to me. It doesn't pay to work too hard in California.


So is it a good estimate that at least ~30% of your total income will go to taxes if you are self-employed?

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Re: How much are independent contractors really taxed?

Post by DSInvestor » Sun Feb 26, 2017 12:11 am

Using HRBLock's tax calculator, I entered 35K of net self employed income for a single filer.
AGI = 32527 which is 35,000 - half of self employment tax
Fed Tax: 2863
Self Employment Tax: 4945
Fed Tax and SE Tax =7808 which is about 22% of 35K.

If I increase net business income to 100K for a single filer:
AGI = 92,395 which is 100K - half of self employment tax
Fed tax = 16,418
SE Tax = 14,129
Fed Tax and SE Tax = 30,547 which is about 30%

If I increase net business income to 200K for a single filer:
AGI = 179,624 which is 100K - half of self employment tax
Fed tax = 43,332
SE Tax = 20,050
Fed Tax and SE Tax = 63,382 which is about 32%

If you're married filing jointly, your Fed tax will be very different. SE tax stays the same.
Is there a state income tax in your state?

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Re: How much are independent contractors really taxed?

Post by Derivative » Sun Feb 26, 2017 12:21 am

DSInvestor wrote:Using HRBLock's tax calculator, I entered 35K of net self employed income for a single filer.
AGI = 32527 which is 35,000 - half of self employment tax
Fed Tax: 2863
Self Employment Tax: 4945
Fed Tax and SE Tax =7808 which is about 22% of 35K.

If I increase net business income to 100K for a single filer:
AGI = 92,395 which is 100K - half of self employment tax
Fed tax = 16,418
SE Tax = 14,129
Fed Tax and SE Tax = 30,547 which is about 30%

If I increase net business income to 200K for a single filer:
AGI = 179,624 which is 100K - half of self employment tax
Fed tax = 43,332
SE Tax = 20,050
Fed Tax and SE Tax = 63,382 which is about 32%

Is there a state income tax in your state?


Yes, California. So that would mean 30% of the total income of $35,000 would be taxed??

DSInvestor
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Re: How much are independent contractors really taxed?

Post by DSInvestor » Sun Feb 26, 2017 12:27 am

Derivative wrote:
DSInvestor wrote:Using HRBLock's tax calculator, I entered 35K of net self employed income for a single filer.
AGI = 32527 which is 35,000 - half of self employment tax
Fed Tax: 2863
Self Employment Tax: 4945
Fed Tax and SE Tax =7808 which is about 22% of 35K.

If I increase net business income to 100K for a single filer:
AGI = 92,395 which is 100K - half of self employment tax
Fed tax = 16,418
SE Tax = 14,129
Fed Tax and SE Tax = 30,547 which is about 30%

If I increase net business income to 200K for a single filer:
AGI = 179,624 which is 100K - half of self employment tax
Fed tax = 43,332
SE Tax = 20,050
Fed Tax and SE Tax = 63,382 which is about 32%

Is there a state income tax in your state?


Yes, California. So that would mean 30% of the total income of $35,000 would be taxed??


If I enter 35K taxable income on CA tax calculator, that's $1040 of CA tax. Fed, CA and SE tax would be about $8848 or 25% on 35K of self employment income for a single filer. If you earned 35K gross salary as a W-2 employee, your tax would be 2.5K lower because your employer pays the employer portion of social security and medicare.

Here's a link to HRBlock page where you will find a tax calculator so you can run your own numbers:
https://www.hrblock.com/get-answers/

Derivative
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Re: How much are independent contractors really taxed?

Post by Derivative » Sun Feb 26, 2017 12:41 am

DSInvestor wrote:
Derivative wrote:
DSInvestor wrote:Using HRBLock's tax calculator, I entered 35K of net self employed income for a single filer.
AGI = 32527 which is 35,000 - half of self employment tax
Fed Tax: 2863
Self Employment Tax: 4945
Fed Tax and SE Tax =7808 which is about 22% of 35K.

If I increase net business income to 100K for a single filer:
AGI = 92,395 which is 100K - half of self employment tax
Fed tax = 16,418
SE Tax = 14,129
Fed Tax and SE Tax = 30,547 which is about 30%

If I increase net business income to 200K for a single filer:
AGI = 179,624 which is 100K - half of self employment tax
Fed tax = 43,332
SE Tax = 20,050
Fed Tax and SE Tax = 63,382 which is about 32%

Is there a state income tax in your state?


Yes, California. So that would mean 30% of the total income of $35,000 would be taxed??


If I enter 35K taxable income on CA tax calculator, that's $1040 of CA tax. Fed, CA and SE tax would be about $8848 or 25% on 35K of self employment income for a single filer. If you earned 35K gross salary as a W-2 employee, your tax would be 2.5K lower because your employer pays the employer portion of social security and medicare.

Here's a link to HRBlock page where you will find a tax calculator so you can run your own numbers:
https://www.hrblock.com/get-answers/


Thank you!

Does anyone know the easiest/best tax calculators to use? I will use HR Block but just wondering if there is a consensus on the best quick tax estimator or excel spreadsheet.

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JoMoney
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Re: How much are independent contractors really taxed?

Post by JoMoney » Sun Feb 26, 2017 1:01 am

Derivative wrote:
Derivative wrote:
JoMoney wrote:When I was living in California, I was looking at doing some part time work as an independent contractor in addition to my normal day job that already put me at the top of the 25% federal tax bracket.
For each additional dollar I earned it would have been

25% Federal Tax +
15% Self Employment (FICA/Med) +
9% California State Income Tax

I would have had to form an LLC to do the independent work, because the people most of the work would be coming from would only deal with a company (would not deal with an individual to avoid being construed as an employer). The LLC meant I would have had to pay a California 'Franchise Fee' annually. There were other fees, and potentially even a business license required. There was extensive amounts of other paperwork involved to keep everything on the straight and narrow, and additional tax complications.

When I realized that more than half of each additional dollar I made was going to be going to the 'government', and all the cumbersome paperwork and tax complications, I decided the additional work wasn't worth it to me. It doesn't pay to work too hard in California.


So is it a good estimate that at least ~30% of your total income will go to taxes if you are self-employed?

There's a lot of factors that can go into it, in my case I already had income putting me up into the 25 % bracket, so each additional dollar was in that 25% bracket. If this is your only earned income, your effective federal tax rate would be lower when you blend in the amounts earned in a lower bracket and take whatever deductions your eligible for.
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Re: How much are independent contractors really taxed?

Post by danaht » Sun Feb 26, 2017 9:46 am

I just read a story that stated that more people in the workforce are being forced to become contractors because companies just don't want the added risk and overhead that being an employee would bring. I am one of those people who made this change 5 years ago when I was laid off by a Mega corp. I really prefer being a contractor. As a self employed individual: - you can 1) participate in a low cost (solo) 401k, and usually put a lot more money in this 401k than you could even with the former Mega-corp match. 2) may be able to expense some things (used 100% for business) that the Megacorp policy was not allowing you to expense before. 3) avoid a lot of the Mega-corp bureaucracy - like the employee (yearly/quarterly/monthly) review. The only con with being self employed right now is the rising cost of health care. The cheap individual plans offered a couple years ago - are no longer affordable (or even offered) in TX. The mega corp highly subsidizes their health care plan for their employees.

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Re: How much are independent contractors really taxed?

Post by DoubleClick » Sun Feb 26, 2017 11:05 am

JoMoney wrote:When I was living in California, I was looking at doing some part time work as an independent contractor in addition to my normal day job that already put me at the top of the 25% federal tax bracket.
For each additional dollar I earned it would have been

25% Federal Tax +
15% Self Employment (FICA/Med) +
9% California State Income Tax

I would have had to form an LLC to do the independent work, because the people most of the work would be coming from would only deal with a company (would not deal with an individual to avoid being construed as an employer). The LLC meant I would have had to pay a California 'Franchise Fee' annually. There were other fees, and potentially even a business license required. There was extensive amounts of other paperwork involved to keep everything on the straight and narrow, and additional tax complications.

When I realized that more than half of each additional dollar I made was going to be going to the 'government', and all the cumbersome paperwork and tax complications, I decided the additional work wasn't worth it to me. It doesn't pay to work too hard in California.


Several things don't add up here. First, if you were working a day job and were in the 25% bracket, and in CA, most likely, you were going to hit the FICA limit and didn't need to pay the 15%.

Next, you'd still pay the 25 + 15 in any other state, plus potentially some part of the 9 in state taxes, so I don't see how you concluded CA is somehow special in this respect

Third, it's less than half of each dollar made.

Fourth, it's exactly the same percentage in taxes whether you're an employee (your employer pays part of it) or self employed.

Fifth, when self employed, you can make gigantic tax deferrals, which potentially gains you a lot, making it better than being a W2 employee.

Sixth, when self employed, as above, you can make expense deductions.

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Re: How much are independent contractors really taxed?

Post by Dieharder » Sun Feb 26, 2017 11:55 am

To OP - I don't know why you keep asking 30% will go for tax? It's not like that, as someone else stated 7.65% SE tax additional as employer share is what is really extra, everything else remains same. Apart from that there is state/ federal unemployment tax, business licences state / county, annual registration and filing, so on. But you also have a lot of deductions as a business since you have expenses. The overall benefits are not simple, and you need to do some work to figure all this out, plus you need the help of a tax professional. Most people can calculate roughly an hourly rate vs. full time salary to figure out what makes sesne in their industry. For instance, may be an extra $30 an hour is what you need to compense to make it work, and for some people it may be more than that. It all depends.

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Re: How much are independent contractors really taxed?

Post by Spirit Rider » Sun Feb 26, 2017 12:00 pm

This last few posts highlights why the OP is asking the wrong question. The difference in taxation between an employee and am independent contractor is a red herring. The only real difference is the employer's share of FICA (7.65% maximum) is paid as part of the SE tax.

Employee benefits are the real difference between an employee and independent contractor. These are the things typically provided by an employer that have to be accounted for in the difference between an employee's hourly rate and an independent contractor's rate.

Many or all of the following employer commonly paid items need to be accounted for or self-insured as a difference in an independent contractor's rate:
  • Employer's portion of FICA.
  • Federal/state unemployment insurance.
  • Workmen's compensation insurance.
  • Vacation days
  • Holidays
  • Sick days
  • Personal days
  • Time off for appointments
  • Health insurance
  • Short/long term disability insurance
  • Dental insurance
  • Vision insurance
  • Employer retirement plan match and/or non-elective contributions
This usually amounts to +-30% of compensation. This is why I always suggest a 25% - 50% minimum premium for independent contracting.

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Re: How much are independent contractors really taxed?

Post by michaeljc70 » Sun Feb 26, 2017 2:35 pm

It depends on how much you make and what you can deduct. The main hit is paying both parts of the SS/Medicare taxes.

How is it worth it? You bake that into your rate or what you charge for the product or service. You can also deduct way more (typically) than if you are an employee. I cannot even deduct my health insurance as an employee (I buy it myself).

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T-Wrench
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Re: How much are independent contractors really taxed?

Post by T-Wrench » Sun Feb 26, 2017 2:43 pm

Spirit Rider wrote:This last few posts highlights why the OP is asking the wrong question. The difference in taxation between an employee and am independent contractor is a red herring. The only real difference is the employer's share of FICA (7.65% maximum) is paid as part of the SE tax.
...
This usually amounts to +-30% of compensation. This is why I always suggest a 25% - 50% minimum premium for independent contracting.


I live in a state with income tax; this was my experience as well. Around 30% of my independent contractor pay went to taxes (roughly 25% to federal, 5% to state).

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Re: How much are independent contractors really taxed?

Post by monsterid » Sun Feb 26, 2017 3:14 pm

DoubleClick wrote:
JoMoney wrote:When I was living in California, I was looking at doing some part time work as an independent contractor in addition to my normal day job that already put me at the top of the 25% federal tax bracket.
For each additional dollar I earned it would have been

25% Federal Tax +
15% Self Employment (FICA/Med) +
9% California State Income Tax

I would have had to form an LLC to do the independent work, because the people most of the work would be coming from would only deal with a company (would not deal with an individual to avoid being construed as an employer). The LLC meant I would have had to pay a California 'Franchise Fee' annually. There were other fees, and potentially even a business license required. There was extensive amounts of other paperwork involved to keep everything on the straight and narrow, and additional tax complications.

When I realized that more than half of each additional dollar I made was going to be going to the 'government', and all the cumbersome paperwork and tax complications, I decided the additional work wasn't worth it to me. It doesn't pay to work too hard in California.


Several things don't add up here. First, if you were working a day job and were in the 25% bracket, and in CA, most likely, you were going to hit the FICA limit and didn't need to pay the 15%.

Next, you'd still pay the 25 + 15 in any other state, plus potentially some part of the 9 in state taxes, so I don't see how you concluded CA is somehow special in this respect

Third, it's less than half of each dollar made.

Fourth, it's exactly the same percentage in taxes whether you're an employee (your employer pays part of it) or self employed.

Fifth, when self employed, you can make gigantic tax deferrals, which potentially gains you a lot, making it better than being a W2 employee.

Sixth, when self employed, as above, you can make expense deductions.


This is exactly right according to my understanding. I am on the same boat. Already above the FICA threshold with W2 earnings and therefore it's an absolute no Rainer to take additional self employment income for the excellent write off and tax advantaged account benefit's.

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Re: How much are independent contractors really taxed?

Post by Spirit Rider » Sun Feb 26, 2017 3:48 pm

T-Wrench wrote:
Spirit Rider wrote:This last few posts highlights why the OP is asking the wrong question. The difference in taxation between an employee and am independent contractor is a red herring. The only real difference is the employer's share of FICA (7.65% maximum) is paid as part of the SE tax.
...
This usually amounts to +-30% of compensation. This is why I always suggest a 25% - 50% minimum premium for independent contracting.

I live in a state with income tax; this was my experience as well. Around 30% of my independent contractor pay went to taxes (roughly 25% to federal, 5% to state).

You are continuing to make the wrong correlation as the OP. Other than the extra 1/2 SE tax, a W-2 employee and independent contractor will pay about the same federal and state taxes on the same net income.

So the real difference is the 1/2 SE tax plus the additional out-of-pocket and self-insured costs that are normally covered by the W-2 employer.

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JoMoney
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Re: How much are independent contractors really taxed?

Post by JoMoney » Sun Feb 26, 2017 4:02 pm

DoubleClick wrote:...
Several things don't add up here. First, if you were working a day job and were in the 25% bracket, and in CA, most likely, you were going to hit the FICA limit and didn't need to pay the 15%.
This was several years ago, so the numbers are slightly different, but here goes with the current tax #'s:
The 25% bracket is for every dollar between $37,651 to $91,150
I was making about $50-60k a year in regular W2 employment, the additional $20-30k I hoped to make with this part time SE work would not hit the limit (SS tax limit is now $127,200 and there is no limit for medicare).
Next, you'd still pay the 25 + 15 in any other state, plus potentially some part of the 9 in state taxes, so I don't see how you concluded CA is somehow special in this respect
True, but between California's income tax, and their annual $800 LLC "Franchise Tax" that was what hit the over 50% market and really discouraged me from doing any additional work, and I suspect that it was some of California's labor laws (not that it's a bad thing) that was making the use of an LLC necessary to contract with the customer(s).
Third, it's less than half of each dollar made.

Fourth, it's exactly the same percentage in taxes whether you're an employee (your employer pays part of it) or self employed.
True, but this was additional work, for additional money, that I didn't have to do on top of my regular job. Maybe others would view it differently. I know I viewed overtime with my main employer differently (at least prior to adding up the #s), but the money that looked good in gross terms was so much less net of taxes, it de-motivated me from this work offer that I didn't necessarily need to do.
Fifth, when self employed, you can make gigantic tax deferrals, which potentially gains you a lot, making it better than being a W2 employee.
Yes, a SEP IRA or similar would have postponed some of the burden... and use of the money.
Sixth, when self employed, as above, you can make expense deductions.
This work wouldn't require much in the way of expenses to me, but how would that change the bottom line? If I have to spend $500 to deduct $500 that doesn't move the needle. Maybe I wouldn't owe federal tax on some of the state taxes paid, but it's not a huge amount, and it means other deductions would have to be found just to get over the loss of the standard deduction.
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Re: How much are independent contractors really taxed?

Post by DoubleClick » Thu Mar 02, 2017 2:23 am

JoMoney, I wouldn't be surprised if one could work out a very specific scenario what you said is plausible, but that is precisely my point: a whole bunch of narrow conditions would need to hold for your taxes to exceed many other states by a potentially small margin. You'd have to earn around $55k in W2 to fit that tax bracket, and very close to $20k-$30k to exceed 50%, refuse to use an IRA (even though you obviously didn't need the money immediately), and have zero existing expenses.

Perhaps it was slightly worse in CA for your specific circumstances, but going from that specific scenario to "It doesn't pay to work too hard in California" is at the very least quite an over-generalization that flies in the face of reality.

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Re: How much are independent contractors really taxed?

Post by 3DTV » Sun Oct 29, 2017 1:08 pm

Feel like I am missing out on deductions and paying far to much in taxes each year as contract employee. Can anyone recommend a good book or some internet resources? Write off home office, a few meals and mileage here and there. Contribute what I believe to be the full amount to a Self Directed IRA (Is there a better option?) Feel there has to be more I can legitimately write off to help reduce my taxable earnings.

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Re: How much are independent contractors really taxed?

Post by JBTX » Sun Oct 29, 2017 2:05 pm

Derivative wrote:
Fri Feb 24, 2017 5:08 am
How much are independent contractors really taxed? If you are a self-employed independent contractor, what % of your income goes away as tax?

Let's say an independent makes $35,000 for the year. Then:

"Then to elaborate on the SE tax percentage, it is only 15.3% on the first $113,700 of income."

Income tax: 10% on first $9,325. 15% up to $37,950.

So to make it simple, can we say that about 30% of an independent contractor's income will go to tax?


My main question is: How is it worth being an independent contractor full-time if you have to pay this much tax?
I’ve been both employee and independent contractor. The downsides of being a contractor:

- less “security”
- no paid time off or benefits.
- having to pay the employer side of fica and Medicare tax.

Upsides:

- more flexibility (hours etc )
- don’t have to deal with many employment issues (employee meetings, performance reviews etc)
- you are primarily evaluated on what you accomplish vs how you “fit” into the organization
- you can typically deduct some things for tax purposes that you can’t as an employee
- you can often contribute more to employment retirement plans than you can as an employee.

When I was self employed I tended to make less, but I worked less and generally enjoyed it more.

I wouldnt get wrapped about the self employment tax by itself. Ultimately you will pay roughly 5% more of income vs an employee (7.65% employer share less tax deduction of the employer share on schedule C), but on the flip side you can deduct some things you can’t.

There are some other things a CPA can do to make your income lower if you choose to go that route that will avoid some of those self employment taxes by paying you a lower salary and having rest of income flow through as dividend distribution. I have never done that but probably should have.

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Re: How much are independent contractors really taxed?

Post by Sandtrap » Sun Oct 29, 2017 2:07 pm

An independent contractor, self-employed, or business person, has an extraordinary amount of control over deductions and claimed income, and much more. Whereas an employee receives a check with appropriate things taken out of it each month.
A very savy self-employed business person has control over how much he is taxed. He could be grossing millions and yet paying near zero or zero in taxes.

This is one of the key factors in the book, "Millionaire Next Door" and is true AFAIK.

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Re: How much are independent contractors really taxed?

Post by ivk5 » Sun Oct 29, 2017 2:15 pm

3DTV wrote:
Sun Oct 29, 2017 1:08 pm
Contribute what I believe to be the full amount to a Self Directed IRA (Is there a better option?)
Solo 401(k)

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