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Your Money Q&A: How Do I Pay Self-employment Taxes Now That I'm a "Consultant"? June 21, 2010 (South Florida Sun-Sentinel) Question: I recently began to be paid at my employer like a "consultant" instead of a regular employee. The paycheck now does not have money withheld for Social Security, Medicare or federal income taxes. Am I supposed to pay these taxes quarterly? If so, how? And how do I pay my taxes at the end of the year? Answer: First, you need to check whether your employer can make such a change. As a general rule, worker classification is based on IRS guidelines and unless your particular situation changed, neither should your status with your employer, said Carl Howden, a partner at MarcumRachlin. Assuming that the change is correct and you become a sole proprietor, yes, you do have to pay the taxes yourself every quarter if you expect, at the end of the year, to owe tax of at least $1,000. You will owe self-employment (FICA/Medicare) and federal income tax, which your employer withheld from your check. Only now, you would be responsible for both shares, your employer would no longer match. Self-employment tax is a combination of Social Security (12.4 percent) and Medicare (2.9 percent). The tax rate is steep, but when it is time to pay federal income taxes, you get to deduct half the self-employment taxes. You can figure your self-employment tax on Schedule SE on the 1040 form, which is available online at irs.gov. For federal income taxes, you should use Form 1040 ES to figure and to pay your taxes. And remember, self-employed people can deduct business expenses such as office costs. You would report your income and expenses on Form 1040-Schedule C. |
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