As technology has evolved over the last decade, more and more people are working as independent contractors, also known as "1099 contractors" or "1099 employees." The benefits of setting one's own hours and working mobile are just a few of the benefits enjoyed by former employees turned independent contractors. However, when it comes to tax return preparation, independent contractors can run into some trouble.There are a few landmines out there in the tax code for independent contractors that workers - who were formerly employees and are now 1099 contractors - need to know about before they complete any independent contractor tax forms.
As an employee, when you received your paycheck your employer held back income tax, social security and medicare taxes. What you didn't see happen behind the scenes is your employer then matched the social security amount and medicare amount withheld from your check and sent that to the IRS.
As an independent contractor, you are now responsible for not only the income tax due, but also both sides of the social security and medicare taxes.
Listen carefully: the combined rate for social security and medicare is 15.4% and is figured on the earnings from your business activities and calculated before itemized deductions or personal exemptions. When you factor in the combined income tax and social security tax, medicare tax, and state income tax, the combined tax rate can hover around 50%.
Now that I have your attention, here are a few things that you can do to help reduce the tax burden of being an independent contractor.