Story last updated at 8/19/2009 - 5:58 pm
Layoffs and cutbacks at some businesses have forced many of us to take on side work. Whether it's a part-time job, turning a hobby into a little extra cash or starting our own enterprise, a lot of us don't think about the tax implications.
When you work for someone else, that company pretty much handles payroll tax, including state and federal withholding, social security, etc. But when you're not an employee, things are different. As an independent contractor, you have to take care of all that yourself.
Even though you may be doing work similar to what payroll workers are doing, your arrangement isn't the same.
Here in the newsroom, we often contract with freelance writers and photographers. Although they perform some of the same tasks as actual employees, they don't earn a standard paycheck.
And the tax forms associated with their earnings aren't the same.
Whereas an employee generally files a W2 wage and tax statement listing income as well as deductions taken from that income in the form of federal and state taxes, deferred compensation and Social Security contributions, 1099 forms are used as a record of the income independent contractors received from a particular business.
The trouble that many taxpayers run into is failing to do their withholding, said Mark Green, an IRS spokesman.
"We see a lot of after effects where people failed to keep track of their earnings and their tax liability," Green said. "They're generally self-employed individuals who didn't make their estimated tax payments and ended up owing more than they could handle at the end of the year."
Besides income tax, freelancers or independent contractors have to pay self-employment tax, a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
Many people don't realize they have to pay more than standard income tax when they do contract work for more than $400, Green said.
Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. You generally have to make estimated tax payments if you expect to owe tax, including self-employment tax, of $1,000 or more when you file your return.
There are two ways to pay as you go: withholding and estimated taxes. If you are a self-employed individual and do not have income tax withheld, you must make estimated tax payments.
And if you think you might be self-employed, you probably are. The IRS offers these guidelines:
- Your net earnings from self-employment (excluding church employee income) were $400 or more.
- You had church employee income of $108.28 or more.
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself.
The self-employment tax rules apply no matter how old you are and even if you are receiving Social Security or Medicare.
But don't despair if you haven't yet done your homework, Green said.
"We can set up an installment agreement to pay the back taxes and set up a schedule to pay estimated tax," he said. "We want as many taxpayers as possible in compliance. Everyone wins that way."
Arlinda Smith Broady can be reached at (912) 652-0314 or email@example.com.