The Transition to Independent Contractor

Taking the leap to independent contractor status is a scary and exciting endeavor.

You (usually) get to make all your own decisions from what time you show up to work to when and how often you take vacation. But at the same time, the client(s) you do business for can stop giving you work at any point in time without cause.

While these are the obvious aspects you need to consider before moving to independent contractor status, there are some less obvious aspects you may not have considered. Your newfound freedom comes at the cost of self-employment taxes and estimated tax payments.

As an Independent Contractor, you are considered self-employed. This means that you will have to pay the employer portion of your Medicaid/Social Security (FICA) taxes, as well as the employee portion that is usually pulled from your paycheck. To put this into perspective, let’s look at the following equation:

FICA Tax rates as of 2022:

Social Security Tax (OASDI) Employee Portion 6.20%

Medicaid Tax (HI) Employee Portion 1.45%

Social Security Tax (OASDI) Employer Portion 6.20%

Medicaid Tax (HI) Employer Portion 1.45%

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Total Percentage that is now your responsibility 15.30% This means you will owe an additional 7.65% of your income to the IRS than you are accustomed, for a total of 15.3% in FICA taxes.

The next aspect you will want to consider is your federal taxes. When you worked for an employer, it was their responsibility to withhold your taxes and submit them to the IRS. That responsibility now lies with you. This is done with Estimated Tax Payments due Quarterly on Voucher Form 1040-ES.

The 2022 Estimated Tax Worksheet should be used for figuring out your estimated tax payments. This worksheet can be found on page 8 of the IRS “2022 Form 1040-ES Estimated Tax for Individuals” instruction booklet. This worksheet helps you calculate your personal tax bracket, deductions, and credits, along with the 15.3% of FICA taxes due (up to the base wage maximum that applies to your social security taxes).

Once you figure out your estimated taxes due, you will need to make these payments Quarterly. The due dates for 2022 are as follows (found on page 9 of the IRS “2022 Form 1040-ES Estimated Tax for Individuals” instruction booklet):

Quarter One (January 1 thru March 31) April 18, 2022

Quarter Two (April 1 thru June 30) June 15, 2022

Quarter Three (July 1 thru September 30) September 15, 2022

Quarter Four (October 1 thru December 31) January 17, 2023

Your first year as an Independent Contractor will be the hardest, as you learn the procedures behind your new responsibilities. After your first year, you can use the previous years’ taxes as a basis for your estimates.

Fear not! It is easier than it sounds; and it may be worth the hassle for your new job offer. If you need help, Shadburn Bookkeeping, LLC is here to help keep you sane. Contact us today at 325-274-5870 for your free consultation.

Find the “2022 Form 1040-ES Estimated Tax for Individuals” instruction booklet, worksheet, and payment vouchers here: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

Chrystal Shadburn is an accounting paraprofessional with ten years of experience working in the law firm industry.

Disclaimer: Chrystal Shadburn is not a CPA. Shadburn Bookkeeping, LLC is not a CPA firm. For more information, please see https://www.tsbpa.texas.gov/enforcement/faq.html#activities

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