for independent contractor vs. corporation
I started working as an independent contractor
in February of 2005. I am not sure what taxes I have to pay.
I register as a corporation, and do I get any tax benefits by doing so, or should
I continue to be an independent contractor? Thanks for your help. -- Ravi
As an employee, you have your taxes withheld
by your employer and that is pretty much all you need to do for the year. As a
self-employed person, you are responsible for your own taxes, which means you
have to pay them to the Internal Revenue Service directly.
addition to owing income tax, self-employed individuals pay self-employment tax
on their net earnings. Self-employment tax is 15.3 percent of the net earnings
and is computed on Schedule
SE. Your earnings less expenses are reported on Schedule
C. Certain additional expenses allowed to a self-employed individual are considered
adjustments to gross income on page one of Form 1040 and therefore do not reduce
your self-employment tax. These adjustments include health insurance, pension
contributions and one-half of your self-employment tax.
need to estimate your taxes for 2005. You can do this based on 100 percent of
the tax you paid for 2004 (if you had high income in 2004, you might have to estimate
higher), or based on 90 percent of the tax you expect to owe for 2005.
you would remit one quarter of your total tax as estimates to the IRS on a somewhat
quarterly basis: the 15th day of April, June, September and January of the following
year. You would use Form
1040ES to remit the payments. Depending on your cash flow, you may want to
make more frequent payments to the IRS to avoid owing a large amount quarterly.
You can either send in additional Form 1040ES coupons or, if you prefer, you can
register to pay your taxes online at www.eftps.com.
The Electronic Federal Tax Payment System Web site is free to register and use.
It's also beneficial as it keeps a history of all your payments within a certain
period of time.
The incorporation decision depends on
several cost factors. You can probably set up a corporation for less than $500.
You also have to measure the annual cost of maintaining the corporation, such
as licenses, separate bank accounts, additional tax filings, your volume of sales
and the likelihood of its continued existence. You also have to look at your state's
tax situation. I wrote more about incorporating in a previous column on