Life, food, events, and community in Albuquerque, NM

Self Employment Tax Rant

OK, so I'm getting my taxes prepared at Tax Help New Mexico (which BTW is a GREAT service offered free by CNM for those w/ low enough income, or seniors).
Anyhow, as an umpire and referee for the city parks I am not actually a city employee; I'm an independent contractor.
All along I knew they weren't taking taxes out of my checks, and that I would have to pay them at the end of the year.... What I didn't realize is that on top of the regular income tax for those umpire/ref earnings, I also have to pay what's called the Self Employment Tax (making me a "corporation" who has to pay the social security and medicare tax for my employee: me).

I suppose other indepent contractors have had to deal with this / can feel my pain.

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Replies to This Discussion

Permalink Reply by Sarahjmd on March 3, 2009 at 5:37pm: Welcome to my world. I am a sole proprietor and 15% of my profit goes to the Feds for SS and medicare. When you work for somebody else you kick in 7.5% and your employer pays 7.5%. When you work for yourself or do contract work, you must fork up the whole 15% yourself. Eeee but that hurts.; ▶ Reply to This

Permalink Reply by Alexis on March 3, 2009 at 6:50pm: For anyone who is curious, here's the link to the Tax Help New Mexico website.

Official disclaimer: I work at CNM.; ▶ Reply to This

Permalink Reply by Michelle Meaders on March 4, 2009 at 12:18am: And here's the link to the website for Tax Aide, the free Tax help offered through the AARP.; ▶ Reply to This

Permalink Reply by Sarahjmd on March 3, 2009 at 9:00pm: Boy, I wasn't complaining that I have to pay. I hope I will get to collect something. I pay, and I am fine with that. I am even willing to pay more income tax. I just said it hurts because it does, and paying the additional 7.5% is almost always a shock to someone who is new to working contract or for themselves, as it was for Donny Ozmund.; ▶ Reply to This

Permalink Reply by Robert S. on March 4, 2009 at 4:45am: I think you meant unemployment insurance. AFAIK, if my contract is not renewed, I can't apply for unemployment insurance because I"m self employed.

Luckily if my contract is not renewed at the end of the this year, I have some savings stashed to live on while looking for another contract opportunity or having to find a 9-5 job.; ▶ Reply to This

Permalink Reply by Kelly on March 3, 2009 at 9:12pm: Well, there is a bit of a bright side. 1/2 of the self-employment tax you have to pay is tax deductible. We self-employed people do have that going for us. It may be cold comfort, though.; ▶ Reply to This

Permalink Reply by Robert S. on March 4, 2009 at 4:40am: yep, I feel the pain, but in the end it's worth it (it gives me quarters of SS credit by paying it since I am 100% independent contractor and have no 9-5 job with normal withholding of state/fed, social security taxes, etc.)

p.s. you may want to think about paying estimated taxes each quarter on your independent contractor earnings just to avoid any potential penalties on not having enough money withheld through the year.; ▶ Reply to This

Permalink Reply by Sarahjmd on March 4, 2009 at 10:22am: Yep, good advice Robert S. There is a penalty for not paying enough within a certain percent. I think there is even a penalty for paying too much over a certain percent too.; ▶ Reply to This

Permalink Reply by cathyray on March 4, 2009 at 10:32am: This is a rant that has been on my mind a lot lately. I'm thinkin that since I have been unable to find a job, I may as well invent one. That would mean being self employed, ultimately netting less money, paying estimates & on & on. One reason I want/need a job is because of the benefits, them doing the taxes, steady income, etc. I know we don't always get what we want & sometimes the things we think we want are not the best for us & all of that cheery, true stuff.; ▶ Reply to This

Permalink Reply by sophie on March 4, 2009 at 10:38am: Save every receipt and write off everything the IRS will allow. I love being self-employed.; ▶ Reply to This

Permalink Reply by Robert S. on March 4, 2009 at 3:11pm: People need to be careful about this, though, as I always wonder how many people abuse it.

For instance in my case, I have a "office" that I work from, equipment that I work with to meet my contractual obligation to my client, and a PC and internet to use to do my job. I'm a conservative tax filer and I honestly can say I don't use any of those things 100% fpr business , so I don't write it off on my taxes because it's not used entirely for business. I always wonder how many self-employed people write off things that aren't entirely used for business.

@sarahjmd - I think the goverment would love you forever if you overwithheld in estimated tax payments. While there can be a penalty for underwithholding (see the worksheet or whatever at the "tax due" part of your 1040 to see if one is owed or not), I don't think there is such penalty for overwithholding too much since it's llike a tax free loan to the government throughout a year that doesn't have to be repaid until you file your taxes. I always get a kick over how people are so excited to get a huge tax refund when they could have used that money throughout the year to fund their own IRA since if they are young enough, SS won't amount to much when they retire, fund a child's education fund, put it away in savings, use it to save the family house from a foreclosure close-call, etc.

Getting back a hundred or two is always fine for me because it means I got to use my money through the year to save or put in my IRA.

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Permalink Reply by QGal on March 4, 2009 at 11:17am: Sorry, but taxes are just part of your pricing structure as a self-employed contractor/consultant. You must factor in these kinds of costs of doing business. I guarantee an employer is very aware that an employee costs them more than just the gross salary that the employee thinks they make a year. Employers must pay that 7.5% mentioned above plus an employer's portion of any health plan's premiums, plus and employer's portion of any other benefit (like matching 401K or life insurance premiums), etc. They certainly factor in such "overhead" when they pimp you out on a contract, marking up your pay rate by like 100%. Have you seen how government contracts are estimated? They'll list secretarial services at ~$45/hour so they can still make a profit; the employee only sees maybe 30% of that as salary, at best. (I'm not sure of the exact factoring formulas.) But if you want to realize $40/hour consulting income, you'll need to bill your clients at least $70/hr, etc. [Receipts minus Expenses = Income] Any case, practice due diligence when starting your business - take some business classes; use SBA and SCORE counselors; research your market; get a mentor on your side; create a business plan. Gee... it's not painful if you're prepared...; ▶ Reply to This