I'm considering accepting a position where I'll be treated as a "consultant" and am trying to determine the tax repercussions. My current understanding is that on next year's taxes I'll be considered self-employed and will no longer be able to utilize the standard deduction and/or the standard exemption. Is this correct?Thanks much!
Not at all. The big implication is on Social Security and Medicare taxes. As an employee, you pay 6.2% for Social Security, and 1.45% for Medicare. So does your employer. As a self-employed person you pay both halves of this tax, so you lose 15.3% of your income off the top. Now, a quarter of that is deductible, but it is still a big hit.You really want to talk to a CPA about how to set your business up. But, as a self-employed individual, you get the same deductions as any individual does.
You have misunderstood someone. You can always take the standard deduction. You itemize if it's to your benefit. You will be entitled to your exemption as long as no one else can use it (parents, etc.).Your employer will not withhold from your wages. Taxes are "pay as you go." So, the IRS will expect you to make estimated taxes quarterly.Your business will probably entitle you to other deductions. You might want to consult with a tax advisor.Good luck.
As others have already pointed out, there are several issues to consider. The biggest issue is the self employment tax. This is twice the FICA tax you would pay as an employee, or 15.3% or net income.Also, as a consultant, I assume you will have to pay for your own medical insurance. The deduction for medical is limited for self employed individuals.Also, as a consultant, you will be able to deduct more costs as business expenses. As others have suggested, see a CPA.
Whoa! People are assuming that anngal will not be an employee of the company offering her this position. Their answers are all valid, based on that assumption. But I have to speak up, and point out that it is entirely possible to be an employee of a company, having taxes withheld, getting a W-2, etc., and be called a consultant. I've done it. Job titles are meaningless. What counts is how your income is reported: On a W-2 (employee), on a 1099 (unincorporated business), or not at all (incorporated business). So, anngal, my advice is to get clarification on this point. If the answer is W-2, none of the above applies. 1099, all of it aplies. Neither, it gets a good deal more complicated, and there are opportunities for you to save a lot on taxes, or spend a lot more on overhead.MichaelConsultant
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