The Tax Man Cometh . . . for Independent Professionals

By Nina Kaufman, Esq.

As you probably know, one of the great advantages for businesses in outsourcing to independent contractors is that they don’t have to pay the whole array of taxes that they do for employees. The IRS has stated . . .

Companies must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees.  They don’t generally have to withhold or pay any taxes on payments to independent contractors.

[If you’re self-employed, the IRS has a specialized Tax Center for you]

When you’re an employee, the company you work for (as noted above) pays to the government a portion of the taxes on your income. You are responsible for paying in the other part. However, when you’re an independent contractor, you bear the full responsibility of paying in both “portions” of your taxes: The portion you pay in as your own employer and the portion you pay in as if you were an employee.

But here’s one of the reasons why the IRS is starting to crack down on independent contractors.

Independent contractors have developed a reputation for not paying  their full tax burden.  Let’s face it: A check for $1,000 comes in–the landlord is itching to get paid, you need a new computer, and there are other bills to pay, leaving you with approximately $7.47 in “walking-around money.”  Where’s the money to pay taxes? Many independent professionals figure they’ll calculate taxes and worry about it on April 15.

But what happens if you don’t have enough on hand to pay that tax bill?  Say hello to “penalties and interest”–which become an ever-losing battle where you try to salvage a leaky boat by scooping out the water one bucket at a time.

Here’s a system I found helpful that I learned at one of T. Harv Eker’s Millionaire Mind seminars:

Every time money comes into your business, set aside a certain amount right away for taxes in a separate account. Take it right off the top. Don’t think about it–just do it. The percentage you may want to set aside depends on where you’re living (in New York City where I live, I should probably start setting aside 40 percent to 50 percent; for other states, your tax burden may only be about 20 percent).

This Guide to small business accounting suggests 30%.

Either way, having a regular system forces you to do two things:

  1. Set aside money to take care of tax obligations
  2. Look very carefully at your budgeting process

If the thought of taking 30 percent off the top makes you choke and cry with frustration because you can’t meet your bills, it’s time to look at where you can cut expenses and where you can increase income. Maybe this exercise will make you realize that you’ve been undercharging all these years!  🙂

Want to learn more about Kaufman Business Law? This is the video to watch.