Taxes Made Simple

Lynn (Mary Kay rep) asks:

Hi Mike. I just started working as a Mary Kay rep. This is my first time being paid as an independent contractor. What significance does this have?

Answer:

Hi Lynn.

Being an independent contractor is going to impact your tax situation in several ways. All the changes will stem from the fact that, for tax purposes, you are now self-employed. Your "job" is actually a one-person business as far as the IRS is concerned.

Self-Employment Tax

Your income is now going to be subject to the Self-Employment Tax. This tax is calculated as roughly 15% of your earnings from self-employment. This sounds like bad news, but in actuality it's just a different name for the Social Security and Medicare taxes that would be taken out of your paychecks automatically if you were working in a salary-type position. (Granted, when you are an employee, your employer foots half the bill, but you can bet that they would budget for it and adjust [reduce] your pay accordingly.)

Quarterly Estimated Tax Payments

Now that you're self-employed, nothing will be withheld from your paychecks to cover the taxes that you owe on the income. Instead, you'll have to make tax payments four times per year.

Extra Paperwork

Every year you'll have to fill out a Schedule C on which you calculate your income from the business, and a Schedule SE on which you calculate the amount you owe for Self-Employment Tax.

Business Deductions 

You are now entitled to a deduction for any expense related to your business that would be considered "ordinary and necessary" in your line of work. Extra bonus: These deductions save you money on both regular income tax and on the Self-Employment Tax.

For More Information, Take a Look at My Related Book.

See it on Amazon now.

A testimonial from a reader on Amazon:

"Quick and easy read. No fluff, just straight to the point and gives you more helpful information that you might imagine. If you are looking to get the bottom line information you need to start your business right then this book is a must have." R.L. Muhammad

Read more reviews on Amazon.