Self-Employment Tax Danger Signs

I’ve derived some or all of my income from self-employment almost all of the last 20 years. I’ve gotten pretty good at estimating what I will make, and I can come close to my self-employment tax for the year in my head. But I’m not going to give you advice specifically about self-employment tax.

Except for this: If you’re self-employed, or being asked to work as a contractor, make sure you get advice from someone who knows. For the record, that group does not include me.

My taxes went very well this year, and I’ve received me refund. It was close enough to my estimate to keep me from concern. What has raised a red flag for me is the number of friends and relatives who have been asking me questions about this topic, and often doing so too late.

When is it too late? I’d suggest that’s when you have a huge, unexpected tax bill and you’re wondering what to do about it. (Think: Payment arrangement.) There appear to be some employers out there who are trying to replaced regular employees with contractors. There are legitimate cases of contract work, but it’s not a sort of open choice. There are rules that indicate who is a contractor and who must be an employee. Each person in an agreement has certain duties.

If you’re in this situation, don’t go to friends and relatives (such as yours truly) who might know. Go to someone who does know. Find out whether the arrangement is legal, and if it is legal, what it’s going to cost you.

One piece of bad advice I’ve heard in several cases is this: You don’t need to worry about your estimated taxes. Your deductions (due to family size, etc) will take care of it. Self-employment tax doesn’t work that way. It starts from your profit and comes off the top. That nifty standard deduction doesn’t help, though refundable credits will.

I hope I’m just giving enough information here to warn people who are treated as contractors by their employers that they need to get reliable information. Don’t make any decisions based on this post other than the decision to check. It might cost you a little bit of money now, but not doing it could cost you a great deal of money later.

Know whether your contract arrangement is legal, and know how much it will cost you in taxes.

Related articles

• Self-Employed Federal Income Taxes (turbotax.intuit.com)
• What is a Schedule C IRS form? (turbotax.intuit.com)