WASHINGTON — Some people work for themselves because they like the autonomy. Others have been unable to find full-time, regular jobs and have had to settle for contract work for a specific project or period of time. And still others have retired but have been brought back as consultants by former employers.
Contract workers, consultants, freelancers or the self-employed — these workers face additional challenges when it comes time to file their taxes.
They won't receive the traditional W-2 that other workers get reporting income and taxes paid. Instead, they'll receive a 1099 form with their earnings from each of their employers.
However, employers aren't required to provide 1099 forms if income is less than $600. Still, all income, even if there is not a 1099 form, is required to be reported to the Internal Revenue Service.
Since self-employed individuals or contract workers don't have taxes withheld, they could be in for an unpleasant surprise. “You could be really hurt if you haven't paid any estimated taxes,” said Jackie Perlman, principal tax research analyst with The Tax Institute at H&R Block.
Not only will these workers have to pay taxes on income earned, they'll also have to pay a self-employment tax, said Barbara Weltman, contributing editor to “J.K. Lasser's Your Income Tax 2013.”
That self-employment tax is equivalent to both the employer's and the employee's share of Social Security and Medicare. For 2012, it is 13.3 percent, which includes 10.4 percent for Social Security on income up to $110,100 and 2.9 percent for Medicare on all income.
And they may be subject to a penalty if they did not file estimated taxes.
But there is a bright side.
“The tax code smiles on people who are self-employed,” said Mark Steber, chief tax officer for Jackson Hewitt Tax Services. That's because you can offset the true cost of doing business, he said.
Did you take a potential client out to lunch? You can generally deduct half the bill as a business meal.