This is a little scary, but the government has rolled out a new I-9 form. The I-9 is a form you need to sign a new employee up for payroll. Or, to quote Citizenship and Immigration Services, “Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens.”
Okay, so it’s only scary if you have a default paranoid style like mine. Which, to be fair, is not a bad style for a bookkeeper.
Worrying about 1099s already? If, like Cathy Keeps Books, you subscribe (or have been subscribed to) various accounting-related e-mails, you may have seen something like this:
This one came from Paychex. Previously, the forms were always due to recipients (your contractors) at the end of January—but the government reporting copy, the 1096, was due at the end of February, or in March if you e-filed it. Starting with tax year 2016 (that is, with the forms you file at the start of 2017), that government deadline will also be the end of January, for both paper and e-filing. By the way, the same applies to W-2s and their associated W-3.
I’ve never understood why there was a month allowed between recipient and IRS filing. For a bookkeeper, the biggest risk is screwing up on recipient forms; you can always amend your 1096, but if you get a contractor’s payment wrong on her 1099, she’ll be pissed. So this deadline change is no big deal to me.
Our previous blog entry covered freelancer tax tips, specifically the shitload of taxes you will owe in your journey as a freelancer. As we mentioned, the IRS requires that self-employed individuals pay quarterly estimated taxes to make up for the quarterly payments that are not being made by an employer. It can be very painful to discover that you have underpaid your estimated taxes, which is why we’re writing this post in the first person plural, because this definitely didn’t happen to us.
Remember that your estimated taxes cover not just your self-employment tax (i.e., twice the usual amount of FICA), but your income tax as well, and any other taxes on income that is not subject to withholding. In Cathy Keeps Books’s experience, there are two ways to figure estimated taxes. You can project your tax for the year, most likely by basing it on last year’s, and divide that into quarters. Or you can do a quarter-by-quarter calculation and remit a percentage of each quarter’s income to the feds. For instance, you already know you’ll be paying 15.3% of your income in self-employment tax (6.2% to Social Security plus 1.45% to Medicare, doubled). Add to that your best estimate of your income tax rate. If you think you’re going to be taxed at 20%, you’ll want to remit 15.3% + 20% = 35.3% of what you made in the quarter.
Once again, Cathy Keeps Books is just a regular person and this is not professional tax advice. But take it from us and estimate higher, not lower, to avoid a storm of emotion on April 14.
Kids, this comes from the New York Times so is presumably pretty legit. In “Tax Tips for Those Who Make Money in the Gig Economy,” from the March 4 Sunday Business section, Tara Siegel Bernard lays it out: self-employment taxes, expenses and deductions, estimated tax payments, health insurance. A great starting point for new freelancers.
From Cathy Keeps Books’s point of view, the most important thing to know about self-employment is you’re going to pay a lot of taxes. Or, at any rate, more than you’ll want to believe when you’re just starting out. You know how when you’re working for the man, a chunk of your paycheck is taken out for taxes? That deduction probably includes:
- FICA (Federal Insurance Contributions Act). This comprises Social Security, at 6.2% of your wages, and Medicare, at 1.45%.
- Your federal income tax.
- Your state income tax.
Meanwhile, your employer pays their share of FICA, which is usually equal to yours (barring tax-relief legislation for workers, or what not). When you’re working for yourself, what happens to that chunk of your paycheck? Well, you don’t get a paycheck, so no chunk gets taken out. That means you have to pay your own FICA, federal and state income tax out of whatever you’ve earned. Moreover, you have to pay employer’s FICA, too, because you’re your own employer. And in a special twist, because you’re not contributing taxes every time you get a check, you have to pay estimated taxes on a quarterly basis.
In short, freelancing is totally awesome, but do your tax research before you start out and avoid getting into trouble later.