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It is a common belief that self-employment income is somehow “tax free” as it comes without the paperwork of W-2s and withholding statements. Every tax season, the IRS audits thousands of self-employed contractors, determining that they owe massive sums on their back earnings. Most agencies that employ contractors send 10-99 statements to the government and to the contractor, so self-employment income must be reported promptly to avoid an audit and falling into arrears.
Social Security Taxes for Self-Employed Contractors
When a business pays a wage to regular employees, they must also withhold a certain amount of money for the federal government’s social security tax. On the other hand, self-employed people must still pay the same Social Security tax burden without having any withholdings from their employer. This means that all self-employed people take a de-facto pay cut over their waged counterparts, along the lines of 8% because of their Social Security taxes.
The New 10-99K
Previously to tax year 2012, it was difficult for the government to estimate the earnings of self-employed contractors who used PayPal as their primary payment processor. PayPal did not have the same reporting requirements as credit card companies, but that was rectified with the creation of the 10-99K. The 10-99K is basically a transaction record from PayPal to the IRS, detailing all transactions in a calendar year as long as the calendar year saw more than $1,000 in business. Attempting to evade taxes on self-employment income is virtually impossible if you received any payments in credit or in PayPal, as the government already has these payment records to hold up against reported income and taxes due.
Selecting a Self-Employment Tax Accountant
Doing taxes is a headache for the simplest of returns, so the complexity of a tax return for a self-employed contractor can be overwhelming. It is vital that self-employed people seek a tax accountant to help with their tax filing, as it can dramatically reduce the overall tax burden that they owe the government. Taxes for self-employed contractors are calculated based on their overall profit during a year, rather than their revenue, so contractors can deduct most expenses that were directly related to their business dealings. As an example, the IRS allows certain deductions for office supplies and electronics related to the creation of a home office, as long as the home office is used primarily for business and meets certain other criteria.