As a contractor, it is important to understand how much you will be taxed in order to properly budget for your finances. Unlike traditional employees, contractors are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, among other taxes.
One of the first things to consider is whether you will be classified as an employee or an independent contractor. If you are classified as an employee, your employer will withhold taxes from your paycheck, as well as pay their portion of Social Security and Medicare taxes. However, if you are classified as an independent contractor, you will be responsible for paying your own taxes.
As an independent contractor, you will be required to pay the Self-Employment Tax, which is made up of the employer and employee portions of Social Security and Medicare taxes. The Social Security tax rate for 2021 is 12.4%, with 6.2% paid by the employer and 6.2% paid by the employee. The Medicare tax rate for 2021 is 2.9%, with 1.45% paid by the employer and 1.45% paid by the employee.
In addition to Social Security and Medicare taxes, there are other taxes that may apply to contractors. These include state income tax, federal income tax, and sales tax. The amount of state income tax you will be required to pay will depend on the state you live in and the amount of income you earn. Federal income tax rates range from 10% to 37% depending on your income level.
Sales tax may also apply if you are selling goods or services, depending on the state you live in. It is important to research the specific tax laws in your state to determine if you are required to collect and remit sales tax.
Overall, contractors may be subject to higher tax rates compared to traditional employees, due to the additional responsibility of paying both the employer and employee portions of Social Security and Medicare taxes. It is important to properly budget for taxes as an independent contractor in order to avoid any surprises come tax season. Consulting with a tax professional can also be helpful in ensuring you are in compliance with all applicable tax laws and maximizing your tax deductions.