If you're like most people, the amount of your first paycheck was somewhat of a surprise. Unless you are considered an "independent contractor" (more on that below), your employer is required by law to withhold estimated taxes from each pay check. These taxes include:
Your employer knows how much to deduct for withholding based on both your income and your "Personal Allowances" as listed on your federal W-4 form. Your employer will supply this short, easy to understand form when you begin work. One warning - if you have more than one job, make sure you complete the "Multiple Jobs Worksheet" on page two of the form. Otherwise, you may have too little tax withheld and end up owing money when you file your tax return. You can update your W-4 form with your employer at any time.
At the end of the year, your employer will provide a "W-2 Wage and Tax Statement" that lists all of the deductions that were taken from your paycheck. You use this form to complete the 1099 income tax form.
If you are a business owner, work from home, or can set your own hours, you may be considered an independent contractor for tax purposes. In this scenario, you will receive your entire gross pay with no tax deductions, but you are responsible for paying all of your own taxes. In fact, you may even have to pay quarterly estimated taxes.
Tax rates for independent workers are the same as other workers, but with one major exception - Social Security and Medicare. In a typical employment situation, the worker pays 6.2% of earnings for Social Security and 1.35% for Medicare. In reality, these rates are only one-half of the actual tax since the employer pays the other half. If you are an independent contractor, you are responsible for both halves of each tax, yielding a grand total of 15.3% of your income. While you are permitted to deduct the additional "employer" half of your tax as a business expense, the effective rate continues to be significantly higher than a traditionally employed worker.
Many independent contractors are provided with a "1099 MISC" form by their employers at the end of the year. This form lists your income from that employer and is also supplied to the Internal Revenue Service. Business owners may or may not not receive at 1099 MISC form, depending on the nature of his or her business. Either way, independent workers must also complete a "Schedule C" form that lists profits and losses from their employment, in addition to a standard 1099 form.
FAFSA Updates-South Dakota Department of LaborMonday, July 24 at 2:00 PM CST
Sneak Peek for School Counselors on FAFSA ChangesWednesday, August 30 at 3:00 PM CST
T.F. Riggs High School Financial Aid NightThursday, September 7 at 7:00 PM CST