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IC vs. employee - WillWorkForChocolate

Posted: Sep 01, 2011

I have only had one long-term position as an employee for an MT company. Left to get some work out in the "real world" but am in a position to return to an at-home job.

Can someone explain the differences between an IC and an employee? What can I expect from applying for those jobs, and how does it affect your taxes, etc.?

Thanks in advance!

IC vs Employee - Happy MT Robin

[ In Reply To ..]
Someone who is working an IC should not have a schedule set for them by the MTSO. That's a big one and it's one that the MTSO's are trying to blur the lines on. They can say "the work is available at such and such times" but they can't require you to be at your computer from 8 am to 5 pm. When I was an IC we simply had to let our MTSO know how many lines we were going to commit to on any given day and then were expected to live up to those commitments. As an employee, your employer has a lot more control over when you work, etc., theoretically anyway.

As far as the taxes go, you have to pay all of your income tax withholding like you would normally pay in an employee position, but then you also have to pay the employer's portion of FICA in addition to the employee portion that you already pay. You declare that employer's portion of your FICA on your taxes at the end of the year.

You also get more in the way of deductions for using your home office, etc. As an experiment on last year's taxes and because I had both employee wages and IC earnings, I did my taxes the regular way and with everything as an employee. The regular way - with both IC and employee earnings and the IC deductions for the house got me $36 back. Refiguring it with everything as employee wages meant I owed $550 to the IRS, so there's a big difference in the percentage of the deductions that you get.

The hardest part for me was taking the money out and putting it aside. Many people take their taxes out and put it in a separate account and then pay quarterly. I am not as structured as I need to be, so I found it easier to just pay it every paycheck and that way I didn't have to worry about it.

You can pay federal taxes online here:
https://www.eftps.gov/eftps/

You have to sign up for it and wait a couple of days for the final paperwork and one final password, but it's easy as pie once you get everything set up. Your state probably has an online portal where you can pay your state taxes on line as well. Google your state and Taxation and Revenue and it should come up.

I kept a spread sheet showing how much money I made each pay period and how much of that was federal withholding and how much of that was FICA and then when I paid and how much I paid along with the confirmation number that I got once the payment went through.

Download this guide from the IRS:
http://www.irs.gov/pub/irs-pdf/p15.pdf

It tells you a lot of what you need to know from an employer's standpoint (and you are essentially your own employer if you're an IC) and it has the withholding tables so you know how much to withhold for your federal income taxes. Your state should have the same thing on line in their Taxation and REvenue department web site (if they have a website).

The FICA tax percent changed just for this year and will revert to what it has been in the past at the beginning of next year, so you'll need to make sure to adjust those figures accordingly. Right now the FICA withholding is 13.3% for income earned in 2011 and in 2012 it goes back to 15.3% unless they change it. As an employee, your employer pays half of that and you pay half. As a self employed person, you pay all of it.

Here's some info from the IRS about self employment taxes
http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

Here's some info from the IRS about tax withholding and estimated tax.
http://www.irs.gov/publications/p505/index.html

It all can get very confusing, so if you are going to end up with an IC position, your best bet would be to invest a couple hundred bucks in an hour or two with a good CPA for advice and help in setting up a good system for withholding your taxes and paying them.

Now, having said all that... what some people do if they're married is have more taken out of their spouses check. This works great, except that all of the social security goes into your spouses's name. Not a problem if you have a good marriage, you're filing your taxes jointly, and don't foresee any problems down the road. If you end up divorced before the 10 year mark, though, then you don't qualify for your spouse's SSA income at retirement (if there's any left, that is) and you could end up not getting credit for your actual earnings.

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