“How come I have to pay so much tax?”
Sadly, that’s something I hear a lot from first time business owners or even worse, people who have always been employees and now are receiving Form 1099s as Independent Contractors.
Instead of a refund, they are now looking at paying more than they ever did before. Why?
The biggest tax that Independent Contractors face is self-employment tax. This tax is 15.3% of taxable income and is in addition to federal and state income tax. In fact, a Sole Proprietorship (Schedule C) owner may have self-employment tax even if they end up with no income tax at all. The self-employment tax is calculated on the net income of the business, before you take any itemized deductions or the standard deduction or other deductions from your income.
If you are just new to receiving 1099s, you might not even realize you are a business owner. You might not realize all of the business deductions you may now get, including a home office deduction, cell phone, cellphone plan, computer, ISP, travel, auto and more. Business deductions are very important because they reduce your taxes. And then, you’ll have to pay the self-employment tax on the net income and, of course, federal and state income tax on your total taxable income. Before you were a business owner, your employer made sure your taxes were withheld from your paycheck. You weren’t hit with one big bill at tax time. Instead you had taxes paid every pay day. That shock can also mean you suddenly realize you owe a lot of taxes.