How to Pay Social Security Tax As a Consultant

Working as a consultant has a number of important advantages, including the ability to set your own hours and work at your own pace. Even so, consultants and other self-employed individuals need to be aware of some tax details. Tax filing can be a bit more complicated for consultants, and it is important to start tax planning before you take on your first client.

Things You'll Need

• Tax preparation software
• 1099 forms from your clients
• 1040-ES form
• Payment vouchers

Instructions

1. Ask your clients how payment will be made. Most likely, you will be paid directly from the client, and chances are you will be working as an independent contractor instead of an employee. If you are working as an independent contractor, you will receive a 1099 at the end of the year, and you will be responsible for paying the taxes due, including both the employer and the employee portion of Social Security and Medicare taxes.

2. Use a quality tax preparation software to estimate the taxes you will owe for the year. If you will be consulting on a full-time basis, you likely will need to file quarterly tax returns and pay quarterly estimated taxes. If you fail to file quarterly tax returns, you could be subject to an underpayment penalty when you file your tax return on April 15. You can run the numbers using Turbo Tax, Tax Cut or another quality tax preparation software.

3. Consult with a CPA about your tax liability and your Social Security taxes. A good CPA will be able to let you know whether or not you need to file quarterly tax returns, and he or she can also give you advice on how to lower your overall tax bill.

4. Estimate how much you expect to make as a consultant in the current tax year. After you have an idea of how much you expect to make, you can easily figure your Social Security and Medicare tax liability. The Social Security tax you will owe is equal to 12.4 percent of the first $102,000 in earnings, while the Medicare tax amounts to 2.9 percent of that amount.

5. Put aside 15.3 percent of the earnings from your consulting business in a safe investment such as a savings account or money market fund. This money should be set aside for taxes, and you can draw on that fund when you file your quarterly estimated tax return and fill out your payment voucher.

6. Complete your 1040-ES form and mail your payment voucher. You will find the payment voucher attached to Form 1040-ES. Simply complete the voucher by indicating the amount of the payment you are making and mail it to the IRS. After you have made the first payment, the IRS should mail you three additional envelopes for the remaining payments. If you do not receive these pre-addressed envelopes, be sure to complete your own and keep them in a safe place. The due dates for quarterly tax payments are April 15, June 15 and Sept. 15 of the current year and Jan. 15 of the next year.

References

• Social Security and Medicare Taxes
• Form 1040-ES