By Joe Staples
Working at home has lots of advantages, but those taking the leap for the first time are often unprepared. They sometimes mistakenly assume that if you work at home for yourself it is no different from working at an office for an employer. Easier dress code. Well-stocked refrigerator.
In fact, however, if you work at home as a contractor, the most significant difference between you and traditional employees is the way you're handled (or mishandled) by income tax law. Read on to learn why the income tax bite is often a shock to at-home workers and what you can do about it.
The cautions and advice in this post are applicable to those who work at home as self-employed contractors, not employees who work at home performing a job for an employer. If you're not sure which category you fall in, you need to find out today because the implications are huge. Ask the person for whom you perform the work, or contact a tax professional.
Contrary to popular belief, the IRS is not "out to get" those with work-at-home jobs. There are no secret or hidden penalties, no traps to catch you because you work at home in your pajamas. Yes, it's true that self-employed contractors often pay more income taxes, but that's due to ignorance, not to secret surprises the IRS holds in store until April 15. The truth is, if you work for yourself you might pay more for one simple reason: Social Security tax. Every person who works in the US is obligated to pay Social Security tax (which includes Medicare tax), regardless of age or income. Unlike income tax, which can be zero if your income is low enough, everyone who earns money pays 15% of his or her income to this tax (assuming they're within the law).
If you're one of the many work-at-home contractors who was surprised in the past by your tax bill, you're thinking, "Wait a minute. I KNOW I paid a lot more when I quit my job and started to work at home." You probably did, and here's why: when you're an employee, your employer pays half of your social security tax for you. When you work for yourself, you pay all of it. If you're an employee, your employer withholds 7.5% of your taxable pay every pay period, adds 7.5% from its own money, and sends 15% of your pay to the IRS. If percentages confuse you like they do me, here's a simpler example: If I work at my job and earn $1,000, my employer withholds $75, adds $75 from her own pocket, and sends $150 to Uncle Sam. If you are self employed, you are responsible for the entire 15%. You see? The $75 gone from my paycheck has suddenly doubled. And the numbers are not moved by deductions or credits on your form 1040 because they're computed after those deductions and credits have been applied. In short, if you think your withholding sucked as an employee, wait 'til you see what you have to pay when you're self employed!
Sorry. Didn't mean to scare you. But now that you know about the tax shark cruising in the work-at-home sea, there are things you can do about it. The most prudent thing you can do is set aside 15% of your work-at-home income for taxes. Sock that money away in an interest-bearing account so you can pay it come tax time. Or to be safer yet, send that 15% to the IRS every quarter; you might avoid some penalties and interest that way. Remember, there are no secrets when it comes to taxes and surprises are only circumstances for which you did not prepare.
So go ahead and work at home in your wardrobe of choice. Enjoy the well-stocked refrigerator. But know how the tax game is played so you don't get hit.
Joseph Staples worked at the IRS for several years as a tax examiner, and for H&R Block as a tax preparer. He blogs at www.ivetriedthat.com, your
go-to source for reviews of the Internet's money making and money
saving claims. "We lose money so you don't have to!"
PLEASE NOTE: This article is not intended to give legal, financial or tax advise. For information concerning your particular situation, please consult a competent tax, financial and/or legal advisor.
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