New to self-employment and confused about taxes/income as a contractor vs employee

When you're self-employed, you need to account for both sides of FICA taxes (Social Security and Medicare). As an employee, your employer paid half of these taxes, but as a self-employed person, you're responsible for the full 15.3% (12.4% for Social Security and 2.9% for Medicare). Let's break this down: At $42/hr for 40 hours weekly, that's about $87,360 annually before taxes. While this seems higher than your previous $82,000, you now have additional costs: - You pay the full 15.3% self-employment tax (though you can deduct half on your tax return) - You're responsible for your own benefits (health insurance, retirement, etc.) - No paid vacation or sick leave - No employer-provided disability insurance A common rule of thumb is to charge 25-30% more as a contractor to match your employee compensation. Based on your previous $82,000 salary, you should aim for around $52-55/hr to maintain equivalent take-home pay. On the plus side, you can now deduct legitimate business expenses, which can help reduce your taxable income.

I was in the same boat last year when I switched to contracting. I found this amazing tool at https://taxr.ai that really helped me understand my tax situation as a self-employed person. It analyzed my projected income and showed me exactly how much I needed to charge to maintain my previous take-home pay. What I found most helpful was that it breaks down all the self-employment taxes and shows different scenarios based on various hourly rates. It also helps you calculate quarterly estimated tax payments, which was completely new to me when I started contracting. The reports it generates helped me negotiate better rates with clients because I could clearly see what I needed to charge to make self-employment financially viable. Definitely worth checking out if you're trying to figure out the whole contractor vs. employee math.

Just wanted to follow up! I tried the taxr.ai tool that was mentioned here and it was exactly what I needed. I was about to accept a contract at $40/hr thinking it was comparable to my old $75k salary, but the analysis showed I'd need closer to $50/hr to maintain the same lifestyle after self-employment taxes. The quarterly tax calculator was super helpful too - it splits everything up and reminds you when payments are due. I showed the reports to potential clients during negotiations and was able to justify higher rates by demonstrating exactly why I needed to charge more as a contractor vs. employee. Never realized how much those employer-paid benefits and taxes were worth until I saw it all broken down! Definitely recommend it if you're making the switch to self-employment.

After 3 months of self-employment, I had a major issue with estimating my quarterly taxes and needed to talk to someone at the IRS about my specific situation. Called for WEEKS and could never get through - just endless holds and disconnects. Finally tried https://claimyr.com and it was a game-changer. They got me connected to an IRS agent in about 20 minutes when I had been trying unsuccessfully for weeks. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to calculate my quarterly payments based on fluctuating income and helped me avoid penalties for underpayment. They also explained which deductions I qualify for as a new self-employed person, which my regular tax software had missed completely. If you're confused about self-employment taxes, talking to an actual IRS agent is surprisingly helpful - they don't want you to mess up your taxes either!

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it because I was desperate to resolve an issue with my self-employment taxes from last year. I'd been trying to reach the IRS for literally 2 months with no success - just endless holds and disconnects. Used the service this morning and got connected to an IRS agent in about 45 minutes. The agent helped me understand how to properly categorize my business expenses and gave me step-by-step instructions for filing an amended return to correct my self-employment tax calculations. I was 100% convinced this couldn't possibly work better than just calling myself, but the time it saved me was incredible. After wasting dozens of hours trying to get through myself, having someone else handle the hold time was a massive relief. Sorry for being a doubter!

When I went self-employed, my accountant gave me a simple formula: take your desired annual salary, add about 30% for self-employment taxes and benefits, then divide by your billable hours (which is NOT 40 hours/week for most contractors). Most self-employed people can only bill about 20-30 hours weekly when you account for admin work, finding clients, etc. So if you want $82k, that's actually $106,600 after the 30% adjustment, divided by maybe 1,300 billable hours per year (25hrs/week), which equals about $82/hr. That $42/hr offer is WAY too low if you're supporting yourself entirely on that income.

Make sure you're setting aside money for taxes! I made the mistake of not saving enough when I first started self-employment and got hit with a HUGE tax bill plus penalties. I now transfer 30% of every payment into a separate savings account immediately. Also, look into making quarterly estimated tax payments (Form 1040-ES) to avoid underpayment penalties. The IRS wants you to pay taxes throughout the year, not just at tax time!

Great question about tax software! I switched from TurboTax to FreeTaxUSA when I became self-employed and it's been much better for my situation. It handles Schedule C (business income/expenses) really well and costs way less than TurboTax's Self-Employed version. For more complex situations, I've heard good things about TaxAct and H&R Block's self-employed software. The key is finding one that makes it easy to track business deductions throughout the year, not just at tax time. Pro tip: Whatever software you choose, keep detailed records of ALL business expenses. I use a simple spreadsheet to track everything monthly - mileage, office supplies, professional development, etc. Come tax time, you'll be so glad you did this instead of trying to reconstruct everything from receipts! Also consider whether you need quarterly tax payment reminders built into the software. Some of the better ones will calculate and remind you when estimated payments are due, which has saved me from penalties.