I'm a Contract Employee. How Much Should I Save for Taxes?

Candace works for a small company, and the owner is issuing a check to each of her employees as contract employees. Candace isn't sure how to handle her taxes now.

QUESTION: Candace in Pensacola works for a small company, and the owner is issuing a check to each of her employees as contract employees. Candace isn’t sure how to handle her taxes now. Dave explains how this is going to work.

ANSWER: You should probably withhold about 25% from your check. At 20%, you’re probably a little low depending on what you’re making because you’re going to have both sides of the Social Security and Medicaid/Medicare taxes. That’s 15.3%. The rest of it will be income tax, and you’re probably going to have more than 5% income tax depending on what you make. You may not have any income tax. I’d go ahead and withhold 25% on yourself just to be sure.

Just a note to you small business people out there, you can’t just decide someone’s not an employee. They either are an employee under the definition of the law or they’re not. You can’t just decide that. The owner is probably ignorant about that. She’s going to get herself in trouble because if she gets audited, they’re going to nail her ears to the wall because you guys probably are employees. She’s going to mess herself up, and you might just want to gently let her know. It’s not going to hurt you in any way as long as you do your withholding, although she did give you a 7% pay cut. She was paying half of that Social Security at 7.65% and you were paying half of it. Now you’re paying the whole 15.3%. By doing this, you got a 7% pay cut. Aside from that, you may just want to gently help her and tell her to check with her CPA about this, because I think she’s totally messing herself up. She probably doesn’t mean to. She probably just doesn’t know what she’s doing.

Jump-Start Your Goals!

Jump-Start Your Goals!

Get our 8-Day JUMP START series and weekly newsletter that are packed with articles and tools to help you win with money.

Find a Local Expert

Start with a Local Expert

Get trustworthy guidance to help you save money on life’s most complicated financial decisions.

Find an ELP

Thank You!

Your 8-Day Jump Start is on its way to !