Pay Taxes as an Independent Medical Transcriptionist
Doing medical transcription work as an independent contractor may do a lot of good things for you, but getting you out of paying taxes isn’t one of them. When you work for yourself, you get to take some great tax write-offs.
You also have to pay increased Social Security and Medicare taxes and manage paying them yourself. Most important:
You have to make quarterly estimated tax payments. If you forget to do so, Uncle Sam can reach into your pockets and take out extra!
As your own employer, you’ll have to pay the portion of Social Security and Medicare taxes an employer pays on an employee’s behalf. This is known as self-employment tax.
That’s the major stuff. As long as you know about it and take care of it, it’s really no big deal. It only becomes problematic if you don’t do it. Two other notable things happen:
Instead receiving a W-2 form at the end of the year, you’ll receive one or more 1099 forms.
Your federal income tax return will include additional forms.
Taxes are a complicated subject, and can only be touched on here. If you want thorough information on preparing your taxes, check out some detailed books on the subject.
Understanding self-employment tax
Self-employment tax is just another name for Social Security and Medicare contributions. If you had an employer, it would pay half and you would pay the other half. Because you’re your employer, you have to pick up the whole tab.
You figure self-employment tax by completing the Schedule SE form along with your annual federal tax return. It’s calculated based on your net self-employment income, which, if you recall, means what’s left after you deduct business expenses.
The standard self-employment tax rate is 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare). If you’re used to paying just the employee portion (7.65 percent), paying double can be a little stunning at first.
But there’s some good news: You get to deduct that extra half when calculating your adjusted gross income (AGI). AGI is the number used to determine your federal income tax. The lower it is, the lower your income tax bill will be.
Because of the 2010 Tax Relief Act, the self-employment tax rate was reduced to 13.3 percent (10.4 percent for Social Security and 2.9 percent for Medicare) for tax year 2011; Congress voted to extend the Tax Relief Act for tax year 2012 as well, but you can bet this extension won’t last forever.
For up-to-date information on the self-employment tax rate, go to IRS website.
Making estimated tax payments
Income tax is a pay-as-you-go system. You pay in all year long, based on estimates of what your final tax bill will be. Then you have until April 15 to complete your annual tax return and calculate what you really owe. You either pay more or get some back.
When you’re someone else’s employee, your employer does the estimating and submits payments on your behalf. A portion is subtracted from your paychecks throughout the year as withholding and submitted to the public tax coffers.
You don’t get to get out of paying in all year long just because your income isn’t coming from an employer. The difference is, you have to take over the task of estimating and making payments.
There are a couple of ways you can do it:
Make quarterly estimated tax payments.
Increase withholding from paychecks from an employer by enough to cover your self-employment income, too.
Estimated taxes are due four times a year (April 15, June 15, September 15, and January 15). Whoever you owe income taxes to (federal, state, and/or local) gets estimated tax payments. The mechanics of paying them is easy — just fill out the proper form and send it in with a check.
Federally speaking, it’s IRS Form 1040-ES. Whoever else you pay income tax to will have a corresponding form. You may expect them to be named similarly, but they’re not. In New York State, it’s form IT-2105. In North Carolina, it’s NC-40. Go figure.
It is an approximation process, and the IRS doesn’t expect you to get it smack on; however, it does expect you to come close. If you underpay, you can get hit with extra charges.
Estimated taxes payments made to municipalities are occasionally due on a different schedule. For example, in some cities, it’s a once-a-year thing instead of quarterly.
If your income fluctuates, predicting this year’s bill can get tricky. You can use a tax publication worksheet, tax prep software, an online calculator, or a tax professional to help you figure it out. As long as you pay estimated taxes equivalent to 100 percent of the previous year’s tax bill or 90 percent of this year’s bill, you’ll be in the clear.
If you still have a “regular” job or file a joint return with someone who does, you can save yourself the hassle of submitting estimated tax payments by increasing the withholding from those paychecks.