NOTICE: THIS PAGE IS BEING UPDATED FOR THE NEW TAX YEAR, PLEASE CHECK BACK AFTER APRIL 15th.
One of the biggest decisions a professional has is to decide whether to become an independent contractor or become an employee with a W-2. Each has its own unique tax consequences and reporting requirements and under certain circumstances a W-2 professional may enjoy an increase in their disposable income. The following example is a taxpayer who files as a single individual for the tax year ending December 31, 2005 who maximizes their contribution to their SEP or 401K retirement plan. This example does not take into account any fringe benefits that employers may offer there employees. This example is confined to the Federal tax consequence and does not take into consideration any State tax issues.
|
Independent Contractor |
W-2 Payroll Employee |
|
| Gross business income | ||
| Schedule C deductions | ||
| 401K Contribution | ||
| Total Income | ||
| SEP Retirement Plan | ||
| One-half of FICA | ||
| Adjusted Gross Income | ||
| Itemized deductions | ||
| Standard Deductions | ||
| Personal Exemption | ||
| Total Income subject to tax | ||
| Federal tax | ||
| Total Income | ||
| Less: | ||
| Self Employment Tax | ||
| FICA | ||
| Itemized business exp | ||
| SEP retirement plan | ||
| Federal tax | ||
| Disposable Income |
Please note: The preceding information is confined to Federal taxes, as State
taxes vary. This example does not include medical insurance costs. For the independent
contractor, only 60% of health costs are deductible. For the W-2 employee, the
employer contributions have not been reflected. This example does not take into
account any fringe benefits or bonuses that employers may offer to their employees.
For further information, please contact Heather J. Blake, CPA, at Murphy Blake
& Associates, LLP.
ICon Professional Services, 1065 E. Hillsdale
Blvd., Suite 108, Foster City, CA 94404
Tel: (650) 378-4150 Fax: (650) 378-4157
www.icontract.com