What are FICA taxes for a sole proprietor in the United States
FICA taxes are separate from federal and state income taxes. As a sole proprietor you owe all of those.  Additionally, there is a difference with FICA when you are employed vs. self employed.  Typically FICA taxes are actually split between the employer and the employee, so you pay half, they pay half. But when you're self employed, you pay both halves. This is what is commonly referred to as the self employment tax. If you are both employed and self employed as I am, your employer pays their portion of FICA on the income you earn there, and you pay both halves on the income you earn in your business. Edit: As @JoeTaxpayer added in his comment, you can specify an extra amount to be withheld from your pay when you fill out your W-4 form. This is separate from the calculation of how much to withhold based on dependents and such; see line 6 on the linked form. This could allow you to avoid making quarterly estimated payments for your self-employment income. I think this is much easier when your side income is predictable. Personally, I find it easier to come up with a percentage I must keep aside from my side income (for me this is about 35%), and then I immediately set that aside when I get paid. I make my quarterly estimated payments out of that money set aside.  My side income can vary quite a bit though; if I could predict it better I would probably do the extra withholding. Yes, you need to pay taxes for FICA and federal income tax.  I can't say exactly how much you should withhold though. If you have predictable deductions and such, it could be lower than you expect. I'm not a tax professional, and when it comes doing business taxes I go to someone who is. You don't have to do that, but I'm not comfortable offering any detailed advice on how you should proceed there. I mentioned what I do personally as an illustration of how I handle withholding, but I can't say that that's what someone else should do.
That seems to indicate that you can in fact depreciate a vehicle given   to you? Section 1015 discusses the calculation of basis for gifted property, it says nothing about depreciation. Personal property cannot be depreciated for tax purposes unless it is used for business purposes. So unless you drive your car as part of your sole-proprietor business, you cannot depreciate it, be it a gift or a car you purchased yourself. If you can depreciate the car, then sec. 1015 is used to calculate the basis for the depreciation. Yes, you should be able to deduct at least some of these expenses.  For expense incurred before you started the business: What Are Deductible Startup Costs? The IRS defines “startup costs” as deductible capital expenses that are used to pay for: 1) The cost of “investigating the creation or acquisition of an active trade or business.” This includes costs incurred for surveying markets, product analysis, labor supply, visiting potential business locations and similar expenditures. 2) The cost of getting a business ready to operate (before you open your doors or start generating income). These include employee training and wages, consultant fees, advertising, and travel costs associated with finding suppliers, distributors, and customers. These expenses can only be claimed if your research and preparation ends with the formation of a successful business. The IRS has more information on how to claim the expenses if you don’t go into business. https://www.sba.gov/blogs/startup-cost-tax-deductions-how-write-expense-starting-your-business Once your business is underway, you can deduct expenses, but the exact details depend on how you organized.  If you're a sole proprietor for tax purposes, then you'll deduct them on Schedule C of your Form 1040 on your personal tax.  If you are a partnership, C-Corp, or S-Corp, they will be accounted at the business level and either passed on to you on a Schedule K (partnership and S-Corp) or deducted directly by the company (C-Corp). In any case, you will need good records that justify your expenses as business related. It might be well worth at least an initial meeting with a CPA to make sure that you get started on the right foot. The amount of the income taxes you will owe depends upon how much income you have, after valid business expenses, also it will depend upon your filing status as well as the ownership form of your business and what state you live in.  That said, you will need to be sure to make the Federal 1040ES quarterly prepayments of your tax on time or there will be penalties. You also must remember that you will be needing to file a schedule SE with your 1040.  That is for the social security taxes you owe, which is in addition to your income taxes. With an employer/employee situation, the FICA withhoding you have seen on your paycheck are matched by the same payment by your employer.  Now that you are self-employed you are responcible for your share and the employer share as well; in this situation it is known as self-employment tax.  the amount of it will be the same as your share of FICA and half of the employer's share of FICA taxes.  If you are married and your wife also is working self-employed, then she will have to files herown schedule SE along with yours.  meaning that you will pay based on your business income and she will pay baed on hers. your 1040Es quarterly prepayment must cover your income tax and your combined (yours and hers) Self Employment taxes.  Many people will debate on the final results of the results of schedule SE vrs an employee's and an employer's payments combined.  If one were to provides a ball park percentage that would likely apply to you final total addition to your tax libility as a result of needing schedule SE would tend to fluctuate depending upon your total tax situation; many would debate it.  It has been this way since, I first studied and use this schedule decades ago.  For this reason it is best for you to review these PDF documents, Form 1040 Schedule SE Instructions and Form 1040 Schedule SE. As for your state income taxes, it will depend on the laws of the state you are based in. "LLC is, as far as I know, just a US thing, so I'm assuming that you are in the USA. Update for clarification: other countries do have similar concepts, but I'm not aware of any country that uses the term LLC, nor any other country that uses the single-member LLC that is disregarded for income tax purposes that I'm referring to here (and that I assume the recruiter also was talking about). Further, LLCs vary by state. I only have experience with California, so some things may not apply the same way elsewhere. Also, if you are located in one state but the client is elsewhere, things can get more complex. First, let's get one thing out of the way: do you want to be a contractor, or an employee? Both have advantage, and especially in the higher-income areas, contractor can be more beneficial for you. Make sure that if you are a contractor, your rate must be considerably higher than as employee, to make up for the benefits you give up, as well as the FICA taxes and your expense of maintaining an LLC (in California, it costs at least $800/year, plus legal advice, accounting, and various other fees etc.). On the other hand, oftentimes, the benefits as an employee aren't actually worth all that much when you are in high income brackets. Do pay attention to health insurance - that may be a valuable benefit, or it may have such high deductibles that you would be better off getting your own or paying the penalty for going uninsured. Instead of a 401(k), you can set up an IRA (update or various other options), and you can also replace all the other benefits. If you decide that being an employee is the way to go, stop here. If you decide that being a contractor is a better deal for you, then it is indeed a good idea to set up an LLC. You actually have three fundamental options: work as an individual (the legal term is ""sole proprietorship""), form a single-member LLC disregarded for income tax purposes, or various other forms of incorporation. Of these, I would argue that the single-member LLC combines the best of both worlds: taxation is almost the same as for sole proprietorship, the paperwork is minimal (a lot less than any other form of incorporation), but it provides many of the main benefits of incorporating. There are several advantages. First, as others have already pointed out, the IRS and Department of Labor scrutinize contractor relationships carefully, because of companies that abused this status on a massive scale (Uber and now-defunct Homejoy, for instance, but also FedEx and other old-economy companies). One of the 20 criteria they use is whether you are incorporated or not. Basically, it adds to your legal credibility as a contractor. Another benefit is legal protection. If your client (or somebody else) sues ""you"", they can usually only sue the legal entity they are doing business with. Which is the LLC. Your personal assets are safe from judgments. That's why Donald Trump is still a billionaire despite his famous four bankruptcies (which I believe were corporate, not personal, bankrupcies). Update for clarification Some people argue that you are still liable for your personal actions. You should consult with a lawyer about the details, but most business liabilities don't arise from such acts. Another commenter suggested an E&O policy - a very good idea, but not a substitute for an LLC. An LLC does require some minimal paperwork - you need to set up a separate bank account, and you will need a professional accounting system (not an Excel spreadsheet). But if you are a single member LLC, the paperwork is really not a huge deal - you don't need to file a separate federal tax return. Your income will be treated as if it was personal income (the technical term is that the LLC is disregarded for IRS tax purposes). California still does require a separate tax return, but that's only two pages or so, and unless you make a large amount, the tax is always $800. That small amount of paperwork is probably why your recruiter recommended the LLC, rather than other forms of incorporation. So if you want to be a contractor, then it sounds like your recruiter gave you good advice. If you want to be an employee, don't do it. A couple more points, not directly related to the question, but hopefully generally helpful: If you are a contractor (whether as sole proprietor or through an LLC), in most cities you need a business license. Not only that, but you may even need a separate business license in every city you do business (for instance, in the city where your client is located, even if you don't live there). Business licenses can range from ""not needed"" to a few dollars to a few hundred dollars. In some cities, the business license fee may also depend on your income. And finally, one interesting drawback of a disregarded LLC vs. sole proprietorship as a contractor has to do with the W-9 form and your Social Security Number. Generally, when you work for somebody and receive more than $600/year, they need to ask you for your Social Security Number, using form W-9. That is always a bit of a concern because of identity theft. The IRS also recognizes a second number, the EIN (Employer Identification Number). This is basically like an SSN for corporations. You can also apply for one if you are a sole proprietor. This is a HUGE benefit because you can use the EIN in place of your SSN on the W-9. Instant identity theft protection. HOWEVER, if you have a disregarded LLC, the IRS says that you MUST use your SSN; you cannot use your EIN! Update: The source for that information is the W-9 instructions; it specifically only excludes LLCs." "Many individual states, counties, and cities have their own income taxes, payroll taxes, sales taxes, property taxes, etc., you will need to consult your state and local government websites for information about additional taxes that apply based on your locale. Wages, Salaries, Tips, Cash bonuses and other taxable employee pay, Strike benefits, Long-term disability, Earnings from self employment Earned income is subject to payroll taxes such as: Earned income is also subject to income taxes which are progressively higher depending on the amount earned minus tax credits, exemptions, and/or deductions depending on how you file. There are 7 tax rates that get progressively larger as your income rises but only applies to the income in each bracket. 10% for the first 18,650 (2017) through 39.6% for any income above 470,700. The full list of rates is in the above linked article about payroll taxes. Earned income is required for contributions to an IRA. You cannot contribute more to an IRA than you have earned in a given year. Interest, Ordinary Dividends, Short-term Capital Gains, Retirement income (pensions, distributions from tax deferred accounts, social security), Unemployment benefits, Worker's Compensation, Alimony/Child support, Income earned while in prison, Non-taxable military pay, most rental income, and S-Corp passthrough income Ordinary income is taxed the same as earned income with the exception that social security taxes do not apply. This is the ""pure taxable income"" referred to in the other linked question. Dividends paid by US Corporations and qualified foreign corporations to stock-holders (that are held for a certain period of time before the dividend is paid) are taxed at the Long-term Capital Gains rate explained below. Ordinary dividends like the interest earned in your bank account are included with ordinary income.  Stocks, Bonds, Real estate, Carried interest -- Held for more than a year Income from assets that increase in value while being held for over a year. Long term capital gains justified by the idea that they encourage people to hold stock and make long term investments rather than buying and then quickly reselling for a short-term profit.  The lower tax rates also reflect the fact that many of these assets are already taxed as they are appreciating in value. Real-estate is usually taxed through local property taxes. Equity in US corporations realized by rising stock prices and dividends that are returned to stock holders reflect earnings from a corporation that are already taxed at the 35% Corporate tax rate. Taxing Capital gains as ordinary income would be a second tax on those same profits. Another problem with Long-term capital gains tax is that a big portion of the gains for assets held for multiple decades are not real gains. Inflation increases the price of assets held for longer periods, but you are still taxed on the full gain even if it would be a loss when inflation is calculated. Capital gains are also taxed differently depending on your income level. If you are in the 10% or 15% brackets then Long-term capital gains are assessed at 0%. If you are in the 25%, 28%, 33%, or 35% brackets, they are assessed at 15%. Only those in the 39.6% bracket pay 20%. Capital assets sold at a profit held for less than a year Income from buying and selling any assets such as real-estate, stock, bonds, etc., that you hold for less than a year before selling. After adding up all gains and losses during the year, the net gain is taxed as ordinary income. Collectibles held for more than a year are not considered capital assets and are still taxed at ordinary income rates." "This seems to depend on what kind of corporation you have set up. If you're set up as a sole proprietor, then the Solo 401k contributions, whether employee or employer, will be deducted from your gross income.  Thus they don't reduce it. If you're set up as an S-Corp, then the employer contributions, similar to large employer contributions, will be deducted from wages, and won't show up in Box 1 on your W-2, so they would reduce your gross income.  (Note, employee contributions also would go away from Box 1, but would still be in Box 3 and 5 for FICA/payroll tax purposes). This is nicely discussed in detail here. The IRS page that discusses this in more (harder to understand) detail is here. Separately, I think a discussion of ""Gross Income"" is merited, as it has a special definition for sole proprietorships. The IRS defines it in publication 501 as: Gross income.    Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. If you are married and live with your spouse in a community property state, half of any income defined by state law as community income may be considered yours. For a list of community property states, see Community property states under Married Filing Separately, later. Self-employed persons.    If you are self-employed in a business that provides services (where products are not a factor), your gross income from that business is the gross receipts. If you are self-employed in a business involving manufacturing, merchandising, or mining, your gross income from that business is the total sales minus the cost of goods sold. In either case, you must add any income from investments and from incidental or outside operations or sources. So I think that regardless of 401(k) contributions, your gross income is your gross receipts (if you're a contractor, it's probably the total listed on your 1099(s))." "You are confusing entirely unrelated things. First the ""profit distribution"" issue with Bob's S-Corp which is in fact tax evasion and will probably trigger a very nasty audit. Generally, if you're the sole employee of your own S-Corp, and the whole S-Corp income is from your own personal services, as defined by the IRS - there's no profit there. All the net income from such a S-Corp is subject to SE tax, either through payroll or through your K-1. Claiming anything else would be lying and IRS is notorious for going after people doing that. Second - the reclassification issue. The reason employers classify employees as contractors is to avoid payroll taxes (which the IRS gets through Bob's S-Corp, so it doesn't care) and providing benefits (that is Bob's problem, not the IRS). So in the scenario above, the IRS wouldn't care whose employee Bob is since Bob's S-Corp would have to pay all the same payroll taxes. The reclassification is an issue when employees are abused. See examples of Fedex drivers, where they're classified as contractors and are not getting any benefits, spend their own money on the truck and maintenance, etc. The employees are the ones who sued for reclassification, but in this case the IRS would be interested as well since a huge chunk of payroll taxes was not paid (driver's net is after car maintenance and payments, not before as it would be if he was salaried). So in your scenario reclassification is not as much a concern to Bob as his tax evasion scheme claiming earnings from performing personal services as ""profits from S-Corp"". A precedent to look at, as I mentioned elsewhere, would be the Watson v Commissioner case." "I agree that you should have received both a 1099 and a W2 from your employer. They may be reluctant to do that because some people believe that could trigger an IRS audit. The reason is that independent contractor vs employee is supposed to be defined by your job function, not by your choice. If you were a contractor and then switched to be an employee without changing your job description, then the IRS could claim that you should have always been an employee the entire time, and so should every one of the other contractors that work for that company with a similar job function. It's a hornet's nest that the employer may not want to poke. But that's not your problem; what should you do about it? When you say ""he added my Federal and FICA W/H together"", do you mean that total appears in box 4 of your 1099? If so, it sounds like the employer is expecting you to re-pay the employer portion of FICA. Can you ask them if they actually paid it? If they did, then I don't see them having a choice but to issue a W2, since the IRS would be expecting one. If they didn't pay your FICA, then the amount this will cost you is 7.65% of what would have been your W2 wages. IMHO it would be reasonable for you to request that they send you a check for that extra amount. Note: even though that amount will be less than $600 and you won't receive a 1099 in 2017 for it, legally you'll still have to pay tax on that amount so I think a good estimate would be to call it 10% instead. Depending on your personality and your relationship with the employer, if they choose not to ""make you whole"", you could threaten to fill out form SS-8. Additional Info: (Thank you Bobson for bringing this up.) The situation you find yourself in is similar to the concept of ""Contract-to-Hire"". You start off as a contractor, and later convert to an employee. In order to avoid issuing a 1099 and W2 to the same person in a single tax year, companies typically utilize one of the following strategies: Your particular situation is closest to situation 2, but the reverse. Instead of retroactively calling you a W2 employee the entire time, your employer is cheating and attempting to classify you as a 1099 contractor the entire time. This is frowned upon by the IRS, as well as the employee since as you discovered it costs you more money in the form of employer FICA. From your description it sounds like your employer was trying to do you a favor and didn't quite follow through with it. What they should have done was never switch you to W2 in the first place (if you really should have been a contractor), or they should have done the conversion properly without stringing you along."