Money Mommy

Stuff your mom should have taught you, but didn't…


“What do you mean, I gotta pay taxes!!?” I’m a contractor!

Congratulations!  You are finally done with school and have entered the work place.


And your nice boss has hired you on as a contract worker!

He says you won’t have any taxes taken out of your paycheck.

And you get to take lots and lots of deductions.

Things couldn’t be better…Until you sit down to do your taxes in early April….That’s when reality hits.

You can’t deduct a home office when you actually work somewhere else.  You can’t deduct your gas and mileage and tolls when you drive to work – that’s called commuting.  In fact, your nice boss provides you with your tools, office supplies, work station. Everything.  You actually don’t have any deductions at all.

It’s about this moment in the tax preparation process that people start moaning that they don’t pay for more work items out of their own pocket.  Don’t fall into this trap!  Remember, everytime you haven’t had to pay for anything, you kept more money in your own pocket.

But I digress.  Anyone who is a contract worker must save for the April 15th reckoning with the tax man.  The contract worker pays his own federal tax, social security tax, medicare tax, state tax, and any additional tax imposed by his locality.  These are all the taxes that an employer would generally have withheld from his employee’s paycheck.  In addition, the contract worker will also pay the employer’s share of the social security tax and medicare tax.

So, as a rule of thumb, the contract worker should save a minimum of 35% of every pay check they receive:

  • 10% – 25% Federal Tax
  • 6.2% Social Security
  • 1.45% Medicare Tax
  • 5% – 7% State and Local Taxes
  • 6.2% Employer portion of Social Security Tax
  • 1.45% Employer portion of Medicare Tax
  • 30.3% – 47.3% Total taxes to save

Well, looking at the above taxes, perhaps the higher earning contract worker should aim to save closer to 50% of their check.

Both my daughter and daughter-in-law were hired as contract workers before they were actually permanently hired as employees at their respective firms.  I can still hear my daughter wailing, “You mean I have to pay taxes on all that money!?”  Well, sure.  So does the rest of the country.

Open a seperate account in your bank, and label it your tax account.  Put 35% – 50% of every paycheck you receive into it.  Without fail.  If you doubt this amount, recheck my numbers above, or find a friend or family member who is working and will let you look at their paystub; take a look at the taxes that are withheld.  You will see that taxes have reduced their check by nearly one quarter to one third.  And don’t forget you will need to double the social security tax and the medicare tax, since your nice boss is not paying for that.  You will need to save at least one third of your earnings.

Mark down how much is in your tax account on December 31.  Now figure out your taxes.  Do you have enough in your tax account as of December 31 to pay the taxes?  Good for you!  If not, you will want to increase the amount of each check that you save.  Anything extra is yours to do as you want.

And my daughter and my daughter-in-law?  They both saved 35% of their checks.  My daughter-in-law  had just enough to pay her taxes on April 15 and was delighted it had worked so well.  My daughter, who earned much less and had a much lower federal tax rate, had enough left in her tax account as of December 31 to take a once in a life time trip to Jamaica. She ziplined through the tropical forest that spring.





1 thought on ““What do you mean, I gotta pay taxes!!?” I’m a contractor!

  1. And my tail bone still hurts from jumping off that water fall in the DR! Thanks for all the tips money Mommy! I love you so much and I’m glad you’re sharing everything you’ve taught me with the rest of the world 🙂

    Even though it was the Dominican Republic and not Jamaica that I ended up going to my mom sure knows her stuff!

    Love your daughter who still wishes she didn’t have to pay taxes 😉

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