Transitioning to independent contractor - what do I need to know? What am I not thinking of? (New Jersey)

Submitted by Wishyouamerry t3_zzy7se in personalfinance

I recently retired from 27 years in a public school system (speech language pathologist). I will now be providing part-time/short-term speech services to public schools as a W9 employee - covering maternity leaves and LOAs, covering caseloads until they find a permanent SLP, etc. The demand for this type of niche service is pretty big and I'm not too worried about getting gigs, except possibly during the summer - I guess we'll see how that pans out.

(For reference, when I decided this was what I wanted to do i sent a mail merge to all the special ed directors in two counties. I sent the email at 12:53 pm and by 1:10 pm was booked Monday through Thursday at two different school districts through the end of the school year. I have a third district who might be interested in Fridays, but I was kind of hoping to keep Fridays free.)

Anyway, I've never done anything like this before, and I'm afraid I'll screw up my finances. I'd appreciate help/advice in making sure I have all my bases covered.

I already have health coverage from my pension, so I don't need to worry about that. I also have professional liability insurance.

To start, my rates are $85/hour and so far both jobs are 7 hour days - so that's $595 per day, $2380 per week. I think I need to save about 30% for taxes, right? So that's saving about $715 and banking about $1665 per week?

For taxes, I think I have to pay estimated taxes, but I'm not sure exactly what/how to do that. When I used the IRS Tax Withholding Estimator, it asked if I have a "job that regularly withholds federal income taxes from your paychecks." I said no because nothing is withheld from my check when I get paid, and the tool said that I can't use it. :-( It seems like it's only for W4 jobs?

When I do my tax returns, I can claim business expenses now, right? For instance, I bought my own evaluation kits for $2100, so I can claim those on my tax return? Can I claim the laptop I bought this year if I am using it for work? (In the fall I contracted just one day per week at a school district and bought the laptop/eval kits to use there.)

Finally, for taxes, is it based on when you did the work, or when you got the money? Example: I worked in December for $3600, but won't get paid for that until January. That still goes on this year's taxes, right?

I also now have to consider that I only get paid on days that I work, so holidays and sick days will affect my paycheck. I feel like I should set up my own PTO fund so that I don't panic if there's a snow day or if I'm sick. How do I determine what is an appropriate amount - based off my last job it seems like $550/month is what was contributed to my PTO?

Should I open separate checking/savings accounts to deposit my paychecks in and buy materials/supplies from and then basically pay myself from those accounts, or is it fine to just use my existing personal accounts for everything?

I feel like there are probably tons of things I haven't thought of, or that I'm doing wrong. Any advice is apprciated!

Thanks!

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pancak3d t1_j2eevdr wrote

Taxes are paid quarterly, you can use tax filing software to help with this.

Yes you can claim expenses

You're taxed in the year when you receive the $$, not when it's earned

You don't need a "PTO fund" you should just budget based on the average days you plan to actually work and get paid. You should have or build an emergency fund as well.

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Wishyouamerry OP t1_j2eg0lu wrote

Replying to pancak3d (#1,234,785)

Thanks! For tax filing software, is that like TurboTax (or similar?) I’m already familiar with TT so that seems less daunting. And I do that in March, June, September, and December?

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Citryphus t1_j2etqce wrote

First, you're not a "W9 employee." W9 is just a request for your tax ID and does not imply any kind of employment. You're self-employed and you may receive Forms 1099-NEC from your clients / customers. That is income you will report on Schedule C of your Form 1040 tax return. Schedule C is also where you will deduct legitimate business expenses.

Most likely you will run your business on a cash basis just like your personal taxes are, which means you record the income when you receive it, not when you send the invoice. In your example money received in January is taxed next year.

Estimated taxes are paid in April, June, September, and January. For your first year of self-employment, take the "total tax" from last year's tax return, divide by 4, and make that your estimated payment. Open an account with EFTPS.gov for making Federal payments and look into your state's online systems for making state payments.

You may want to open a separate checking account to keep your books separate, but you should not need multiple accounts. You should learn how to keep basic business books though.

One thing you might not be aware of is the self-employment tax. You now have to pay both the employer and employee halves of Social Security and Medicare tax.

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Wishyouamerry OP t1_j2exfbi wrote

Replying to Citryphus (#1,239,863)

Well this is super helpful! Thank you for all that info. I was not aware of self employment tax, I will definitely look into it!

For my 2022 taxes, I had 2 different W4 jobs, the one W9 job, and I got two pension payments. Is that going to be difficult for me to figure out on my tax return, or do you think it will make sense once I get started? Up to this point my tax returns have been super simple - one job, no surprises.

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Wishyouamerry OP t1_j2ezp34 wrote

Replying to Citryphus (#1,239,863)

Wait, one more question. In January 2023 would I be paying for: January 2023, February 2023, March 2023 (what I think I’ll earn) - - or do I skip January 2023 and in April 2023 pay for what I did actually earn in Jan-March 2023?

I think it’s the second one.

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