How your payroll taxes are calculated and what you must do to pay them will depend on the specifics of your employment status. Whether you are an independent contractor or a full-time healthcare provider (HCP), we will show you how to handle your payroll taxes in a responsible and stress-free manner.
What is a payroll tax?
Whether you are a 1099 Contractor of a W-2 Employee, you will be asked to withhold a percentage of your compensation to the government. Many people lump together income tax with payroll tax, but they are both separate entities. While income tax is pooled to fund education, transportation, and other public services of that nature, the payroll tax funds social insurance initiatives like unemployment compensation, Medicare, and Social Security. This is mostly a technicality, however. The rest of this article will lump both taxes together under the “payroll tax” umbrella, for convenience’s sake.
How many kinds of payroll tax are there?
HCPs can expect to cover three kinds of payroll tax. As the name implies, the federal tax is instituted on a national level. Because this rate is progressive, you will pay more federal tax the larger your taxable income is. State and local taxes are a separate matter, and whether you pay them depends on where you live. For example: California has a state income tax, but Texas does not. Finally, there is the Social Security and Medicare tax, or the FICA (Federal Insurance Contributions Act.) This is the tax paid to fund Medicare and Social Security.
What are key differences between a 1099 Contractor and W-2 Tax?
On paper, both independent contractors and full time HCPs pay the same taxes as everyone else. Because of the nature of their classification, how you pay your taxes will depend on which classification you are:
The biggest difference is how you pay your taxes. For W-2 employees, their employer will automatically deduct the relevant taxes from your compensation, before giving it to you. They handle calculating the amount and giving it out to the government. Meanwhile, 1099 Contractors oversee their own taxes. They need to fill out their own paperwork, and keep record of every payment made to them. From there, they calculate their own taxes, and send the government their taxes around the end of each fiscal quarter. They must be thorough as well, since any errors or late payments can result in serious penalties.
There is also a bit more support, with regards to W-2 employment. A portion of your taxed income is funneled towards insurance and several other benefits, while 1099 contractors must pay for insurance themselves. Though costly, this is offset somewhat by the higher compensation rates that contractors can receive. This is especially true if they book shifts with VitaWerks, which use AI technology to instantly match HCPs with the best rates in their immediate area.
Each work arrangement provides its own advantages. W2 employees do not need to worry about handling their taxes as much. Though doing your taxes is more complex as a 1099 contractor, this is offset somewhat by more professional and financial freedom. If you are aware of how taxation differs between these classifications, handling your taxes responsibly should be a straightforward matter.