Ask HN: How to handle taxes on a larger freelance contract

Where do you live ? Taxes are location specific so please specify that before you can get any meaningful advice.

EDIT: As you confirmed that you are in Floride/US, here is my advice being a self-employed myself:

1. Find a good competent CPA/tax advisor who is local and understands floride specific rules. Ask to have an initial consultation. This is very important because it will save you a lot of hassle in the long term.

Now, you are probably looking for more than "find a damn CPA" but that point is still critical. I will now give you some pointers on what are some of things to research about this.

1. How/what will you do business as ? Will you just be yourself aka freelancer/1099/sole prop/dba OR will you actually do business as a corporation/LLC ? It is hard to give specifics on the internet but start learning the diff b/w 1099/LLC/DBA/Corp/S-Corp. Depending on your need, you may need one or the other. In general, the idea of doing business as is not just about tax consequences but also about liabilities. For example, as yourself/1099, you are exposed to the highest level personally while as corporation, you personally are exposed the least (again a general rule but depends on cases). In terms of taxes, again usually by yourself/1099 will make you pay the highest tax but has least adminitrative burden of other expenses like payroll, accounting etc. So it is all about the balance between one or the other end.

- Will you need general liability insurance ? This is most likely needed for most big contracts. Look into this. I buy mine from http://www.techinsurance.com (no affiliation. they are just a broker who gets u a good deal)

- Other than general liability insurance, you also might need "Errors and Omissions" insurance a.k.a E&O. This is not required unless you are working on mission critical projects where you are liable for coding errors etc. techinsurance.com also has that.

- You will need to run payroll. The idea is that your company will pay you a salary (W-2) and any other benefits. If you are corporation, you have more flexibility in how much to pay as a salary vs other benefits but on 1099 etc, you don't have that flexibility.

- Let me try and give you a general idea of taxes that you might have consider:

  - Personal Income tax: This is the usual federal+state+local taxes that you pay as employee on paycheck.

  - Payroll Tax: You will have to pay Social Security tax, medicare tax as both employee and employer. It comes down to about 7.65% for each (SSN 6.2,Medicare 1.45) employee and employer portion making it total of 15.3%. Btw, SSN tax is limited to upto 117,000 (2014 limit) so if you make more than that, you don't pay SSN on the extra. You pay medicare on entire earnings. BUT, again the question comes down to 15.3% of what ? on 1099, you have no choice but to pay 15.3% of *entire* income. with S-corp etc, you can control how much you pay on W-2 and these payroll taxes are then calcualted on that number. But beware, if you pay yourself too low a salary to save on payroll taxes, IRS comes after you. So a reasonable salary should be paid. What is "reasonable"? Not defined very hard but usually market rate for your skillset. 

  - Other taxes related to your business. This can be anywhere from corporation taxes, umemployment insurance, disability insurance etc. All this goes out to IRS.

- Retirement plans: as self employed person, you can setup retirement plans with companies like fidelity etc. One benefit is that you can put more than the usual employee limit (17,500 for 2013) because you can also contribute a employer portion (upto 25% of earnings) but the total is capped at 50,500 (2014)

So there is a lot to this. Like I said, best bet is to talk to a CPA and go from there.