Paying and Collecting Taxes on Consultants

Friday, February 05th, 2010 | Author: Richard

Question:

I have been a consultant and am now an account exec with a staffing and recruiting company. My particular practice sells consulting services more than we do staffing and it seems that the taxes for our jobs are complicated and I wondered if it was just a lack of knowledge from our tax department.

Here is an example:

A consultant is assigned to a company that is based out of Tampa, FL. The consultant lives in Pittsburgh, PA and does some of their work from home. At other times they are working at customer sites in Ohio, or Illinois, or elsewhere in the country.

What taxes (for which states) should be taken from the consultant?

And which taxes should be billed to the customer?

Answer:

As to what to bill the customer? That should be decided and stipulated in the contract, whether the customer is paying “cost-plus” or simply a gross amount.

For taxes, the Federal taxes are consistent from state to state, so All the Social Security, All the Medicare, All the workers comp will be the same for each dollar earned, regardless where it was earned.

The “income tax” will need to be paid to each state based upon the state rules. If the person resides in PA then all of their income is subject to the PA income tax of 3.07%. They can deduct taxes paid in other states, so if they work for a company in Illinois they’d owe Illinois 3% of the income derived in Illinois.

Ohio has a tax rate that starts at 0.618% and slides up to 6.24% so it can be very confusing.

The fact that the company is in Florida (a no-state tax state) has no benefit for the PA residing employee.

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