Working for yourself comes with certain freedoms. As an independent contractor, you can forget the standard 9-to-5 and set your own hours. Rather than earning an annual salary, it’s up to you to set the price of your work—and to sell it. Instead of receiving assignments from a manager, you get to choose who you work with and what type of work you do. Show
Of course, more freedom comes with more responsibility. If you make more than $400 a year as an independent contractor, managing your business income means managing your taxes, too. While there’s no need to become a tax code expert in addition to running your own business, understanding the basics of the tax system for self-employed individuals can help you make more informed financial decisions. You’ll avoid unnecessary penalties—ultimately allowing you to make the most of your professional freedom, while reducing the stress of added responsibilities. What is an independent contractor?According to the Internal Revenue Service (IRS), an independent contractor is someone who offers services to someone else with control over how the services are performed, such as what, how, and when it will be done. The payer, or client, only has the right to control the result of the work. This means that a client can control what deliverable you create for them, but not the schedule on which you create it. If you’re an independent contractor, you’re considered self-employed and must pay self-employment taxes, in addition to other forms of tax, depending on your business structure. Types of independent contractorsThere are several ways to structure your business as an independent contractor. Two of the most common structures include:
Paying taxes as an independent contractor vs. as a full-time employeeIndependent contractors and full-time employees share some basic similarities in terms of what types of taxes they pay. But there are differences when it comes to specific tax types, filing taxes, paying taxes, and available tax write-offs. Types of tax
Filing taxes
Paying taxes
Tax credits and deductions
Independent contractor tax deductionsAs a self-employed person, you are eligible to “write off” business expenses—meaning you can deduct certain costs of running your business from your taxable income. This effectively reduces the income you pay taxes on at the end of the year. You may want to work with an accountant to ensure you’re aware of all of the tax write-offs available to you. Common tax-deductible business expenses include:
1. Pay quarterly estimated tax paymentsIf you expect to owe more than $1,000 in annual taxes as an independent contractor, the IRS requires you to either pay quarterly estimated tax payments (covering both self-employment tax and income tax) or pay an underpayment penalty fee during tax season (the fee varies based on the amount you underpaid, the due date, and the current interest rates for underpayments, which the IRS publishes quarterly). You can use Form 1040-ES to calculate and pay your estimated taxes to state and federal governments, based on your adjusted gross income. The deadlines to pay estimates are generally April 15, June 15, September 15, and January 15, unless those days fall on a weekend or federal holiday (in which case the deadline is pushed to the following business day). 2. File an annual returnIf you make at least $400 in net profit as an independent contractor, the IRS requires you file an annual tax return. Even if you make less than $400, you may still need to file a tax return; double check to see if you meet any of the requirements in the IRS’s Form 1040 and Form 1040-SR (for those born before January 2, 1957). To file an annual return, use a Schedule C to report your business income and expenses. You must also file a Schedule SE (Form 1040) to report your self-employment taxes. The deadline to file your annual return is typically on April 15 of the following year.
Independent contractor taxes FAQHow do independent contractors calculate taxable income?Your taxable income—an amount used to determine how much you owe in income taxes—as a self-employed person is based on the earnings you made from your services, minus tax credits and deductions. How are estimated taxes calculated for independent contractors?Estimated taxes for independent contractors include both income taxes and self-employment taxes, each of which are calculated differently. In 2022, the self-employment tax rate is 15.3% of your net self-employment earnings (your earnings minus business expenses). Your federal and state income tax rate varies based on which tax bracket your taxable income falls within. Note that some states do not levy income tax, while some cities assess income tax on top of state income taxes. How much money should I keep for taxes as an independent contractor?Every quarter, estimate your net self-employment earnings and your taxable income. You can set aside 15.3% of your earnings for self-employment tax and then work with an accountant, create a free online account with the IRS, or use a third-party tax software to determine how much income tax you may owe based on your bracket. Join 446,005 entrepreneurs who already have a head start.Get free online marketing tips and resources delivered directly to your inbox. No charge. Unsubscribe anytime. |