The Complete Guide to Independent Contractor Taxes – NerdWallet

Paying business taxes as an independent contractile organ can be catchy. You have to file extra forms, make certain you ’ re paying the government adequate during the year and pay a self-employment tax .

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What is an independent contractor?

How does a occupation determine whether you are an autonomous contractile organ or employee ? The IRS has rules and tests to help make the decision, but at a high level, if a business merely has the ability to control the result of the bring you perform, not how you perform the exploit, you might be considered an independent contractor. If you are an independent contractor, the IRS considers you to be freelance — you aren ’ deoxythymidine monophosphate an employee of any company. As an independent contractile organ, you can operate as a sole owner, a limited liability ship’s company ( LLC ) or an S-corporation. The majority of businesses in the U.S. are run as exclusive proprietorships, so we ’ ll focus on that structure in this article.

How does an independent contractor pay taxes?

Things get a little more complicated with your taxes when you ’ re an autonomous contractor. You ’ ll have extra forms to file and you ’ ll need to file estimated taxes regularly. There are four main differences between filing taxes as an employee and charge taxes as an independent contractor. These include :

  • Reporting self-employment income and deductions on Schedule C .
  • Paying self-employment tax on Schedule SE .
  • Paying quarterly estimated taxes .
  • Receiving form 1099-MISC preferably than a W-2 .

Reporting self-employment income

How you report the income you earn as an independent contractor is different than how you ’ d report it as an employee. As an independent contractor, you ’ re required to file Schedule C along with your personal tax revert. Schedule C details your profit and loss from occupation. Remember that an independent contractor is considered to be freelance, so in effect, you are running your own one-man clientele. Any income that you earn as an independent contractile organ must be reported on Schedule C. You ’ ll then pay income taxes on the total profit.

Deductions

While being an freelancer contractor means you have to pay more in self-employment taxes, there is an top : You can take business deductions. These business deductions reduce the amount of net income you pay income taxes on. You ’ ll report these deductions along with your income on Schedule C. There are a number of business deductions you can take as an independent contractor, including health policy, home office deductions, mileage and deductions for your phone bill. The Tax Cuts and Jobs Act besides created another deduction that some independent contractors may qualify for : the qualify business income deduction. This may allow you to deduct up to 20 % of your business income.

Self-employment taxes

A boastfully fiscal drawback of self-employment is paying self-employment taxes. These taxes are equivalent to the Medicare and Social Security taxes you ’ vitamin d give as an employee. But as an employee, your employer covers half the monetary value of the taxes. As a freelance person, you ’ re required to pay the entire tax yourself. And these self-employment taxes in truth add up. The stream self-employment tax rate is 12.4 % for Social Security and 2.9 % for Medicare — a sum of 15.3 % fair in self-employment tax. The estimable news is that while you need to pay the stallion 15.3 % tax, you can take half of what you pay as a deduction from your income. You ’ ll report self-employment taxes by filing Schedule SE with your personal tax reappearance. These taxes are in addition to any income tax that you ’ ll owe.

Quarterly estimated tax payments

The U.S. tax system is a pay-as-you-go tax arrangement, meaning you need to make tax payments regularly throughout the year. When you ’ re an employee, your employer is responsible for withholding income taxes from your paycheck and sending it to the politics. so, how does an independent contractile organ pay taxes ? When you ’ re an mugwump contractor, paying the government regularly throughout the year is your province. You do this by making quarterly estimated income tax payments. You can estimate how much you need to pay the government each quarter by guessing what your total income for the class will be or by using the come you ’ ve paid in estimated taxes the previous class .

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You won ’ deoxythymidine monophosphate know precisely how much tax you owe until you file your personal tax reelect at the end of the class. But you ’ ll want to spend clock time estimating this because if you underpay your estimate taxes, you could be subject to penalties. And don ’ deoxythymidine monophosphate forget to pay estimated taxes to your submit. aside from making federal estimated income tax payments, you ’ ll be required to pay your state throughout the year deoxyadenosine monophosphate well.

1099-MISC

As an employee, you receive a W-2 each year detailing how much you made and how much you had withheld from your paycheck for taxes. rather of a W-2, as an mugwump contractor, you ’ ll receive a 1099-MISC. This form details how much you were paid throughout the class. You can use that information to double-check that you ’ re reporting all of your income earned through the year. If you earned less than $ 600 from a node during the year, you won ’ t receive a 1099-MISC, but you will silent need to report that income on your Schedule C. That ’ s why keeping a good accounting system is so important.

Independent contractor tax deadlines

As an independent contractile organ, be prepared for extra tax deadlines. nowadays, in addition to your personal income tax deadline of April 15, you ’ ll besides have both union and state of matter quarterly tax deadlines.

Quarterly estimated tax filing

Your estimated tax payments are ascribable four times per year. You can use Schedule SE to help you calculate how much you owe at each deadline. The deadlines for making your quarterly estimated tax payments are :

  • April 15 : for income earned from January through March .
  • June 15 : for income earned in April and May .
  • Sept. 15 : for income earned from June through August .
  • Jan. 15 : for income earned from September through December in the anterior year .

Don ’ thymine forget that if your state has income taxes, you ’ ll besides need to make estimate tax payments to your state. Check with your state of matter ’ s business resources for deadlines and any command forms.

Personal income tax deadline

Your personal income tax deadline as an independent contractor is the like as it is for employees. All personal income tax, filed with form 1040, is due April 15 of each year. If April 15 falls on a weekend or a holiday, they are due the future business day. With your form 1040, you ’ ll file your Schedule C, Profit and Loss from Business and your schedule SE, Self Employment Tax. If you can ’ t file your taxes by the April 15 deadline, you should use Form 4868 to file for an automatic six-month extension. But that ’ s alone an extension to file your paperwork — if you owe any taxes, you ’ ll need to pay them by the April 15 deadline to avoid being charged a penalty.

State tax deadline

If your state has income tax, you ’ ll besides be required to file and pay your state income taxes. Check with your country to understand when and how to pay state taxes on your income as an freelancer contractor .

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Independent contractor taxes: An example

so, how does calculating your own freelancer contractile organ taxes work ? Let ’ s say during the year you earn $ 40,000 as an independent contractile organ from working with two companies. These are your lone jobs and you ’ re not an employee anywhere else. You should receive a 1099-MISC from each company confirming how a lot they paid you during the year. You ’ ll include this income on Part 1 of your Schedule C. You besides have some expenses that you can deduct from your income. You work from a qualify home function, which is 200 square feet — and using the simplify method, you can deduct $ 5 per square foot. Your home position deduction is $ 1,000. You besides drove 600 miles during the year for some necessitate assignments, so you can take a subtraction of $ 348 ( using the IRS discount of $ 0.58 per mile ). In total, you have $ 1,348 in deductions so the full net profit as an autonomous contractor that you report on Schedule C is $ 38,652. That income sum will be included on class 1040 as your taxable income. once you know how much you earned, you ’ ll need to figure out how much you must pay in self-employment taxes. Using Schedule SE, you calculate that you owe self-employment taxes of $ 5,914. half of this tax that you pay ( $ 2,957 ) is taken as a deduction on Page 1 of your imprint 1040. immediately that you ’ ve completed your Schedule C and Schedule SE, you have the income and tax write-off information you need to finish filing your 1040 personal tax return.

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