This article was updated on January 31, 2024
Table of Contents:
- What is an independent contractor?
Build your business as an independent contractor
A guide on how to pay independent contractor taxes
Whether you work as an independent contractor for a local business or you’re self-employed as a blogger, tutor, plumber, or dog-walker, you bring a unique set of skills to the world of work. Along with your knowledge and expertise comes a distinct path to navigating tax season and the fiscal year.
Unlike traditional employees—whose employers withhold employment taxes for income, Social Security, and Medicare—self-employed people are required to sort through those numbers, percentages, and forms themselves.
What is an independent contractor?
If you're new to independent contracting, you might be enjoying some of the freedoms that come with being your own boss and taking charge of your own schedule. You may even be earning a higher hourly rate than employees who work alongside you, since employers can pay independent contractors more due to the absence of employer tax and benefits.
As an independent contractor, you may share your workspace with a number of other professionals, such as:
- Nail technicians
- Personal trainers
- Virtual assistants
Regardless of your particular trade, the government classifies you as a self-employed individual who operates in one of a few ways:
- As a sole proprietor – Sole proprietors are responsible for paying income tax and self-employment tax. This tax payment structure allows only one avenue through which to file taxes: your own personal tax return.
- As an LLC – If independent contractors choose to switch from a sole proprietorship to a Limited Liability Company (LLC), it provides the business with a legally recognized tax payment structure and offers a degree of separation between personal assets, business income, and business expense finances.
- As an S Corporation – Once established as an LLC, a business entity may then opt for a distinct tax classification such as an S Corporation. This allows owners to avoid paying corporate income taxes, potentially setting themselves up for business tax savings when it comes to reporting company profits.
Depending on your business structure, filing for independent contractor taxes will take different shapes. To set yourself up for success come tax season, you'll likely want to get an Employer Identification Number (EIN) or a Taxpayer Identification Number (TIN)—an identifier specific to your business. Though not always required for one-owner businesses, it may be required by banks and other services. Using an EIN or a TIN can also help you keep your business finances and personal finances separate.
For a glimpse into what the self-employment tax process will look like as you navigate how to start an independent contractor business, read on.
How paying taxes as an independent contractor differs from traditional employees
When you work as a traditional employee for a company, the business itself is responsible for withholding money from your paychecks in order to cover the costs of federal and state income taxes as well as Federal Insurance Contribution (FICA) taxes (including Social Security and Medicare).
As an independent contractor, on the other hand, that responsibility falls on your shoulders.
Here are a few of the main differences between employees and independent contractors when it comes to tax filing and paying taxes:
- While both employees and independent contractors must fill out Form 1040, only those who are self-employed will need to supplement this IRS form with a Schedule C form. (We'll dive more into the details of these forms later.)
- Independent contractors are also responsible for paying a self-employment tax, which is why they may want some knowledge of bookkeeping or accounting. The self-employment tax includes three distinct taxes: the federal and state income tax you’d pay if you worked as a traditional employee, your Social Security tax contribution, and your Medicare tax contribution. While the exact percentage may change from year to year, the self-employment tax rate for the 2022 tax year is 15.3%.
- While traditional employers pay payroll taxes (federal withholding for income, Social Security, and Medicare) every pay period or quarterly, independent contractors have two options—paying quarterly or annually.
- As long as you estimate your annual tax contribution carefully, you can safely pay your taxes once per year before the deadline for the previous calendar year (i.e., make one payment in mid-April 2023 to cover your taxes for all of 2022).
- But, if you’d like to operate more cautiously (and avoid possible penalties and interest if you underpay your taxes), you can make quarterly self-employment tax payments to the IRS.
Special considerations and deduction benefits
Before you begin the process of gathering paperwork and crunching the numbers in preparation for tax season, there are a few more considerations you'll want to make if you plan to file as an independent contractor:
- You'll only need to file a tax return if your annual net earnings as an independent contractor total more than $400.
- As a contractor, you may be eligible for certain tax deductions benefits for both business and personal expenses. These deductions may range from everything from pens, paper, and general office supplies to health insurance premiums and continuing education.
- As an example, gas and car mileage is deductible—a small business owner or independent contractor may deduct costs of operating a vehicle for business purposes at the standard rate of 58.5 cents per mile (note that the IRS increased the mileage reimbursement rate to 62.5 cents for miles accrued between July 1 and December 31, 2022). For a contractor vehicle with 10,000 work-related miles per year, the standard mileage deduction will reduce taxable income levels by $5,850. In addition to gas and mileage, be sure to save your receipts for expenses such as:
- Business travel, accommodations, and meals
- Marketing and advertising expenses
- Gas and car mileage (standard mileage rate)
- Rental or lease payments for your office space
- Mortgage and property taxes for your home office space
- Contributing to a self-employment retirement plan
- Business insurance premiums
- Phone and internet bills
- Another consideration for independent contractors with high annual incomes is the Medicare surtax. Self-employed individuals who file as single or as a head of household and earn more than $200,000 per year may be required to pay a surtax of 0.9%.
Tax forms you should know about as an independent contractor
Here's a closer look at the forms that you'll need to be familiar with once tax season begins:
- Form 1040 – Both traditional employees and independent contractors will need to complete and submit this IRS form before the tax deadline each year. It's where you'll detail the specifics of your gross income and determine how much you owe or how much of a refund you can expect to receive.
- Schedule C – This tax form is submitted along with your Form 1040 if you operate as a sole proprietor or as an LLC with only one owner. You'll provide detailed information regarding your income, mileage records, inventory, and business expenses.
- Schedule SE – Another component of Form 1040 that applies to self-employed workers is Schedule SE. Completing this document will help you to calculate the amount you owe in self-employment taxes based on your net income for the year.
- Form 1099-MISC – Whereas Form 1040 and Schedule C refer to the paperwork you submit to the IRS, Form 1099-MISC is the document you'll receive from the various clients you've done business with throughout the course of the year. It is a report of payment made to you by the business that hired your services.
How to pay taxes as independent contractors
So, how do you actually get these forms and payments into the hands of the IRS? Here’s a complete breakdown of how to pay taxes as an independent contractor.
1. Prepare your tax forms
The first step is preparing your tax documents—compiling all of the information you’ll need to perform calculations and “show your work” to the IRS.
- Collect all of the documents you’ll need:
- Form 1040
- Schedule C
- Form 1099, 1099-NEC, or 1099-MISC
- Receipts for deductible expenses
- Complete form 1040 using information from the other forms and receipts
- Calculate your total (sometimes called your “tax liability”)—the amount you’ll pay to the IRS when you file
2. File your taxes
Once you complete form 1040, attach (physically or digitally) all of your other forms and submit them to the IRS with your payment. You have a few options for filing your taxes as an independent contractor:
- Filing by mail – You can mail your tax return and a check to your regional IRS facility—find the address here.
- Filing online via EFTPS – If you choose to pay quarterly, arguably the easiest way to process quarterly payments is via EFTPS Online, the Department of the Treasury’s online payment platform for businesses. You have to sign up for EFTPS in advance, so make sure to set up your account with plenty of time left before the tax deadline.
- Other online filing tools – You can also file your taxes online using paid tools like TurboTax. But, if you fall under a certain income level (which changes every tax year), you may qualify for IRS Free File, a free, online filing service for federal taxes (but not state taxes).
3. Await Confirmation
Once your tax forms are completed, signed, and sent away with a check, all you have to do is wait. If you’re owed a federal income tax refund (unlikely, but possible), you should receive payment via check or direct deposit.
If you’re not expecting a payment, you may or may not receive confirmation that your tax forms (or your payment) have been accepted. Online filers may receive an email notification, but mail-in filers should keep an eye on their bank account—check clearance might be the only confirmation you receive.
Tips for navigating tax season like a tax professional
Now that you have a better understanding of how to become an independent contractor and file your taxes, here are a few tips to consider to start preparing for tax season and ensure it's as stress-free as possible:
- Set up a system to track your expenses and earnings – With so many different contracts, clients, and costs associated with earning a living as an independent contractor, it can be a challenge to stay on top of it all. Meticulous tracking throughout the year will help tax season feel like less of a scramble. You might even consider automating your income statements with the help of an online platform or working with a bookkeeper to handle the specifics on your behalf.
- Get ahead of what you owe – In order to avoid having to pay a sizable amount of taxes at the end of the fiscal year, it could be a good idea to start planning as soon as your first-of-the-year paycheck comes in. As payments come in, set aside 15.3% plus your state’s income tax rate plus an extra 1% out of an abundance of caution. This will help you get ahead of your tax bills and to avoid tapping into part of your income that would be better saved for a later date.
- Set up a payment plan – At the start of the year, do your best to make an estimate on how much money you expect to bring in and how much you anticipate owing for taxes. Based on this approximation, you can begin making payments quarterly to chip away at the estimated tax total for your next bill.
- Mark your calendar – When you run a one-person show in the business world, there are a number of important deadlines you'll be responsible for keeping track of. The deadline by which you'll need to file your taxes is one of them. As you prepare for the year ahead, mark your calendar for April 18th, 2023, the last day to submit your taxes to the IRS.
Build your business as an independent contractor with Nextdoor
After you've tackled the challenges of tax season as an independent contractor, it's time to start focusing on the year ahead. How will you work to develop your business, update your services, and set your sights on acquiring new contracts? How much do small businesses pay in taxes? The answer is much simpler than combing through the intricacies of tax-related paperwork.
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