As an independent contractor, you’re subject to a different set of tax rules than someone who works for an employer. Independent contractors file additional forms to ensure they’re paying enough during the year and must pay self-employment tax. Independent contracts are defined as individuals who work for themselves.
The businesses they work for can control some aspects of their work but not how the work is performed. For example, the business can assign a deadline, but they cannot control what hours the contract employee works. Independent contractors are self-employed and required to pay self-employment and quarterly taxes throughout the year at the federal and state levels, making taxes slightly more complicated. Here’s how to file taxes as a contract employee.
Types of Taxes for the Self-Employed
As an independent contractor, you report self-employment income and deductions to the IRS on a form called Schedule C while also paying self-employment tax on form Schedule SE. Independent contractors are also required to pay quarterly estimated taxes, typically based on their previous year’s earnings or estimated yearly earnings. These individuals receive 1099-MISC forms from their clients rather than standard W-2s.
As a self-employed individual, you must report your income to the IRS by filling out a Schedule C when filing your taxes. Schedule C includes information about profits and losses because contractors are considered one-person businesses. Therefore, the income you receive as a freelancer, contractor, or contract employee is reported on a Schedule C, no matter how you earned that income. Once your schedule C is completed, you’ll pay income taxes on your total profit after deductions.
One factor of self-employment taxes that’s different from employee taxes is that contractors can make deductions on their taxes. Deductions allow self-employed individuals to reduce their taxable income based on payments they’ve made to support their business. For example, freelancers can deduct office supplies, utilities, and tools they use to support their business. Deductions can significantly reduce the amount of profit reported to the IRS, which means paying less in taxes.
If you’re unsure what you can claim as a deduction, talk to an accountant to help you determine what counts as a deduction to help you save more money on your taxes. For example, most new contractors may not know they can deduct their health insurance premiums and some personal expenses.
When you have an employer, they pay part of the taxes for Medicare and Social Security while you pay the other half. However, as a contract employee, you’re responsible for paying the full amount yourself, which equals 15.3% of your earnings. All self-employed individuals are required by law to pay self-employment taxes, but you can deduct half of what you pay as a deduction, helping you save on your total taxes.
Independent contractors are business owners who must pay quarterly and annual taxes. Regular employees pay these taxes throughout the year, too. However, their taxes are deducted from each of their paychecks. For contract employees, the employer deducts nothing from their pay, so they must pay estimated taxes every quarter.
Luckily, you don’t need to know how much you’ll make in a year to pay your taxes. Instead, you can guess your total income or use your last year’s income to determine how much you should pay in quarterly taxes. Paying your taxes is easier with professional tax software, which can help you track income and expenses and determine how much you’ll owe in estimated quarterly taxes.
If you’re not using tax software, it’s always best to consult an accountant who can help you determine how much to pay each quarter to help you avoid any penalties when you pay annual taxes.
Contract employees must be aware of the different tax deadlines than regular employees. For example, independent contractors must pay taxes quarterly with the following deadlines:
- April 15
- June 15
- September 15
- January 15
Depending on where you live, your state may also require you to pay estimated taxes. These deadlines typically coincide with the federal deadlines, but it’s always best to talk to an accountant or tax preparer if you’re unsure when to pay or how much.
Independent contractors must also pay income taxes, due April 15 of every year.
Work With an Accountant
Professional tax software makes it easy to estimate and file your taxes online. However, taxes can quickly become confusing if you’re running your own business and managing your finances especially if you don’t have a lot of experience with financial literacy. Additionally, accountants may be able to find deductions software can’t, helping you further reduce your tax liability.
Ultimately, the more complicated your business is, the more difficult it will be to file your taxes. However, most freelancers with only a few clients can easily track their profits and expenses with software. At the same time, other businesses may need to work with an accountant throughout the year to ensure their finances are in order.
It can be easy to lose records if you’re not using software to manage your business finances. However, keeping records is important because the IRS can audit you up to three years after you’ve filed your taxes. Therefore, it’s important to keep information regarding payments, income, revenue, expenses, and losses, to ensure you’re covered in case of an audit. While you might think the IRS won’t audit a contractor, they will if they find any information that leads them to believe you falsified information on your taxes.
Whether you work with an accountant or use tax software to estimate and file your taxes, it’s typically easiest to file and pay online. The IRS allows you to create an account that will allow you to track previous payments to help you remember whether or not you paid your taxes correctly and on time. If you decide to work with an accountant, you’ll be able to print off your tax payment history for them to use when doing your taxes next year, helping them understand how much you’ve already paid and how much you’ll owe.
Taxes for Contract Employees
There are more hoops to jump through when filing your taxes as an independent contractor, but once you get the hang of it, you’ll understand how much to pay every quarter and what you need to do to file your taxes every year. While the rules for contractors are different from those for employees, they’re fairly simple and easy to follow, as long as you keep track of your different sources of income and expenses.