A guide on how to pay independent contractor taxes
Whether you work as an freelancer contractile organ or freelance person in blogging, tutoring, plumb, or chase walk, you bring a unique arrange of skills to the worldly concern of influence. Along with your unique cognition and expertness, however, comes a classifiable nerve pathway when it comes to navigating tax season and tax year. Unlike traditional employees whose employers withhold employment taxes for things such as Social Security and Medicare, a freelance individual is required to sort through those numbers, percentages, and paperwork themselves .
Taking charge of your self-employment tax requirements can be a daunt undertaking for evening the most skilled professionals. That ‘s why we ‘ve put together a guide to simplify the business tax burden procedure and aid you steer clear of any blunders when it comes clock time to file. Keep take to learn how you can pay taxes as a contractor like a pro.
What is an mugwump contractile organ ?
If you ‘re newfangled to independent narrow, you might be enjoying some of the freedoms that come with being your own party boss and taking charge of your own schedule. You may evening be earning a higher hourly rate than employees who work aboard you. In fact, the Wall Street Journal reports that independent contractors frequently make between 20 and 40 percentage more than an employee in the same role. You likely plowshare this space with a act of other professionals such as :
- Nail technicians
- Personal trainers
- Virtual assistants
Regardless of your particular trade, however, you are seen through the government ‘s eyes as a freelance individual who operates in one of a few ways :
- As a sole proprietor – Sole proprietors are responsible for paying income tax along with 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 pass 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 and 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 occupation 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 ) which is a Taxpayer Identification Number ( TIN ) specific to your business. Though not constantly required for one-owner businesses, it may be required by banks and other services .
For a glance 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 an employee for a certain company, the occupation itself is responsible for withholding money from your paychecks in rate to cover the costs of federal and state income taxes equally well as Federal Insurance Contribution ( FICA ) taxes. As an autonomous contractor, on the other hand, that province falls on your shoulders.
Read more: What Is a Debt Management Plan? – NerdWallet
hera 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 a Form 1040, only those who are self-employed will need to supplement this IRS form with a Schedule C. (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. Since independent contractors don’t pay Medicare tax or Social Security tax throughout the year, self-employment tax acts in its place. While the exact percentage may change from year to year, it currently totals 15.3%.
- Unlike employees who may only pay a tax bill once per year, independent contractors may need to make a quarterly tax payment based on their annual tax estimations. If this applies, contractors will make fixed payments four times per year in January, April, June, and September.
Special considerations and deduction benefits to be aware of
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. For a contractor vehicle with 10,000 work-related miles per year, the standard mileage deduction will reduce taxable income levels by $5850. 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
There are hundreds of Internal Revenue Service ( IRS ) forms orbiting around in the world of taxes. Rest assured, however, that as an independent contractile organ, you wo n’t need to study the specifics of each one but rather focus your attention on a match of essential documents. here ‘s a close 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 the 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.
Tips for navigating tax season like a pro
now that you have a better understand of how to become an independent contractor and file your taxes, here are a few tips to consider to start preparing for tax temper and ensure it ‘s arsenic 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 of your business’s inflows and outflows 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 20 to 25% of your check in a separate account to 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 15th, 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 mugwump contractor, it ‘s time to start focusing on the year ahead. How will you work to develop your clientele, update your services, and set your sights on acquiring raw contracts ? The answer is much simpler than combing through the intricacies of tax-related paperwork. Tap into the power of a neighborhood-centric, easy-to-use platform like Nextdoor. here you ‘ll be able to contribution single deals and updates with your local community, take advantage of viva-voce referrals and access new clients right field in your own region .
With about 1 in 3 U.S. households on Nextdoor, the electric potential to grow your commercial enterprise and reach a wide audience is not only promising but right at your fingertips. Claim your complimentary Business page with Nextdoor to get started .