If you ‘re considering becoming an independent contractor, or are one already, it helps to be companion with the taxes you ‘ll be required to report and pay then that you can plan for tax meter .
What Is an autonomous contractor ?
An independent contractor ( IC ) is person who immediately offers services to the general public. autonomous contractors may be people who work in professions—dentists, doctors, or attorneys. They may besides work in such trades as plumbing, building condense, or electric make. They may besides include other types of service workers or spear workers such as rideshare drivers or freelancers .
As an autonomous contractor, the Internal Revenue Service ( IRS ) considers you freelance, in clientele for yourself, rather than an employee of person else. You don ’ t have to register your commercial enterprise as a specific type to be an mugwump contractor. For tax purposes, the default business type is a exclusive proprietorship —a one-man business that isn ’ triiodothyronine formed as a pot. The other coarse business type for ICs is the single-member ( owner ) limited liability company ( SMLLC ) .
What Taxes Do Independent Contractors Have To Pay ?
As a freelance individual who is in commercial enterprise as a sole owner, you have several types of taxes to pay :
Everyone who works in the U.S. must pay Social Security and Medicare taxes. For autonomous contractors and others who are freelance, these taxes are called “ self-employment taxes. ”
These taxes are based on your business ‘s final income ( profits ). The self-employment tax rate is 15.3 % with 12.4 % going to Social Security and 2.9 % to Medicare. You can take a deduction for half of the sum, peer to the amount that an employer would pay for these taxes .
Each year, the Social Security separate is capped at a particular utmost. If your aggregate earnings as an IC and as an employee are greater than $ 200,000 for the year, you must pay an extra Medicare tax of 0.9 % on your aggregate earnings as an IC and as an employee ( if this applies ) .
You ’ ll need to use Schedule SE to calculate the total self-employment tax you owe. then, you must add this total to your personal tax fall ( Form 1040/1040-SR ) .
Self-employment income is used for Social Security credits each year. If you don ’ t have any business income for the year, you don ’ t have to pay self-employment taxes, but you don ’ metric ton get Social Security credits based on that income for the year .
federal Income Taxes
freelancer contractors are considered to be business owners. The government requires that you include on your render any personal income you make from your business, along with business tax deductions .
Most independent contractors are sole proprietors or single-member LLCs who report their federal income taxes on Schedule C as share of form 1040. Calculate your business income, and take deductions on Schedule C to find your internet profit or loss sum that is added to other sources of income ( from employment or investments, for example ) to get your net taxable income for the year .
If you received a Form 1099-NEC from a customer screening payments made to you and tax withhold as part of your business income, you must include that income on Schedule C and report it on your tax retort .
State Income Taxes
You must besides report and pay state income taxes on your business income in most states. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming preceptor ’ thymine have a state income tax. New Hampshire doesn ’ t tax earned income, but it does tax interest and dividends. Contact your department of state ’ second tax means for information on how its income taxes work .
As a commercial enterprise owner, you normally don ’ t have amounts withheld from pay for income taxes and Social Security/Medicare taxes during the year, as employees do. You can use the tax worksheets on IRS Form 1040-ES to calculate estimated taxes and self-employment taxes. You must pay calculate taxes during the year to avoid penalties for underpaying. In most years, and for most taxpayers, the ascribable dates are April 15, June 15, September 15, and January 15 of the following year .
Residents and business owners in Louisiana and parts of Mississippi, New York, and New Jersey were granted extensions on their deadlines for filings and payments to the IRS due to Hurricane Ida. Due to the tornado in December 2021, taxpayers in parts of Kentucky were besides granted extensions. You can consult IRS calamity relief announcements to determine your eligibility .
If you have employees, you must withhold federal income taxes from employees, pay several types of employment taxes, and charge tax reports to the IRS and the Social Security Administration ( SSA ) .
You and your employees must each pay up half of FICA taxes for Social Security and Medicare. The rate is the lapp as self-employment tax ( 15.3 % ), based on the employee ’ s taxable income. You withhold the employee separate from employee paychecks and set aside your depart as the employer to pay to the IRS. You must pay FICA taxes and federal income tax withholding at least monthly and report quarterly on IRS Schedule D, Form 941 .
Employers pay federal and state unemployment taxes to fund unemployment benefits for employees who lose their jobs. Employees don ’ t pay that tax. The pace is 6 % on employee wages above $ 1,500 in any calendar quarter. You ’ ll need to complete IRS Form 940 to report and pay those taxes each year .
Tax Deductions for Independent Contractors
You can reduce your clientele income by taking deductions for business expenses. To be deductible, these expenses must be for the aim of making a profit. They must besides be ordinary ( common ) and necessary ( helpful and appropriate ).
Read more: 8 Top Dividend Index Funds | The Motley Fool
See the tilt of allowable expense deductions on Schedule C. here are some crucial deductions you may be able to take, depending on your commercial enterprise situation .
” cost of goods sold ” is a branch calculation on Schedule C for materials, labor movement, transportation, and early costs for producing products for resale .
home business costs are for the quad you use as a home plate office or for other business uses. You can merely deduct the quad you use regularly and entirely ( only for occupation purposes ). This deduction is calculated on IRS Form 8829 for actual expenses or Schedule C using a simplified method for smaller spaces .
business drive expenses are deductible in your freelancer contractor commercial enterprise. If you use a vehicle for both occupation and personal drive, you can only deduct occupation function, using either actual expenses or a standard mileage rate that changes every year. Report these expenses on Schedule C .
If your commercial enterprise owns major assets, like a cable car, a build, furniture, or equipment, you can deduct the costs over respective years. This process, called “ depreciation, ” is a non-cash deduction that is reported individually. Use IRS form 4562 to calculate depreciation and report it on Schedule C .
independent contractors can besides take a 20 % tax deduction called a “ dependent clientele income discount, ” based on their business net income. This discount, which can be taken through the 2025 tax class, is in addition to the normal business deductions. You ’ ll motivation to use IRS Form 8995 to calculate this subtraction and add it to your form 1040.
How To File Income Taxes as an Independent contractor
Before you begin the process of filing your business income tax reelect, you ’ ll need data on your income and expenses for the year. Prepare a profit-and-loss statement ( besides known as an “ income statement ” ), and retain detail records of expenses to support all of the deductions you want to take .
many small businesses use commercial enterprise tax preparation software that walks you through the assorted sections of Schedule C, Schedule SE, and other schedules and forms to include occupation information on shape 1040 .
Tips for Filing Taxes as an Independent contractor
here are some tips to help you cut your tax placard and avoid tax audit issues .
Lowering Your commercial enterprise Tax Bill
No one likes paying income taxes, but you can keep your clientele tax bill lower by deducting all legalize expenses possible. In addition to taking all of the deductions possible, you may be able to apply for tax credits for diverse business activities. Some examples are a work opportunity tax credit for hiring deprived workers or citation for giving employees health policy .
Recordkeeping From Startup to Tax file
You don ’ t have to show all of your clientele records when you file your tax return, but what if you are audited ? The IRS looks carefully at deductions for driving expenses and family clientele space, among other areas, so it ’ south important to keep excellent records. For exemplar, with driving expenses, you must keep at-the-time records that include the date, mileage, and occupation purpose .
Getting Help with Independent Contractor Taxes
occupation taxes are complex, and there are many qualifications, limits, and exceptions to consider. For case, even a apparently simple tax write-off, like the one for business consumption of your home, has many issues. Finding a license tax professional to help you with your business taxes can save you money and help oneself you survive a tax audit .
frequently Asked Questions ( FAQs )
How do I pay taxes as an independent contractor?
The easiest way to pay your federal taxes, including estimated taxes, is on-line. The IRS allows target payments from a bank account or debit or credit card payments, and it offers the Electronic Federal Tax Payment System ( EFTPS ) for businesses, among other options. You can besides make payments by mail. You must use the EFTPS system or another IRS-approved on-line method to pay federal employment taxes, including FICA taxes and federal unemployment taxes .
How much can an independent contractor make before needing to pay taxes?
Before you can know whether you ‘ll need to file a tax return and pay income taxes for the year, you must know :
- Your filing status
- Any withholding amounts
- Your sources of income for the year, including your self-employment income
You can use this calculator from the IRS to see whether you need to file a federal tax return. You can make up to $ 400 per class in self-employment earnings and not have to pay self-employment taxes.
Read more: A step-by-step guide to identity theft
Are payments to me from my business as an independent contractor taxable?
As an independent contractor, you are considered a business owner and not an employee of person else. Any payments you take out of your business are considered to be taken from your owner score on your business balance sail ( called “ owner ’ south equity ” ). You are taxed on the total come of your commercial enterprise net income for the year, no topic how a lot you take out for personal use .