How to File Independent Contractor Taxes

Independent contractors must pay taxes on their income, but they must also pay self-employment tax. The tax rules and regulations for self-employed workers differ from typical employees. Knowing how independent contractor taxes work, how often a worker must pay and more, will help you stay tax compliant.?

Most employees rarely think about their taxes until it is almost time to file them. Employers withhold taxes and send money to the government to help employees pay taxes on their income. Sometimes, employees may receive a tax refund if their employer pays too much.

Independent contractors have a different process when it comes to paying taxes. They are self-employed, so they don’t have a direct employer that withholds money from their paychecks.?

Keeping track of how much they owe and paying taxes regularly on their income is crucial to avoiding penalties and fees. Additionally, independent contractors must pay taxes multiple times per year.?

Learning how to file taxes as an independent contractor is essential to avoid issues with the Internal Revenue Service. Any freelancer, contract worker or self-employed person must know which taxes they should pay and how they should pay them.

Who Is an Independent Contractor?

An independent contractor is a person that employs themselves and completes services for other entities or people. They are not employees. Independent contractors may work alone or with others.

Contractors have specific tax regulations depending on their business type. Independent contractors control their services and how people or entities receive those services.

Typically, an independent contractor provides services after creating an agreement with the other party. This contract may dictate how many services the contractor must complete or how long they must provide those services.?

Independent contractors don’t have the benefits of being employees such as paid time off or health insurance even if they are in a contracted agreement with an employer.?

Even though contractors don’t receive employee perks, they have flexibility in their schedules, control over the work they complete and other benefits.?

Self-employment is an excellent option for many people with high skill levels in many fields, but classifying workers correctly is essential for federal and state taxes. For this reason, workers and businesses alike must understand the differences.

What Percent Do Independent Contractors Pay in Taxes??

Independent contractors must pay the self-employment tax. For the 2021 tax year, the self-employment tax rate was 15.3% on net earnings up to $147,000.?

This covers 12.4% for Social Security and 2.9% for Medicare. If a self-employed worker makes more than $147,000, they must pay 2.9% of those net earnings.?

Additionally, contractors must pay income tax. This amount will vary significantly from person to person.?

The federal income tax rate falls between 10% and 37% depending on how much money the independent contractor made. State income tax rates vary based on where the contractor lives and works.?

Specific independent contractor tax requirements also depend on if the independent contractor had a net profit or loss. Other taxes may include:

• Sales taxes
• Excise taxes
• Net investment income taxes
• Alternative minimum taxes
• Additional Medicare taxes?

How to Pay Taxes as an Independent Contractor?

Independent contractors, including partners, sole proprietors or S corporation shareholders usually must make estimated tax payments if they believe they will owe at least $1,000 in taxes. A corporation makes estimated tax payments if it owes at least $500 in taxes.?

Independent contractors may use Form 1040-ES to determine estimated tax amounts.?

Estimated taxes are due every quarter for independent contractors so that the IRS receives income tax as the contractors receive payment. A similar scenario happens in employee-employer relationships, but employers handle this on behalf of the employees.

Any type of taxable income that has no taxes withheld is subject to estimated tax requirements, including rental income, capital gains and earned income.

Even though estimated independent contractor taxes cover quarterly requirements throughout the year, the individual must still file a tax return during tax season. Most independent contractors use Schedule C or Schedule SE to file their taxes.

During this point, they would see if they paid the correct amount in taxes throughout the year. Independent contractors might receive a tax refund if they overpaid, or they may have to pay more taxes if they underpaid.

Tax Filing Tips for Independent Contractors?

Tax season can become complicated for independent contractors, but the process is more straightforward once you know which IRS regulations apply to your operation.

Here are a few tips for filing your taxes as a self-employed worker:

• Organize all income and expenses throughout the year manually or with an accounting system to make filing your final tax return easier.
• Don’t forget to report any business-related deductions.
• Determine your state or local tax requirements early in the year to ensure you’re making the correct estimated tax payments.
• Track the deadlines for estimated tax payments (April 15, June 15, September 15 and January 15).

Working with a tax professional may help you understand your tax obligations better and may even save you money in the long term.

Top Takeaways?

How to file independent contractor taxes

• Independent contractors are self-employed workers that have different tax obligations than typical employees.?
• Independent contractor taxes include estimated quarterly payments at the state and federal levels.
• Self-employed workers must pay self-employment tax, income tax and other taxes depending on their business model and type.?
• Working with a tax expert may help independent contractors maximize deductions and pay fewer taxes overall.?

(Reporting by NPD, Editing by Mariah Flores)