Tax season is often the worst time of the year for most people. You have to scramble around trying to figure out stuff like your gross income and tax deductions, and also try to sort through tons of confusing tax forms.
For those who are self-employed or doing freelance work, the process can be even MORE confusing. Chances are, if you fit into the latter category, you'll need to file something called independent contractor taxes.
Understanding what independent contractor taxes are and how they work is crucial to avoid issues with the IRS. This post will run through exactly who needs to pay these taxes, how you can go about paying them, and also cover some tips to make it easier for you. Ready to learn everything you need to know about independent contractor taxes? Let's get right into it!
Who Needs to Pay Independent Contractor Taxes
When it comes to who is an independent contractor, the IRS states that “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Put another way, an independent contractor is somebody who gets paid on a “project by project” basis, whereby the employer pays to have a service or good delivered, but they only have a say in the final result and not how to process is carried out.
Here are some professions that are most commonly filled with independent contractors:
- Public stenographers
Most workers in an independent trade, business, or profession are likely to be classified as independent contractors. That being said, whether someone is actually an independent contractor depends on the fact of their situation and can vary on a case-by-case basis. You could be part of a sole proprietorship, an LLC (Limited Liability Company), or even a corporate structure and still need to pay independent contractor taxes.
How Do Independent Contractor Taxes Work?
As an employee, you're paid on a consistent schedule (weekly, bi-weekly, or monthly). When you work as an independent contractor, you act very much like business owners do in that you and your “clients” decide on when and how you'll get paid.
Maybe you want to be paid at the end of the year via credit card, or maybe you want to be paid on a project-by-project basis via check. Because of this, the way that independent contractor taxes work is different from those of a regular employee.
The first major difference is that in the case of independent contractors, the customer paying you does not deduct any money on their end for your taxes. This means that no medicare taxes, federal taxes, or social security taxes have been taken out before you receive your money. Though this may sound like good news, all it means is that you'll need to pay these at the end of the tax year.
When tax season rolls around, instead of sending you W-2 forms, your “employers” will send you a form 1099-MISC and/or a form 1099-NEC. This will basically be a document listing all of the income the company has paid you over the past calendar year.
The one exception is if you earned less than $600 throughout the previous year (with your self-employed activities). If this is the case, you still need to report your income, but your employers don't need to send you 1099-MISC forms. You can expect to get all of these forms by the end of January, and if you worked with multiple vendors, you'll get multiple forms.
Before going on ahead and filing your taxes, consider organizing your tax deductions for the year. Tax deductions are basically business expenses that independent contractors can use to lower their net income. By using tax deductions you can lower your tax bracket and potentially save tons of money on income taxes (so don't neglect them)!
Depending on what kind of self-employed or freelancing activity you partook in, your expenses might include:
- Advertising costs (flyers, online ads, etc. Extremely important if you're a gig worker or worked a side hustle)
- Home office expenses (anything from pens to paper to staples and even renovations)
- Car related expenses (gas, car insurance, etc.)
- Equipment buys (potentially important if you're a small business owner)
- Rent or lease payments (yes, you can even write off your rent as part of your business expenses!)
When it comes to deducting expenses from your taxes, the limit is actually quite wide. You can even deduct some personal expenses like mortgage interest payments, student loans interest, and real estate taxes as long as you keep accurate records of everything.
How to File Your Taxes
So you've received your 1099 forms from employers and also compiled all your relevant tax deductions. Now it's time to finally file your taxes. When it comes to independent contractor taxes, the IRS treats you much like a self-employed individual. For tax purposes, you're essentially self-employed and you'll abide by much different tax rules than full-time employees.
Here are all of the things you'll want to pay attention to as you file your independent contractor taxes:
- If you made more than $400 in total income throughout the year, you'll need to file a tax return with the IRS. (See the form 1040 and form 1040-ES)
- On top of your form 1040, you'll also want to file a schedule C to calculate how much your business made (or lost) throughout the year.
- If you have less than $5000 in business expenses, consider filing a Schedule C-EZ form.
- Because with independent contractors social security and medicare taxes aren't deducted by the vendors, you'll need to cover those in the form of self-employment taxes. You can check out your self-employment tax rate here.
- As an independent contractor, if you're expected to pay more than $1000 in annual tax, you'll need to pay quarterly taxes. This is basically when you make quarterly tax payments (quarterly payments) to the IRS, estimating the amount that you owe. The first payment is due in April and these payments generally cover your self-employment tax and income tax liability for the year.
Remember to read through these carefully and make sure that you cover everything. Failing to make these payments or paying too little can result in a tax penalty (with varying sizes depending on how much you underpaid).
Go Solo or Get Help Paying Your Independent Contractor Taxes
Depending on your business situation, it might make more sense to either file your taxes yourself or hire somebody for help. Here are some tips to help inform you on whether you should be flying solo or hiring some help.
Do it Yourself
If your freelancing/business operations are relatively straightforward and you don't owe any outstanding taxes from the past, it might be a good idea to try tackling this process yourself. To determine whether this is the right move, try thinking about the complexity of your business income and expenses.
If you DO decide to do it yourself, know that there are two ways you can file your taxes: by mail or online.
To file by mail, you'll need to obtain tax forms by ordering them online from the IRS. You'll then fill them out and submit them back to the IRS. If you end up owing money, you can pay your taxes either by check or by money order.
To file online, simply create an account with the IRS and transfer money directly from your credit/debit cards to the IRS account.
Hire a Professional
Doing your independent contractor taxes yourself may save you a little bit of time in the short run, but if you happen to make a mistake or error in your filing, you could be subject to some hefty tax penalties.
For this reason, if your operations have recently changed, or your business expenses are extremely complex, or you have a high income, or you subcontract work out to OTHER independent contractors, it might be worth it to look into hiring an accounting service to help you.
Make sure that person you end up hiring is CPA certified and has your best interest in mind. The great thing about hiring a professional is that a lot of them will be willing to sit down with you for a free consultation.
Even if you don't end up hiring an accountant to do your full taxes, it could still make sense to pay them some money to help estimate your quarterly taxes (or give you some other tax advice).
Tips to Make It Easier For You
When it comes to dealing with independent contractor taxes, the key is to start EARLY. Don't wait until the last minute to start working on your taxes. Here are some tips you can implement to help make filing your taxes easier.
Prioritize Book Keeping
Regardless of whether you have a small business or are a freelancer, it's wildly important that you develop a good system for tracking your income and expenses for the year. Even if you only work part-time, you should still have a bookkeeping solution in place.
There are tons of bookkeeping providers out there that have automated solutions, making keeping track of everything easy for you. If you don't have enough money to hire outside solutions, consider using something as simple as an expense app to keep track of receipts, donations, and other deductible expenses.
If you don't do so, you may find that you're scrambling around to get all your information ready for form 1040.
Consider Using a Tax Calculator
Even with all of the help in this article, figuring out taxes can be a really complicated task. Thankfully, there are tons of tax calculators online that you can use to help you sort out and estimate just how much you owe to the IRS.
Consider using one of the following tax calculators to help you with your independent contractor taxes:
Consider Hiring a Financial Advisor
If your operations are truly complex and tough to decipher, it might be a smart financial move to hire a financial advisor to help with your taxes. Though hiring a financial advisor seems like something that is reserved for “rich and wealthy” people, it can be extremely beneficial to you if you're a small business owner or even just a freelancer as well.
There are plenty of platforms online that can connect you to financial advisors in your area. When choosing between various financial advisors, make sure to ask them tons of questions to determine whether they truly have your best interests in mind.
Recap: Independent Contractor Taxes
Nobody likes taxes. They are complicated and difficult and oftentimes take up a lot of time and energy out of your life. This is especially true if you need to pay independent contractor taxes (as opposed to full-time employee taxes).
This post has hopefully helped to clear up some of the confusion surrounding independent contractor taxes and provide you with some guidance and tools that could be helpful in the process. As a quick recap:
- The IRS defines someone as being an independent contractor if they have they have control over their process of work but not the final product (including professions such as doctors, lawyers, accountants, and obviously contractors).
- Independent contractor taxes differ from regular taxes because vendors don't withhold certain taxes when they pay contractors (in other words, there is more stuff to figure out at the end of the year, come tax time).
- Before diving into your taxes, make sure to have your tax deductions organized. This is one easy way to reduce the amount of money in taxes that you owe to the IRS. You can get started with this by keeping meticulous track of all the expenses you make throughout the year that contribute to your operations.
- Actually filing your taxes can be done online or via mail and there are several components to it. Make sure to pay attention to all of them lest anything fall through the cracks.
- If you feel uncomfortable filing taxes for yourself, consider hiring a tax professional to help you.
- Some tips for making the process easier for you include: prioritizing your bookkeeping, using online tax calculators, hiring a financial advisor, and potentially loss harvesting.
Though independent contractor taxes can be complicated, the fact that you're researching and reading posts like this means that you're getting familiar with the basics. That, in turn, is already putting you way ahead of the curve.