What Taxes Should Independent Contractors Know About?

What Taxes Should Independent Contractors Know About?

by Brendon Pack, July 2015

If you take the plunge into self-employment and work as an independent contractor to pursue your professional passions, you’re probably really good at what you do. However, you may be less adept at understanding and handling your independent contractor taxes.

This breakdown on independent contractor tax requirements should help you enjoy your work a little more – and keep more money in your bank account each year:

Employee vs. Contractor

First, it’s important to understand what an independent contractor actually is in the IRS dictionary. W-2 employees automatically have their income taxes withheld from the paychecks they receive from their employers. On the flipside, independent contractors must calculate and pay their own income taxes to the IRS. Not only are income taxes at play, but there are additional taxes for an independent contractor to cover each year.

Use Form 1099

The most common independent contractor tax form is known as Form 1099. This tax return is used to report non-employee compensation earned as a contract worker rather than as a W-2 salaried or hourly employee. For example, if you work as an IT consultant, the payment amounts from your clients who pick your brain on technology must be reported on Form 1099 when filing your income taxes.

Estimated Taxes

In general, the biggest tax burden for independent contractors is for estimated taxes. These taxes should be filed 4 times throughout each calendar year and represent an estimation of what a contractor owes in taxes during each 3-month quarter of a given year. Estimated tax deadlines fall on January 15th, April 15th, June 15th, and September 15th. Form 1040-ES is used to file estimated taxes.

Self-Employment Taxes

Unlike W-2 employees, independent contractors are responsible for paying both parts of the federal self-employment tax – also called the self-employment version of the FICA tax. Employers typically cover part of this amount for their employees, but 1099 contractors are on the hook for the entire amount. Self-employment taxes include Social Security and Medicare taxes.

Independent Contractor Tax Deductions

While self-employed professionals often face more tax requirements than others, there is a silver lining – tax deductions for independent contractors. These write-offs, which can reduce your amount of taxable income and thus lower your tax bill, include:

  • The home office deduction
  • The vehicle deduction
  • Travel deductions
  • The meals and entertainment deduction
  • Deductions on out-of-pocket medical expenses
  • Other deductions on expenses you incur for work as an independent contractor
  • 50% deduction on self-employment taxes

You can use an online independent contractor tax calculator to help you estimate how these deductions will affect your independent contractor tax rate.

The Importance of Paying Your Independent Contractor Taxes

Just because you don’t have an employer withholding taxes for you doesn’t mean you don’t have to pay them. In fact, the IRS often takes a closer look at the tax returns of independent contractors and business owners, which could lead to an audit if you don’t fully comply or miscalculate the information on your return. This is why it is extremely important to file and pay all of your independent contractor tax bills when they are due. It may be worth hiring an accountant since you’ll have more tax obligations and a closer eye on your tax returns.

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