Independent contractor taxes can be a little tricky if you are used to filling out a traditional 1040 form like most “normal” full-time employees.
As with most taxes, there is a lot of confusion (and even deception) around the subject.
Because as a sole proprietorship, entrepreneur or self-employed person, you are taxed differently than as an employee.
So it can get tricky.
But don’t worry: understanding and managing independent contractor taxes can be easier than you think, and getting to grips with independent contractor taxes is definitely not a good reason to avoid it work for you.
With the help of our in-depth article below, you have this. You will soon be able to handle your taxes without any problems.
Note: These tips are primarily for independent business owners who pay tax in the United States. While the general advice can be helpful, please read up on the rules and regulations in your area to ensure you are complying with local laws.
Are you an independent contractor? (2 questions to be answered):
Before we dive into the (sometimes boring) topic of independent contractor taxes, let’s make sure you are at the right place.
If you answered yes to either of these two questions, then you should pay tax to an independent contractor:
- Are you Self-employed (including partnerships or part-time business like a part-time job)?
- Do you have a 1099 misc. get right? Tax form?
If the answer to any of these questions is yes, you’ve come to the right place. We’ll show you what you need to do to be an independent business owner and start paying taxes.
Taxes of independent contractors vs. employee taxes
You might not be a full-time business owner, but instead you are Earn a little more money besides your job. In this case, as always, you’ll have to pay your traditional daily taxes as well as some additional independent contractor taxes.
Here is the fundamental difference between taxes for independent contractors and taxes for employees:
As an employee, you don’t take home your full salary or an hourly wage. (You probably noticed this on your first salary as a teenager. Grr.) That’s because your employer puts taxes aside for you to cover your tax liability.
But as an independent contractor, your customers do not set aside payments for their tax debts, which means that you have to pay those taxes yourself (still gr.), Or you pay a fine.
In short, you might have a hands-on approach to taxes and forget about them until April of each year when you scan a few documents into an accounting software and then get a nice tax return check a few weeks later.
If you’re an independent contractor, the hands-off approach won’t work. You need to know what is wrong with your money and tax liability.
Read on and we’ll walk you through the whole thing.
Tax bases for self-employed entrepreneurs
Let’s examine some basic truths you should know about paying taxes as a self employed, sole proprietorship, or independent business owner.
You have to pay tax on your business income
First of all, it is important to understand that you must pay tax on any income you generate from your own business. Here are a few myths you might have heard in the past:
Myth: If you don’t call yourself a trade or don’t have a trade license, you don’t have to pay taxes. Not correct. Any income you earn from a hobby or sideline should be reported to the IRS, otherwise you could face fines, jail sentences, or other penalties.
Myth: You don’t have to declare income below $ 600. Not correct. You are responsible for reporting any income you generate to the IRS, regardless of the amount.
The moral of the story is this: if you make any money as an independent contractor, you must report it to the IRS and pay taxes on it.
What a pity, we know. But still true.
You should pay quarterly taxes
As a typical employee, you are used to reviewing your taxes annually. However, if you pay taxes as an independent business owner, you will have to pay the taxes quarterly.
Basically, the government knows what we all do, deep down in our hearts: We are terrible with our money.
Because of this, every time you get paid, employers take a small portion of your paycheck to pay the government.
In reality, as an employee, you pay taxes all the time (sneaky government) and only reconcile your tax bill annually.
Since you Function as your own boss If you are an independent contractor, you will have to pay quarterly business taxes so that you are not stuck without money during spring “tax season”.
To pay quarterly taxes, follow these guidelines and make an estimated payment each quarter before the deadline. If you overestimate and overpay, that’s fine. You get a nice refund next year.
How to Pay Independent Contractor Taxes
Now that you understand a little more about how independent contractor taxes work, let’s get down to the tactical stuff.
Here’s how to pay the taxes for independent contractors.
Step 1: Estimate your quarterly tax liability
First, you need to make an educated guess about how much money you will be making (and therefore how much money you owe) in any given quarter.
The IRS recommends using the form 1040-ES but you can too Use a quarterly tax calculator estimate.
Remember, this number doesn’t have to be perfect. If you estimate a quarter too high or too low, just adjust the next quarter.
Step 2: Make estimated quarterly tax payments
After estimating your self-employed tax liability, you will actually need to make a quarterly tax payment.
You can mail a check payment along with Form 1040-ES above, or (if you are not ninety years old) pay online, by phone, or from your mobile device IRS2Go app.
Many tax services such as Turbo Tax, HR Block, or your tax advisor also has quarterly options.
Step 3: Receive 1099 Misc Forms From Customers (If Applicable)
At the end of the tax year (December 31 of each year), every customer you worked with in the previous year should give you a 1099-Other form to comply with IRS standards.
It’s your customers job to understand who is receiving a 1099 form, However, if they are not used to working with independent contractors, you may need to remind them to do so.
Keep these forms together in a safe place as you will need them to file your taxes.
Step 4: File Schedule-C at Tax Time
Finally, when the time comes to finalize your tax status and report it to the government, you’ll need to file a Schedule C Form – an appendix to the traditional 1040 forms used to report income.
A Schedule-C reports profits (or losses) from a sole proprietorship or other personal business. As an independent contractor, it is you.
As always, set your taxes – with a CPA or tax software – and make sure the additional information is taken into account.
Bonus: property tax deductions for self-employed entrepreneurs
The joy of running your own business is that some expenses that otherwise would not have helped your tax bill can add up to a nice deduction from your taxes as an independent contractor.
Here are just a few common tax deductions for self-employed entrepreneurs:
- Online services such as project management tools or invoicing software.
- Domain registration and web hosting to keep your website running.
- Your home office (sometimes) counts as a deduction. For FAR more details on this, Click here.
- Marketing, advertising and promotion You ran to advertise your services.
- Computer, telephone and other “trading tools” You have to do work for your customers.
- Business insurance and health insurance.
Where to from here?
Now that we’ve covered the basics of independent contractor taxes, you might be wondering where to go from here.
Here’s what you need to do: Take control of your business money.
I don’t care how badly you have been with money in the past, how much you hate tax forms, or how scary the government sounds.
You need to take control.
Use the information in this article to begin your journey of regular billing, estimating, and paying your independent contractor’s taxes and avoiding the headaches, frustration, and penalties of neglect.
If all else fails (and you have the money to do it), consider getting a CPA to walk you through exactly what you should be doing – at least for your early years.
From there you will learn. A few small fines will get you in shape and soon you will be handling your independent contractor taxes like a seasoned professional.
Do you know your earning potential?
Take my Earning Opportunities Quiz and receive a custom report based on your unique strengths and learn how to make extra money in just an hour.