Independent Contractor Taxes: Guide to Filing Taxes as a Contractor

Filing Independent Contractor Taxes

January 9th, 2020

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Filing your taxes under any circumstances can be tricky, but when it comes to your business, the process can become even more complicated. Whether it’s your first or tenth time doing your taxes as an independent contractor, you could likely use some pointers, especially because there are high stakes when it comes to doing your taxes correctly.

But don’t worry, we have you covered. We’ve put together a comprehensive guide on the ins and outs of filing independent contractor taxes. This way, you can make sure you stay in good standing with the IRS and have plenty of time to plan ahead.

We’ve answered your most pressing questions about paying independent contractor taxes so you can feel confident about what and how much you need to pay. Let these links be your guide:

What is an independent contractor?

How do you know if you have to pay independent contractor taxes?

What taxes do independent contractors pay?

Tax deductions for independent contractors

How to file taxes as an independent contractor

How do you pay taxes as an independent contractor?

Other independent contractor tips

What is an independent contractor?

Not sure what it means to file your taxes as an independent contractor? Before you start preparing your taxes, you need a clear understanding of where you stand in the eyes of the IRS. So, first things first, how do you know if you qualify as an independent contractor?

An independent contractor is defined as an individual (or entity) who has been contracted to perform work for another entity without becoming an employee. So basically, it boils down to contracted work where the entity or individual who has hired you has control over the end result of your work or services, but not how you go about doing it (when and how you choose to work).

For example, let’s say you run a small construction business and a local school hires you to make an addition to their building for more classes. The school district will control what you build (the addition with the new classrooms), but you’ll have control over how and when you’ll build it (the hours and methods of building the addition).

Independent contractors are often referred to as freelancers or self-employed workers. However, it’s important to note that independent contracting is just one of the ways you can be self-employed.

While you might automatically assume that you’re not an independent contractor because you’re not a freelance writer or graphic designer, think again. Many common professions fall into this definition, including doctors and lawyers.

Why business structure matters for filing taxes

The way your business is structured will factor into how you complete your independent contractor taxes, including which forms you should use. While you might not think of yourself as a business per se, you are classified as one by the IRS. Typically, independent contractors are categorized as either a sole proprietorship or LLC (limited liability company).

How do you know if you have to pay independent contractor taxes?

If you made over $400 from your independent contracting activities, you’ll have to pay taxes.

You might be thinking, “but wait, isn’t the minimum tax threshold of $12,000?” Unfortunately, that only applies to income made as an employee. However, one positive way to look at it is that your business is making money, and that’s always a good thing.

What taxes do independent contractors pay?

According to the IRS, independent contractors are required to file an annual income tax return and make quarterly estimated payments.

Independent contractors are expected to pay two main taxes:

A. Income tax: Incomes taxes are taxes paid on the income made by your business.

    • Income tax rates depend on your filing status and your total taxable income. Currently, independent contractor income taxes are the same as any other income taxes, with rates ranging from 10% to 37%.

B. Self-employment (SE) tax: Independent contractors are required to pay self-employment taxes because Social Security and Medicare taxes are not being withheld from paychecks throughout the year.

    • The self-employment tax rate is 15.3%. This is made up of two taxes: Social Security, which accounts for 12.4% and Medicare, which accounts for the other 2.9%.
    • While this might sound like a lot, you can deduct a portion of your self-employment taxes, which we’ll cover shortly.

You will have to pay both of these contractor taxes on both the federal and state levels, which require separate forms and filing.

Are there any additional state taxes that independent contractors need to pay?

As an independent contractor, you may also need to pay sales and use taxes. Sales and use taxes are the taxes that consumers are required to pay on many goods and services. Often, businesses are responsible for collecting them from customers. This makes keeping accurate records of business transactions even more important. Additionally, you’re responsible for paying them when you make purchases for your business.

However, you may be in luck. The following states don’t impose a sales tax:

    • Alaska
    • Delaware
    • Montana
    • New Hampshire
    • Oregon

If you do operate in a state (or states) that impose sales and use taxes, FinancePal can help you ensure that you’re fulfilling your obligations and avoid any trouble with your taxes. Thanks to our smart online bookkeeping for small businesses, you can easily track taxable and non-taxable transactions.

What are estimated payments and how do you make them?

If you expect to owe more than $1,000 on your tax bill, you’ll need to make estimated taxes. When it comes to making estimated payments, here are the key things you should know:

  • Estimated payments are made in four equal parts for your total tax liability.
  • Form 1040-ES should be used to calculate your estimated payments.
    • You need your prior year’s tax return to complete this form. If it’s your first year working as an independent contractor, you’ll need to estimate how much your income will be for this year.
  • Payments are made quarterly on: April 15th, June 15th, September 15th, and January 15th.
  • Mail in a voucher for each estimated payment.
    • You can find quarterly estimated payment vouchers attached to Form 1040 ES.

Note: Because no one is withholding your taxes for you, you’ll be responsible for making sure you have the available funds to make these estimated payments. This can be a major pain-point for many who are new to independent contracting, so make sure you prepare in advance.

Tax deductions for independent contractors

What are tax deductions and why should you care about them? Tax deductions are incentives that allow you to save money on your tax bill. Deductions are subtracted from your gross income, directly lowering your taxable income.

Self-employment tax deduction

As we mentioned earlier, there is a pretty substantial deduction allowed for the self-employment taxes you paid. Currently, you can claim a deduction of up to 50% of what you paid in self-employment taxes.

Business expense deductions

Wondering what you can write off as an independent contractor? The most common expense-related deductions used by independent contractors include:

  • Advertising: From running Google ads to adding a wrap to your car, advertising costs are tax deductible.
  • Insurance: Depending on the type of work you do, you may need one or several types of business insurance (general liability, etc.). Fortunately, you can deduct the cost of your premium on your taxes.
  • Home office: If you work from home as many independent contractors do, you may be able to deduct home-office expenses. However, it’s important to note that in order to take advantage of this deduction, the space must be used regularly and exclusively for business purposes.
  • Vehicle costs: For independent contractors who rely heavily on a vehicle to conduct business, this write-off can be a significant savings point. Not only can you deduct mileage expenses, but you may be able to include depreciation and repairs too.
  • Client entertainment: If you take clients out to discuss business, you can deduct a portion of your expenses. Typically, you can deduct up to 50% for business meeting meals.
  • Supplies: While many independent contractors don’t rely on traditional office supplies anymore, this category is actually quite broad. From purchasing yourself an ergonomic chair that makes typing the day away much more comfortable to packaging supplies for delivering your home-made products, you might be able to write off more than you expect.
  • Equipment: Purchasing tools of the trade is often a necessity for independent contractors, and thankfully, you can often write them off. From laptops to heavy machinery, investing in your business is advantageous when it comes to your taxes.
  • Business travel: If part of your work requires you to attend events around the nation or even the globe, you can write off a portion of your hotels, airfare, and meals.

While these are the primary business expenses many independent contractors take advantage of, there are others you might qualify for. The main thing to keep in mind is that you will need the receipts to back up your claims. So, make sure you hold onto everything in a secure place, whether that be a folder in your inbox or on your desktop (or even with old-school files).

Note: Keep in mind that there’s a distinct difference between business use and personal use, so be sure to only claim items that are used specifically for your business.

Beware of abusing deductions

While it might be tempting to fudge the numbers a bit, complete honesty is the best policy when it comes to dealing with the IRS. If you take the risk and claim some deductions that you might not fully qualify for, you may regret that decision if they decide to conduct an audit. If they find that you’ve been dishonest about any aspect of your taxes, or if you made a major mistake, you could be on the hook for some serious penalties.

How to file taxes as an independent contractor

So, let’s get down to how exactly you go about filing your independent contractor taxes. Here are the steps you’ll need to follow:

  1. Gather all the documentation you’ll need to complete the required forms.
  2. Download, pick up, or have the forms delivered.
  3. Fill out your forms as detailed in the instructions provided.
  4. Verify that all of the information is correct, especially any calculations.
  5. Submit your forms online or mail them in by April 15th.

Once you understand the basics of independent contractor taxes, it’s a fairly straightforward process. However, as your business grows, completing your taxes will likely become increasingly complex. In many cases, it could be advantageous to work with a tax professional to ensure they are prepared correctly and on time.

What forms do independent contractors need in order to do their taxes?

As an independent contractor, you will not receive W2s. Instead, you’ll receive Form 1099-MISC from each of the clients you worked with during the past year. This form will detail all the income you received while working for them throughout the year.

Note: You will only receive a 1099 if you earned more than $600 from a client.

There are several forms you’ll need in order to complete your independent contractor taxes:

In addition to these federal forms, you will need the applicable forms for your state taxes.

How do you pay taxes as an independent contractor?

You can either pay your independent contractor taxes online or by mail. It’s important to keep in mind that if you’re paying by mail, you still need to ensure that your payment arrives by the due date.

To pay your contractor taxes online, you can use your debit or credit card or do direct pay using your checking account. The Electronic Federal Tax Payment System (EFTPS) is the recommended method for large payments.

To pay by mail, you can use a check or money order. You cannot pay cash by mail. If you want to make your contractor tax payments in cash, you may be able to do so through a retail partner or at an IRS office.

Other independent contractor tax tips

Filing your independent contractor income taxes can be difficult, especially the first time around. Here are a few other tips to help make it as easy and stress-free as possible:

  • Put money aside throughout the year: By putting aside a portion of your income specifically for taxes, you’ll save yourself from financial stress when it comes time to make estimated payments.
  • Stay on top of your bookkeeping. If you need help to catch up on bookkeeping, we can work with you to get your books up to date.
  • If you have employees, set up payroll. If you don’t know how to set up payroll, we have a helpful guide that will walk you through it.
  • Use the tools at your disposal: The IRS provides many resources for taxpayers, including a virtual workshop on small business taxes.

When going through the filing process, make sure to take your time and double-check everything. While it might seem like a lot of work, you’ll be thankful you did it correctly the first time around.

Now you’re prepared to file your independent contractor taxes

When tax season comes around, you’ll be ready to complete your independent contractor or freelancer taxes with confidence. And, if you don’t want to tackle your taxes all by yourself, FinancePal also offers small business tax preparation to take this burden off your plate. With our sophisticated online technology and expert finance team, you can rest assured that your independent contractor taxes are in the best of hands.

About the Author

Jacob Dayan, Esq.

Jacob Dayan is a true Chicagoan, born and raised in the Windy City. After starting his career as a financial analyst in New York City, Jacob returned to Chicago and co-founded FinancePal in 2015. He graduated Magna Cum Laude from Mitchell Hamline School of Law, and is a licensed attorney in Illinois.

Jacob has crafted articles covering a variety of tax and finance topics, including resolution strategy, financial planning, and more. He has been featured in an array of publications, including Accounting Web, Yahoo, and Business2Community.

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About the Author

Nick Charveron, EA

Nick Charveron is a licensed tax practitioner, Co-Founder & Partner of Community Tax, LLC. His Enrolled Agent designation is the highest tax credential offered by the U.S Department of Treasury, providing unrestricted practice rights before the IRS.

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About the Author

Jason Gabbard, Founder and CEO of JUSTLAW

Jason Gabbard is a lawyer and the founder of JUSTLAW.

About the Author

Andrew Jordan, Chief Operations Officer at FinancePal

Andrew is an experienced CPA and has extensive executive leadership experience.

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