A Complete Guide on How To File Taxes As An Independent Contractor
It is a luxury to be your own boss. But to enjoy it fully you need to be constantly aware of the responsibilities you have to fulfill to maintain that freedom. What you earn as a self-employed individual will have tax consequences so you need to know how to file taxes as an independent contractor?
Whether you are an Instacart Shopper, a Doordash Driver, a Content Creator, or providing any other services tax filing is inevitable. In this article, you will learn what is an independent contractor? what forms do they fill out? how do they pay taxes & when are taxes due?
What Is An Independent Contractor
Independent contractors earn money by being their own bosses. This means that they have more control over how and when they work. The clients can only dictate the outcome. To determine whether or not you are an independent contractor the IRS gives a general rule.
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.
The IRS further instructs that;
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Whether you are an independent contractor can be determined by looking at three categories.
- Behavioral: If the company control or has the right to control what you do & how you work, you are likely an employee.
- Financial: Do you control how you are paid or whether your expenses are reimbursed, does your client provide the tools?
- Types of relationship: Do you have written contracts or employee-type benefits such as vacation pay or insurance?
You need to weigh all these factors. Once you do that you can choose a business structure. You can either opt for a sole proprietorship, LLC, or S-corp. Once your status is determined you can then focus on figuring out your taxable income, tax deductions, and tax credit while preparing your tax returns
What Tax Forms Do Independent Contractors Fill Out?
The IRS Form 1099 NEC is issued by the businesses for the payments made to independent contractors, self-employed individuals, sole proprietors & freelancers.
Businesses are required to complete Form 1099-NEC for any non-employee person to whom they paid $600 or more during the year. Use this form to figure out your business income while filing your tax returns.
Even if you don’t receive this form you are required to report your income. You are also responsible for;
Reporting Self-employment Income
Self-employed individuals are required to file Schedule C with their Individual tax return Form 1040. As an independent contractor, you are allowed to deduct your ordinary and necessary business expenses to reduce your taxable income. The common deductions allowable to you are
- Mileage
- Home office deduction
- Qualified Business deduction
- Health Insurance Premiums
- Supplies
- Travel
- Mobile Phone costs
- Business Insurance
- Depreciation
- Commissions
Computing & Paying Social security & Medicare taxes
The reporting requirement of a self-employed individual is different than the one who is employed. If you were an employee your social and medicare taxes would’ve been withheld from your paycheck.
But since you are an independent contractor you are liable to figure them out on your own and pay them on time via Schedule SE. The total self-employment tax is 15.3% (12.4% for social security and 2.9% for Medicare).
Estimating your quarterly taxes
In the United States, you pay as you earn. This means you have to make an estimate of your quarterly taxes using Form 1040-ES when you expect your tax liability will be more than $1000. You might wonder how can we predict our taxes? The answer is to use historical information to calculate your estimated taxes.
How Independent Contractor Pays Taxes?
We are now going to learn how to file taxes as an independent contractor in 4 steps.
Step 1: Determine your tax bracket
Your tax bracket determines how much you owe to the tax authority. 10% is the lowest rate for individuals who earned $9,950 or less during the tax year whereas for married couples who file jointly this limit is $19,900.
35% is the highest rate once an individual's income exceeds $2,09,425 if you are single and $4,18,850 if you are married and file jointly.
The following table contains the tax rates for the year 2022.
|
Rate |
Income Threshold for individual |
Income Threshold for Couples filing jointly |
|
35% |
Over $2,09,425 |
Over $4,18,850 |
|
32% |
Over $1,64,925 |
Over $3,29,850 |
|
24% |
Over $86,375 |
Over $1,72,750 |
|
22% |
Over $40,525 |
Over $81,050 |
|
12% |
Over $9,950 |
Over $19,900 |
|
10% |
$9,950 |
$19,900 |
Step 2: Determine Deductions & Credits
You can either opt for a standard deduction or itemized deduction to lower your taxable income.
The standard deduction for married couples filing jointly for the tax year 2022 is $25,900, For single taxpayers and married individuals filing separately, the standard deduction is $12,950.
The standard deduction is a quick way to compute your deductions and doesn’t require a lot of computation. Itemized deduction on the other hand is done based on extensive record keeping.
It is noteworthy that you can claim some business expenses in addition to the standard deduction. Choose a strategy that results in maximum savings.
Seek advice from tax professionals to ensure you claim all the deductions you qualify for. They will also tell you about any tax credit you are eligible to claim. Remember; Tax deductions lower your taxable income and tax credit lowers your tax liability.
Step 3: Compute & Your Social Security And Medicare Tax
As a general rule, 92.35% of your net income is subject to self-employment tax. Let’s say you earned $40,000 during the tax year after claiming your deduction of $10,000 your net income is 30,000.
The self-employment tax rate which is 15.3% is applied to 92.35% of the net income. So your total social security and medicare tax liability will be $4,155.75 {(30000*92.35%=27705) * 15.3%}
The good news is you can deduct half of the self-employment tax to arrive at your taxable income.
Step 4: Final Tax Liability & Quarterly Estimate
Determine which tax bracket you fall into and apply that rate to your taxable income to figure out your final tax liability. Once you do that estimate your quarterly taxes.
When Are Taxes Due?
Once you know how much you owe to the tax authority you need to pay your taxes before the tax deadlines to avoid any penalties. The quarterly estimated taxes are due on April 15, June 15, September 15, and January 15. Personal tax returns are due on April 15 of each year.
This is a complete guide on how to file taxes as an independent contractor. But you might get stuck while practically implementing it. Don’t worry there are tax professionals who can provide you with accurate figures on what you owe, how much deductions you can claim, etc. So seek help from them and save money on your taxes.