As an independent contractor, though there might seemingly be no obvious differences between your relationship with your employer/client, in the eyes of the Department of Labor and IRS, there is!
As an employee, your colleague’s relationship with the employer is subject to a set of employment laws and regulations that might not be applicable to you. That fact impacts how you, as an independent contractor, file your taxes. And if you owe back taxes, the IRS has specific guidelines for filing self-employed past due tax returns.
As an independent contractor, your client will ask you to fill out Form W-9 and they will report any payments made to you during a year, of $600 or more, to the IRS on Form 1099-MISC. You will receive a copy of the form by January 31st of the following year.
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Overview: Independent Contractor Taxes
If you are an independent contractor, then by definition you are “self-employed”. Being self-employed means your tax payment obligations are different than if you were an employee.
Key differences between how an employee files their tax returns and pays taxes, and how you, as an independent contractor, need to file and pay your taxes, include:
- How your tax is determined: Employees pay taxes on their gross wages while the self-employed pay taxes on net self-employed income (income minus qualifying business expenses).
- Reporting: Employers are responsible for reporting employee earnings to the IRS, and receive a copy of Form W-2 from their employers. As a contractor, you will receive a copy of Form 1099-MISC from your client.
- What you pay: Employers deduct a percentage of employee paychecks as federal withholding taxes and pay that to the IRS. Because, typically, no one withholds those taxes from payments made to independent contractors, they (independent contractors) must pay a Self-employment (SE) tax on that income. This is in addition to income tax, which an employee must also pay.
Employers deduct Social Security (12.4%) and Medicare (2.9%) payments, based on actual wages/salaries paid, match those deductions and then pay them to the IRS. As a self-employed contractor, your SE tax will include both your contribution plus the matching amounts and will be based on your estimated income.
- When you pay: Employees pay withholding taxes every pay period. As a self-employed contractor, you may need to file estimated taxes quarterly. You will need to use those estimates to calculate and pay not only income tax but also your SE tax.
You can learn a lot more about paying self-employed taxes, including Social Security and Medicare tax here.
How to File Independent Contractor Taxes
As an independent contractor, you will receive a Form 1099-MISC from each client that pays you $600 or more during a year. If you received less than that amount from any client, you won’t receive a copy of a 1099-MISC, but you still need to include those payments on your tax returns.
You can file your annual tax return using Form 1040 Schedule C or, if you have expenses under $5,001, Schedule C-EZ. Use the income or loss calculated on these forms to determine how much SE tax you should pay.
You can either use a Short or Long form of Schedule SE. Use the flowchart above to determine which format applies to your situation. You list your income and subtract any deductions/expenses to get your net income. Use that amount, reported on Line 12 of your Form 1040, to calculate your tax owed.
If you owe back taxes, the IRS offers options to pay in full, as well as options if you can’t pay in full at this time, including ways in which you can pay by installment (Payment Plan). Consult the publication on the IRS’s Collection process to ensure you choose the option that’s right for you.
Here’s what you need to do in order to file independent contractor taxes:
Step 1: Gather Relevant Forms
It is important to organize yourself before you file. First, gather all relevant information required for filing.
This information may be available on several forms including:
- Form-W-9: Your clients and customers will typically request that you send them a Form-W-9. This form contains information such as your Tax Identification Number (TIN) and details of any withholding tax deduction exemptions you may be claiming
- Form 1099-MISC: Your clients/customers will use data from Form W-9, as well as information about payments made to you during the year to produce Form 1099-MISC. Both the IRS and you will receive copies of the form
- Form 1040: You will use Form 1040 to file your annual income tax return. If you have more complex filing requirements, you may also need to file additional Schedules (1 to 6) along with your Form 1040. Other schedules may also be applicable if you run a business (Schedule C) or run a farm (Schedule F)
- Schedule SE: You will also need copies of your Schedule SE that you used when paying your SE tax
It may be a good idea to also have your expense receipts and copies of your company financial accounts handy in preparation for filing.
Step 2: Understand Your Independent Contractor Deductions and Credits
As an independent contractor, you can use certain deductions and credits that can help reduce your net income, thereby reducing the amount of tax you pay.
The most frequently used deductions include:
- Car and mileage: when you use your personal vehicle for business purposes
- Home office expense: where you use part of your home to conduct most of your business
- Business supplies
- Health insurance premiums: where other health insurance plans (e.g. those of your spouse/partner) don’t cover such payments
- Cellphone charges for business use
- Continuing professional/business education
- Business travel
- Professional membership dues and subscription fees
Some of these deductions may not apply to you. Additionally, you may be able to claim or write-off other expenses against business income. Consult the latest IRS guidelines on applicable deductions before filing.
Step 3: Decide How You’ll File
You have several options for filing taxes:
- You can use Free File, which is free, to file your federal individual tax returns
- You may be entitled to file for free through the Volunteer Income Tax Assistance (VITA) program
- You could use an accountant or a qualified tax-preparation specialist to prepare and file your returns
- You could reach out to an IRS approved Modernized eFile (MeF) provider
- You can print out all the forms and use the paper-and-pen approach to complete and file your returns
Check the IRS website for each of these options before you decide which one is best for you. For instance, Free File is only available for filers with an income of $66,000 or below, while VITA is only available to persons with disabilities or those who make $55,000 or less.
If you are computer-savvy and able to navigate your way through online tools, and your business structure isn’t overly complex, then e-filing or using tax software for self-employed might be a good choice. If, however, you have complex filing requirements, then it might be worthwhile using a professional tax service to help you with your filing.
Here are some additional tips from the IRS to help you choose a tax return preparer.
Step 4: Make Payments or Receive Refund
As a self-employed taxpayer, you must file an annual tax return and make quarterly estimated tax payments. Paying your taxes online is the best way to ensure you receive your refund quickly. You can use:
- The Electronic Federal Tax Payment System (EFTPS) to pay your federal taxes online. The system also allows you to pay by phone using a voice response system
- E-File and authorize the IRS to withdraw funds electronically from your financial institution
- Direct Pay to make a payment through your bank account or mobile device for free
- Same-day wire payment
- A mobile device to pay using your debit/credit card (transaction fees may apply)
- Form 1040-V (Payment Voucher) to mail a check or money order made out to the U.S. Treasury
- The IRS2Go app to make your payment securely
- Cash to pay at IRS-approved partners participating in the PayNearMe program
When and how you receive your refund typically depends on how you file. You can check the status of your refund within 24-hours of e-filing, or 4-weeks after you mailed in your return. You can also download the IRS2Go app to check your refund status using your mobile device.
Instruct the IRS to Direct Deposit your refund into up to three accounts of your choice. Typically, you should see the money in your account within 21-days of e-filing. If you mailed your returns it could take over 6-weeks for you to receive your refund.
Before checking your refund status, make sure you have your Social Security number or Individual TIN handy, you are aware of your filing status and know the exact amount of refund you are expecting.
Step 5: Set up Quarterly Tax Payments
If you are a self-employed independent contractor then you need to estimate your tax liability for income tax, alternative minimum tax and for Social Security and Medicare taxes. Use the Estimated tax computations worksheet to figure out (estimate) your annual earnings, and then spread those earnings over four quarters to estimate and pay taxes owed.
The IRS has specific deadlines for making quarterly payments. Typically, these dates are April 15th, June 15th, September 15th and January 15th (of the following year). You must pay online, or through other means (including cash), by the due dates specified to avoid IRS penalties.
The advantage of paying taxes every quarter is that you spread the amount equally throughout the year, which makes payments more manageable. You’ll avoid a massive tax bill all at once at the end of the year. Additionally, quarterly payments make tax estimation more accurate. If you over/underestimated your tax payments in one quarter, you can re-configure your payments over the next quarter/s to adjust for prior over/underpayments.
Refer to the IRS publication Form 1040-ES guidelines to figure out how to calculate your estimated tax. If you are self-employed, you can use this IRS resource to learn how to prepare an accurate tax return.
In order to ensure you are paying the right self-employment taxes as an independent contractor, it is important to understand whether you are indeed a contractor in the eyes of the IRS/Department of Labor. if you feel you are wrongly classified as an independent contractor, you can use Form SS-8 to request the IRS look into the matter and determine your tax-payer status as either an employee or self-employed individual.
Finally, a savvy taxpayer is always a well-informed taxpayer. The government confers certain rights on all taxpayers, including independent contractors and the self-employed. Before filing, make sure you read and understand your taxpayer bill of rights.