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Paying Income Tax as an Independent Contractor: Filing & Payment

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Updated on:
December 18, 2023
December 18, 2023
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As an independent contractor, you have the freedom to work on your own schedule and set your own prices for the services you offer. However, paying income tax is different for independent contractors compared to employees who receive W-2 forms from their employers.

Even though you can earn money based on your own rates, you are still required to declare the amount you earn on a deadline, whether paid quarterly or annually. You must file your taxes and ensure that you declare what you earn within that period on the due date.

This guide will help you understand how to pay taxes and report your income as an independent contractor. We will discuss the tax forms you need to use to ensure that you can complete the process without any issues.

Whether you’re using an accounting software or a professional, it’s important that you learn how to navigate the potential pitfalls that come with paying taxes as an independent contractor. Be sure to pay careful attention throughout the guide.

What Income Taxes do Independent Contractors Pay?

Independent contractors are subject to different types of income taxes. They include but are not limited to the following:

  • Income tax: An independent contractor pays income tax depending on their earnings. To get a good idea of how much you might be paying, this self-employment tax calculator can be very useful. You will pay your taxes quarterly or at the end of the year, since it won’t be automatically taken out of your pay. This puts all the tax management responsibility on the contractor.
  • Self-employment tax: This tax will cover your contributions to Social Security and Medicare. Like income tax, independent contractors will be responsible for the full amount - both the employer and employee portions. These are split in a traditional employer/employee structure with each respective party paying their own portion and getting a tax refund after filing.
  • Quarterly estimated taxes: Because there is no withholding as you would normally see on your paychecks, independent contractors must make quarterly estimated payments. This will be done to cover both their income and self-employment tax liabilities. It’s recommended to set money aside every quarter for tax payments so you can easily take care of them when they are due.

Who Qualifies as an Independent Contractor?

Freelancer preparing her taxes (Source: Pexels)

Before moving forward, it’s important we address the issue of who can qualify as an independent contractor. When it comes to filing and paying, income tax for independent contractors is entirely different from employees.

Employees and independent contractors differ when it comes to not just paying taxes, but also their status with the company. Unlike employees, independent contractors are not under the authority of the company they work with (i.e. - their client).

Independent contractors will have these attributes:

  • Autonomy over their work: This is one of the biggest perks of an independent contractor. They can determine how, when, and where they can get the job done. You control your schedule, where to get it done, and not have to worry about reporting to a boss.
  • They have their own tools and equipment: Independent contractors will often have their own tools and equipment in order to properly perform their duties. What makes it even better is that the expenses you pay for tools and equipment can be used as a tax deductible (assuming the purchase is for work, not personal use).
  • Independent operation: As you may already notice, independent contractors are not tied to an employer. Therefore, they are able to operate as a separate entity while maintaining multiple clients at a time.
  • Their own pay rates: An independent contractor will be able to work based on the fees they set. They are not paid a salary by an employer. An independent contractor can charge a retainer fee should a client decide to stick with one that offers a recurring service. Employees are paid hourly wages. The total amount of pay plus the tax withholdings will be documented on a stub of their paychecks

How is Independent Contractor Income Tax Paid?

1040 Documents (Source: Pexels)

How is Independent Contractor Income Reported?

Because independent contractors follow a reporting method their income and fulfilling their tax obligations, it is important that they should consider the following actions:

1. Recordkeeping and documentation

When paying income tax for independent contractors, it is highly recommended that you maintain records of income and expenses that are related to their work. This includes keeping invoices for services that are clear and accurate. Invoices must include a date, the services performed, and the terms of payment.

Also, receipts should be kept for all business-related expenses. These can be deducted from taxable income. It will make it easier for you to manage these expenses not just for tax purposes, but also when you want to record them for your overall financial figures.

Numbers change over time depending on how much you earn. The amount you receive one year annually will differ the next. Thus, it is important to make sure you document everything regarding your self-employment income.

Because you may owe less taxes the next year or more. Again, it depends on how much you earn - quarterly or annually. When it comes time to declare how much you’ve earned - you need to look through your records (whether you entered them digitally or physically).

Remember, the amount you earn may determine which of the tax brackets you might be in. So pay attention to how much you earn each quarter or year. A specific amount may make a difference between which bracket you end up in.

As such, each tax liability will differ from independent contractors that earn less or more than others. Regardless, make sure you create record-keeping requirements to ensure your reports are as accurate as possible and to prevent errors.

2. Form 1099-NEC

A client that pays an independent contractor $600 or more for services throughout a tax year must issue a Form 1099-NEC. The NEC stands for (Non-Employee Compensation).

This form will outline the amount of total compensation that is paid to independent contractors. It will be used to report the income on their tax returns. Like employers that need to send out W2’s by the deadline (January 31), clients must send out Form 1099-NECs to any independent contractors by the same deadline.

Make sure you have this when you prepare to submit your tax forms. What you earn from each client is documented in these forms so make sure you look over each part of them.

3. Schedule C

This form will be used to report any income and deductible business expenses when filing their annual tax return on the regular Form 1040. You can calculate your net profit or loss from the activities of your business.

You can use the exact total or estimate how much you have earned or spent. This will be useful for freelancers and independent contractors every year.

Navigating Income Tax Forms and Documentation

Since independent contractors deal with different forms compared to employees, let’s help you get to know what they are and what their purposes are. While we’ve already explained Schedule C forms, we’re going to dig a little deeper discussing Form 1099-NEC and related forms that may go along with it.

Essential Tax Forms for Independent Contractors

Let’s take a look at the following tax forms that you will need as an independent contractor:

  • Form W-9: When starting out as an independent contractor, this form will be filled out for clients. A W-9 will contain information including your taxpayer identification number or TIN. This will certify your tax status as an independent contractor. An EIN does not apply here since it is related to employer/employee tax structures.
  • Form 1099-MISC and 1099-NEC: These will be used to report your income. The 1099-MISC was used as the traditional form until the IRS introduced the 1099-NEC in 2020. Regardless, either form that is issued is applicable to independent contractors.
  • Schedule C: As explained earlier, this will be used for reporting business income and business expenses. It will also be useful in calculating any net profit or losses you have for tax filing purposes. If you have any questions on what qualifies for eligible expenses or anything related to Schedule C, a tax professional will be able to help.

Filing 1099-NEC and Other Relevant Forms

1. Filing Form 1099-NEC

As mentioned earlier, clients of independent contractors will need to issue Form 1099-NEC by January 31st. This will ensure that they receive this to verify the accuracy of the information provided before they move forward with filing their taxes.

2. Form 8829: Expenses for Business Use of Your Home (if applicable)

Another form that you’ll want to pay attention to is Form 8829. Your tax bill can be offset by expenses that you can account for in terms of business use for your home. For example, let’s take a look at your home office.

Did you know that the square footage of your home office can play a role in lessening your tax bill? You can also cite utility costs and home repairs as tax deductions as well. Finding out if you qualify for such deductions will require you to assess what you have spent and used for tools and equipment.

For a complete list of expenses that you can include in your Form 8829 (or if you’re stuck on what should be included), refer to the instructions provided by the IRS.

3. Form 4562: Depreciation and Amortization

This forum will be applicable to independent contractors if you have an asset that is depreciable and can be deducted on your tax return. These assets are known as tangible assets.

Depreciation is defined as writing off such assets over multiple tax years. To define a tangible asset, it’s something that you can touch or use to your advantage. For independent contractors, this can include furniture that you use for your home office.

Keep in mind that some intangible properties like computer software that you use for business purposes can also depreciate. Which means it can qualify under this form. Be sure to do an assessment of any assets - tangible or intangible - to see if they are a fit for Form 4562.

If you are unsure, you can always seek help from a tax professional. They can provide you with an idea of what to include as assets when it comes time to file taxes for the previous year.

Navigating Income Tax Deadlines and Witholdings

Deadlines and reporting the withholding amount can be a challenge to navigate without the vital information you need to know about. There are two deadlines that you can take advantage of as an independent contractor - regarding both your annual return and your quarterly:

  • Quarterly estimated tax payments: An independent contractor is subject to make quarterly estimated tax payments to the IRS - which covers both your income and self-employment taxes. The payment schedule will typically be in April, June, September, and January. Any independent contractor is subject to penalties if not paid. If you have any questions about making quarterly payments, a tax pro will be able to help.
  • Annual tax filing deadline: Income tax is reported annually on April 15. You can file an extension if you need more time. However, the deadline for that extension will typically fall in October of the same year. Either way, filing can help avoid a penalty while following tax regulations.

Tax Preparation and Compliance Requirements for Independent Contractors

There are two major options when paying income tax for independent contractors. They include using tax preparation software or getting help from a tax professional. Before choosing which route to take, it is important to take a few things into consideration.

First, consider what will be the best option for your budget. Tax services - whether by software or a professional - don’t come cheap. Especially if you are filing as an independent contractor.

That’s why it is important to determine which route to take based on the amount you’re willing to spend on such services. But the amount you spend should not just be the only reason. If you’re someone who isn’t computer-savvy, then it’s clear that the tax professional option is your best choice.

If you are willing to get the job done on a computer, then you can choose the software option. You want to find one that is user-friendly and provide you with information that pertains to your state in terms of taxes. You will need to choose tax software that is specialized for self-employed individuals.

Utilizing Tax Preparation Software

1. Benefits of Tax Software

Independent contractors can rely on tax software to streamline the preparation process. Users can experience such benefits including the following:

  • Automation: This includes automations to calculate the numbers to ensure that you make less errors on your tax returns.
  • Guidance: One of the best features of tax software is that it can provide you with step-by-step guidance so you can enter the correct information on the necessary forms. They will also remind you of any pieces of information that may need to be filled out. Before you finish one section, they’ll remind you if you have everything done.
  • Deduction: Getting the best out of your tax return with deductions is possible. The tax software you choose will help you identify what you may be eligible for deductions. Who says saving on your tax bill is impossible?

2. Popular Tax Software Options

Among the variety of tax software options on the market, TurboTax is among the most popular. You can also consider other options including H&R Block, Tax Slayer, and TaxAct among others. Check out which of the best options on the market will fit you best based on your needs, preferences, and budget.

Seeking Assistance from Tax Professionals

1. When to Consider Professional Help

Tax software can be valuable most of the time. However, there can be situations where seeking tax advice from a professional is the best option. Let’s take a look at the following common examples:

  • Complex situations: These can include situations such as multiple streams of income or something you don’t think can be solved on your own, that’s where a tax professional can take a look at the decision and advise you on what you need to do in order to comply with tax regulations. You could qualify for significant deductions just from professional advice - something a software might not be able to clue you in on.
  • Tax planning: Minimizing liabilities while maximizing savings can be the best course of action. Whether it’s to deduct an expense or something else - no one can help you plan strategically quite like a tax pro. The sooner you put something together for the upcoming tax season, the better. This will make it easier to adjust to any changes that may be coming up when it comes time to report and file.

2. Choosing a Tax Professional

When it comes to choosing a tax professional, it may be a good idea to choose someone who is local. This way, you’ll be able to meet someone face-to-face and can be able to walk you through an issue step by step.

This can be someone who is employed under firms such as H&R Block, Jackson Hewitt, or under their own name. It’s important to consider a tax professional that is experienced, fits your budget for consultation fees, and whether or not they are well versed in all things related to tax situations for independent contractors or self-employed individuals.

Alternatively, you may seek the help of tax professionals online. You may be able to consult with them via video call or Zoom. They may also be available to review your tax situation by way of email or live chat.

This option will be your best one if you don’t have a local tax expert in your area (and they happen to be a long drive away). Otherwise, you may want to consider visiting your local tax professional or possibly a Certified Public Accountant (CPA) who is well-versed in taxes for independent contractors.

Key Takeaways

As an independent contractor, you have a different tax status compared to regular employees. You do not have to withhold your taxes each time you get paid. On top of that, you deal with different tax forms such as the Schedule C, 1099-NEC, and others. So please make sure you find the appropriate tax forms whenever you’re filing taxes.

The good news is that you can find the forms online. Likewise, the forms are available on your favorite tax software. Please note that each form has its intent and purpose when you are filing taxes.

Independent contractors will need to pay quarterly estimated payments by the respective deadlines. It is also important that they keep track of any expenses that pertain to their independent contractor business. Keep any documentation and use them when it comes time to file.

You’ll never know what deductions you’ll qualify for. As always, if you have any questions or concerns, a tax professional can address them accordingly. For additional information, we encourage you to check out the frequently asked questions section down below so you are better informed about paying income tax for independent contractors.

Frequently Asked Questions

What Percent Do Independent Contractors Pay in Taxes?

Independent contractors are subject to paying the self-employment tax, which is currently at a rate of 15.3 percent. The rate is calculated based on the following: 12.4 percent of this tax will go to Social Security while the remaining 2.9 percent will go towards Medicare. Compare it to employees where each tax is withheld from their gross pay.

Can an Independent Contractor be Paid a Salary?

No. An independent contractor cannot be paid a salary. A salary is paid to workers who are considered employees. An independent contractor's pay is determined by the rates they charge for services. An independent contractor's rate varies according to the type of services they may provide for their clients. Yes, independent contractors can be paid on retainer by the client, mostly on a monthly basis or an agreed timeframe.

How are Taxes Calculated for Independent Contractors?

Your taxes will be calculated by income that is recorded on 1099 forms. These can include such versions such as the 1099-NEC, 1099-MISC, and 1099-K. Keep in mind that the income will be subject to the 15.3 percent self-employment tax rate.

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