Independent Contractor Taxes California: 2025 Guide

Independent contractor taxes in California require understanding specific tax obligations. As a freelancer, you must file taxes using forms like 1099-NEC for non-employee compensation. Estimated taxes should be paid quarterly to avoid penalties. Set aside funds for Social Security and Medicare taxes, which are approximately 15.3% of your income. California does not have a separate self-employment tax, but you must report all income and deductions on your state tax return. Utilize tax software like Bonsai Tax, QuickBooks, or TurboTax or consult a professional to ensure compliance and maximize deductions. Staying informed about 2024 tax changes and maintaining accurate records will help manage your tax responsibilities effectively.

What is an independent contractor?

An independent contractor is a worker who takes on freelance jobs on a frequent basis. They take on a project, complete it, and then receive payment from their clients through form 1099.

Independent contractors have the freedom to choose the contracts that they want and when they want to work. They collaborate with an employer or a company, but they have no ties with anyone specific.

Rather, they may take jobs from multiple clients - even from companies that are competing with one another. Independent contractors can work in both short-term and long-term projects.

Note: If you need help with recording business receipts for taxes, remembering filing deadlines and estimating your tax liability, try Bonsai Tax. Our app can scan your bank/credit card receipts to discover all the potential write-offs you can claim from your tax bill. The majority of freelancers who use our app save $5,600. Claim your 7-day free trial here.

Independent contractor taxes California: how to classify workers

To classify someone as an independent contractor, California uses something called the "ABC Test." This test is used to determine whether the worker is covered by the Unemployment Insurance Code and the California wage orders or not.

Under this test, the worker may be classified as an independent contractor by the hiring entity's business only as long as they meet all three of the following conditions:

• The worker is free from control and direction in performing their work.
• The work performed is outside the usual course of the hiring entity's business.
• The worker is engaged in an independently established trade, occupation, or business.

A - Works Outside the Control of the Business

An independent contractor will work outside the guidance of a business. In other words, independent contractors decide how they operate, and the hiring company can decide whether they accept their terms or not.

They have their own hours, use their own transportation methods, and no one supervises their job - as long as they finish their tasks when it was decided.

B - Performs Jobs That Aren't Related to Core Business

Independent contractors perform jobs that are normally not related to the core of the business. The work they provide cannot be the same as the work that is done by a regular employee. What they do should be set outside the usual course of the hiring business.

C - Works Independently In the Established Trade

An independent contractor will work separately in their established trade, business, or occupation. The work or business of the independent contractor needs to continue even after the contract with the hiring business is over.

If the worker does not meet all of the "ABC" conditions, then under California's law, they will be classified as an employee. This applies even if the worker can be qualified as an independent contractor under the Affordable Care Act or the federal tax law.

Employee classification tests in California

Understanding the ABC test for independent contractors

The ABC test is the primary method California uses to determine if a worker is an employee or an independent contractor. Under this test, a worker is considered an independent contractor only if the hiring entity proves three conditions: the worker is free from control in performing their work, the work is outside the usual course of the hiring entity's business, and the worker is engaged in an independently established trade or business.

For example, a freelance graphic designer who sets their own hours, works for multiple clients, and runs their own design business typically passes the ABC test. However, a delivery driver working exclusively for one company and following strict schedules likely fails the test and should be classified as an employee.

To comply with California law in 2024, freelancers and small business owners should carefully evaluate these criteria before classifying workers. Using tools like the California Department of Industrial Relations’ online guide can help you apply the ABC test accurately and avoid costly misclassification penalties.

How the Borello test differs and when it applies

The Borello test is an older, multi-factor approach California sometimes uses when the ABC test doesn’t apply. It examines factors like the degree of control over work details, the worker’s opportunity for profit or loss, and the level of skill required. This test is more flexible but also more complex than the ABC test.

For instance, a specialized consultant who works under some supervision but controls their schedule and invests in their own tools might be classified under the Borello test. Courts and agencies weigh each factor, which means classification can be less clear-cut than under the ABC test.

Freelancers and businesses should document work arrangements thoroughly and consider consulting legal experts when the Borello test is relevant. This reduces risks of misclassification and ensures proper tax treatment in 2024 and beyond.

Practical steps to determine worker classification in California

Start by reviewing the ABC test criteria since it applies to most cases in California. Use a checklist to assess control, business relevance, and independent trade status. If the ABC test is inconclusive, evaluate the Borello factors carefully.

Leverage online resources like the California Employment Development Department’s classification tool and consult with tax professionals familiar with California’s 2024 regulations. Maintaining clear contracts that outline the nature of the working relationship also helps clarify classification.

Taking these proactive steps protects your business from penalties and ensures you meet tax obligations correctly. Regularly revisiting classifications as work arrangements evolve is key to staying compliant in California’s changing legal landscape.

What happens if a worker is misclassified?

If an employer misclassifies a worker and labels them as an independent contractor, but handles them like an employee of the business, then the employer may face a lawsuit.

A worker who was misclassified is fully entitled to file a wage per hour lawsuit. This way, they will be able to receive worker's compensation for the benefits they should have received.

These benefits may include:

• Unpaid wages
• Overtime pay
• Health insurance benefits
• Retirement contributions
• Paid leave such as vacation or sick days

• The unpaid wage for meal breaks or rest
• Unpaid overtime
• Interest on unpaid wages
• Attorney fees
• Penalties

If the wrongful classification was done on purpose, then this violation of the law may come with a variety of consequences. Not only would the business have to pay workers' compensation, but the civil penalty may be between $5,000 and $15,000 for every violation.

Things can become even more expensive for the employer if there was a pattern in these miscalculations. If they willfully misclassified workers time and time again, then the penalty may go around $10,000-$25,000 for each benefit violation, along with workers' compensation.

That being said, if the misclassification was not a result of the employer's willfulness, the employer also has the right to sue. This is common in cases where the employee received financial damage because of the misclassification. A lawsuit may be filed against the party who was responsible for the misclassification.

Who does California consider self-employed?

The State of California and the IRS have similar ideas when it comes to classifying someone as a self-employed individual. For instance, a business that is run by a sole proprietor is one clear-cut example of self-employment.

That being said, looking at the tax law, there may be some slight differences. Anyone who lives in California and runs a business, without being an employee or a specific company, may be considered a self-employed individual.

These examples may include:

• Freelancers providing consulting services
• Independent contractors in trades like plumbing or electrical work
• Self-employed graphic designers or web developers
• Direct sellers or multi-level marketing participants

• Sole proprietors
• Members within a partnership
• Part-time business owners
• Members of LLC companies

Usually, these types of businesses work in an outsourcing style, with independent contracts with other companies. The California tax law requires that these individuals pay their taxes by themselves, as they do not work for anyone else.

How are independent contractors different from employees?

In order to understand the differences between an employee or an independent contractor, you first need to understand what an employee is. A worker is an employee when they have signed an employment contract with the company or employee that they decided to work with.

They receive their payment through Form W-2 and they have clear restrictions on what they can or can't do. An employer may dictate several aspects of their jobs, such as how they work or when they work. Employees will typically work full-time for that position.

On the other hand, a worker is an independent contractor when they have the benefit of being free and are not bound by the rules of a certain employer. They are free from the control of an employee, and may also work outside the usual course.

There are federal tax payments for an employee or an independent contractor alike. However, employees pay their employment taxes through income tax withholding, whereas independent contractors have to pay these taxes themselves.

How much social security and Medicare tax do independent contractors pay in California?

The self-employment tax (also referred to as the Social Security and Medicare tax) often varies from year to year. In 2024, the self-employment income tax rate is 15.3%.

From that amount of tax, 12.4% goes to Social Security. It applies to net earnings up to $160,200 in 2024. The last 2.9% goes to Medicare, which has no earnings limit for collection.

Independent contractors pay Social Security and Medicare taxes for both the employer and the employee portions. In other words, they pay their own taxes plus the portion their clients would pay. Regular employees pay 7.65%, but for independent contractors, that amount doubles to 15.3%.

Try our California 1099 tax calculator to quickly see how much you'll owe at the end of the year.

In order to reduce the total liability, you'll want to take advantage of tax deductions by itemizing your expenses at the end of the year.

How much money should independent contractors set aside for income tax in California?

While independent contractors have a Social Security and Medicare Tax they have to deal with, this is not always all they have to pay. In addition to that, there may be other income tax payments or federal income taxes that they will have to pay.

Save around 25% to 30% of your earnings to cover your tax liability as an independent contractor. The exact amount depends on how much you earn.

Higher earnings result in higher tax payments. Monitor your income and stay updated on tax law changes. The IRS offers tax calculators to help you estimate your tax filing amount. Read our guide on how to pay less taxes in California to discover more money-saving strategies.

How to calculate self-employed taxes in California

Calculate your federal self-employment tax

Federal self-employment tax covers Social Security and Medicare contributions for independent contractors. In 2024, the tax rate is 15.3% on your net earnings up to $160,200, which includes 12.4% for Social Security and 2.9% for Medicare. Earnings above this threshold are subject only to the 2.9% Medicare tax, with an additional 0.9% Medicare surtax applying to income over $200,000 for single filers.

To calculate your self-employment tax, first subtract business expenses from your gross income to determine net earnings. Then multiply your net earnings by 92.35% to get the amount subject to self-employment tax. For example, if your net earnings are $50,000, multiply $50,000 by 0.9235 to get $46,175. Then multiply that by 15.3% to find your tax owed, which would be approximately $7,065.

Use IRS Schedule SE (Form 1040) to report and calculate this tax. Remember, you can deduct half of your self-employment tax from your taxable income on your federal return, which reduces your overall tax burden. Keeping detailed records of income and expenses throughout the year simplifies this process.

Understand California state income tax for freelancers

California taxes independent contractors on their net income at progressive rates ranging from 1% to 12.3% in 2024. Unlike federal self-employment tax, California does not have a separate self-employment tax but requires you to pay state income tax on your earnings. Additionally, high earners may face a 1% Mental Health Services Tax on income exceeding $1 million.

To calculate your California state income tax, start with your federal adjusted gross income and make state-specific adjustments, such as deductions and credits. For example, if your net income is $70,000, your tax rate might fall around 8%, resulting in approximately $5,600 owed to the state. Use California Form 540 to file your state taxes and consider estimated quarterly payments to avoid penalties.

Freelancers should track all business-related expenses and keep receipts to maximize deductions like home office, mileage, and supplies. Using tax software like TurboTax or TaxAct can help you navigate California’s tax brackets and credits accurately, ensuring you don’t overpay or miss out on savings.

Plan for quarterly estimated tax payments

Independent contractors in California must pay both federal and state taxes through quarterly estimated payments to avoid penalties and interest. The IRS and California Franchise Tax Board expect payments in April, June, September, and January based on your expected income.

Calculate your estimated taxes by combining your expected federal self-employment tax and state income tax liabilities. For example, if you anticipate owing $12,000 total for the year, divide this into four payments of $3,000 each. Use IRS Form 1040-ES and California Form 540-ES to submit these payments online or by mail.

Regularly updating your income estimates and adjusting payments can prevent surprises during tax season. Tools like QuickBooks Self-Employed or Everlance can track your income and expenses in real time, helping you stay on top of your tax obligations throughout the year.

How to pay taxes as an independent contractor in California

If you are an independent contractor, you are responsible for paying your taxes on their due date. Depending on your income, you may need to pay annual returns and file California quarterly taxes.

You are also responsible for paying state and federal income tax where applicable. More deductions reduce your tax bill. Read more about hacks to lower your taxes.

How to file the annual return

If you owe less than $1,000, you only need to file an annual return after paying your yearly taxes. Use Schedule C to file your income and expenses (instructions here).

Use income calculated on Schedule C to determine your Social Security and Medicare taxes. Independent contractors should use Form 1040 or Form 1040-ES to report these taxes.

How to file quarterly taxes

If you owe more than $1,000, you must file taxes quarterly instead of yearly. First, determine your adjusted gross income from self-employment during the tax year.

Finding more tax-deductible expenses reduces your tax payments. Form 1040 can help you calculate your estimated taxes.

How to file and pay taxes as an independent contractor in California

Understand your tax obligations as an independent contractor

Independent contractors in California must manage both federal and state taxes, including income tax and self-employment tax. Unlike employees, contractors do not have taxes withheld from their paychecks, so you are responsible for calculating and paying these taxes yourself. This includes Social Security and Medicare taxes, which total 15.3% on net earnings.

California also requires contractors to pay state income tax, which ranges from 1% to 13.3% depending on your income level. Additionally, if your net earnings exceed $400 in a year, you must file a Schedule SE with your federal return to report self-employment tax. Understanding these obligations early helps avoid penalties and surprises during tax season.

Keep detailed records of all income and expenses related to your contracting work. Use accounting software like QuickBooks Self-Employed, FreshBooks, or Bonsai Tax to track earnings and deductible expenses. This can reduce your taxable income. Staying organized throughout the year makes filing easier and ensures you pay the correct amount.

How to calculate and pay quarterly estimated taxes in California

Independent contractors must pay estimated taxes quarterly to avoid underpayment penalties. These payments cover federal and California state income taxes, as well as self-employment tax. The IRS and California Franchise Tax Board (FTB) expect payments in April, June, September, and January 2025.

To calculate your estimated taxes, start by estimating your expected annual income and subtracting business expenses. Use IRS Form 1040-ES and California Form 540-ES to determine your quarterly payment amounts. For example, if you expect to earn $60,000 and owe $12,000 in combined taxes, your quarterly payments should be about $3,000 each.

Pay your estimated taxes online through the IRS Direct Pay system and the California FTB's Web Pay portal. Setting calendar reminders for due dates helps you avoid late payments. If your income fluctuates, adjust your estimates each quarter to prevent overpaying or underpaying taxes.

Filing your annual tax return as a California independent contractor

When tax season arrives, you must file your federal and state tax returns reporting your contracting income and expenses. Use IRS Form 1040 with Schedule C to report your business income and deductible expenses, and Schedule SE to calculate self-employment tax. For California, file Form 540 or Form 540 2EZ depending on your situation.

Make sure to include all 1099-NEC forms you received from clients, but also report any income not documented by these forms. Deductible expenses like home office costs, mileage, and supplies can lower your taxable income. Using tax software such as TurboTax Self-Employed or consulting a CPA familiar with California tax laws can simplify this process.

After filing, keep copies of your returns and supporting documents for at least three years. This record-keeping is essential in case of audits or amendments. Filing accurately and on time helps you avoid penalties and ensures you meet all California tax requirements as an independent contractor.

Additional tax considerations for California independent contractors

California independent contractors should also consider the state's minimum franchise tax if operating through an LLC or corporation. For 2024, LLCs must pay an $800 minimum annual tax plus a fee based on income over $250,000. Sole proprietors generally do not pay this fee, but it’s important to verify your business structure.

Another key consideration is the California Compensating Use Tax if you purchase equipment or supplies out of state without paying sales tax. You may owe this tax when bringing items into California for business use. Tracking these purchases and reporting them accurately avoids unexpected tax bills.

Finally, consider contributing to a SEP IRA or Solo 401(k) to reduce taxable income while saving for retirement. These retirement plans offer tax advantages specifically designed for self-employed individuals. Consulting with a tax professional can help you identify all deductions and credits available in California.

What taxes do independent contractors pay in California?

Independent contractors may have a variety of taxes to pay, mostly depending on the state that they are in and the law that governs throughout that tax year. A self-employed person in California will have to pay the following employment taxes:

• Social Security and Medicare Taxes (i.e., self-employment tax)
• Federal Income tax
• Annual LLC fees

California may also impose its own tax, provided you have a business or an LLC.

Common deductions for independent contractors in California

Understanding deductible business expenses

Independent contractors in California can reduce their taxable income by deducting ordinary and necessary business expenses. These deductions directly lower the amount of income subject to state and federal taxes, making them essential for maximizing tax savings in 2024. Typical deductible expenses include:

• Supplies
• Software subscriptions
• Professional services that support your work

For example, if you are a freelance graphic designer, costs for Adobe Creative Cloud subscriptions or purchasing a new laptop used primarily for your business qualify as deductions. Keep detailed records and receipts of all expenses to substantiate your claims during tax filing. Using tools like QuickBooks Self-Employed or the IRS Schedule C form can help track and report these deductions accurately.

To take full advantage, categorize your expenses throughout the year and separate personal from business costs. This approach simplifies tax preparation and ensures you don’t miss eligible deductions, ultimately lowering your California state income tax and self-employment tax obligations.

Home office deduction for California contractors

The home office deduction is a valuable tax break for independent contractors who use part of their home exclusively for business. In 2024, California follows federal guidelines, allowing you to deduct a portion of your rent or mortgage interest, utilities, and home maintenance costs proportional to your dedicated workspace.

To qualify, the space must be used regularly and exclusively for your contracting work. For instance, if you use a 200-square-foot room in a 1,000-square-foot home solely as an office, you can deduct 20% of your eligible home expenses. You can choose between the simplified method, which allows $5 per square foot up to 300 square feet, or the actual expense method, which requires detailed calculations but may yield higher deductions.

Using IRS Form 8829 alongside your Schedule C will help you claim this deduction correctly. Maintaining clear documentation and measurements of your home office space is critical to avoid issues during audits and maximize your tax savings.

Vehicle expenses and mileage tracking

Independent contractors in California who use their vehicle for business purposes can deduct related expenses, either by tracking actual costs or using the standard mileage rate. For 2024, the IRS standard mileage rate is 65.5 cents per mile, reflecting increased fuel and maintenance costs.

To claim this deduction, keep a detailed log of your business miles driven, including dates, destinations, and purposes. Apps like MileIQ and Everlance automate mileage tracking and generate IRS-compliant reports, making it easier to maximize deductions. Alternatively, you can deduct actual expenses such as:

• Gas
• Repairs
• Insurance
• Depreciation

However, this requires more record-keeping.

Be sure to separate personal and business use carefully, as only the business portion qualifies. Accurate mileage tracking can save hundreds or even thousands of dollars on your tax bill, especially if you travel frequently for client meetings or deliveries within California.

Health insurance and retirement contributions

Independent contractors in California can deduct health insurance premiums paid for themselves, their spouse, and dependents, reducing taxable income. This deduction applies if you are not eligible for employer-sponsored health plans and is reported on your federal return, which California generally conforms to for state taxes.

Additionally, contributing to retirement accounts such as a SEP IRA or Solo 401(k) offers tax advantages. For 2024, contractors can contribute up to 25% of their net earnings from self-employment, with a maximum of $66,000 to a SEP IRA. These contributions reduce taxable income and help build long-term savings.

Utilizing these deductions requires careful record-keeping and timely contributions. Consider consulting tax software like TurboTax Self-Employed or a tax professional to optimize your health and retirement deductions, ensuring compliance with California’s tax rules and maximizing your overall tax savings.

Does California have a separate self-employment tax?

Social Security and Medicare taxes in California are the same as in other states. However, California has some of the nation's highest state tax rates.

California also imposes income tax on S corporations, being one of the very few states that does this. If the LLC has to pay taxes like an S Corp, then the income goes through and is taxed based on your individual tax return.

As a result of this, aside from your individual state and federal taxes on your LLC income, you will also have to pay an extra 1.5% dealt by the state of California. In most cases, it will depend on the status of your business.

Tax forms for independent contractors in California

If a worker is classified as an independent contractor, the hiring party should provide the worker with certain tax forms:

Form 1099-NEC For Non-employee Compensation

Most freelancers file a 1099-NEC. It is the most common IRS tax form sent to contractors. The reason why is because the requirement to receive this information return is really easy to meet. If you are paid at least $600 by a business who is not your employer, you will receive a 1099-NEC from them.

Form 1099-K for Payment Card and Third-Party Network Transactions

Form 1099-K reports gross income received from third-party transactions, including gig economy payments.

Similarly, form 1099-K will contain the number of payments that were received, along with any potential state or federal income tax withholding.

Form 1099-MISC for Miscellaneous Income

Form 1099-MISC is used for types of income such as royalties, rents, and workers' compensation. Independent contractors do not have Social Security and Medicare taxes withheld, so they must pay these taxes themselves when filing federal tax returns.

Independent contractors are not required to pay unemployment insurance tax. However, they may choose to pay it voluntarily if they want coverage.

The bottom line on independent contractor taxes in California

Independent contractors in California differ from regular employees because they control how they conduct their business. They must set aside money for taxes to avoid IRS penalties. Calculate your estimated tax payments annually. Also, ensure you are correctly classified to avoid paying additional taxes.