Every self-employed person must be aware of the independent contractor taxes California that they have to pay. A person who is more or less their own employer will have to learn how to pay their own taxes and how much they should save with estimated tax in mind. This article will bring you the information you need about these self-employment taxes that you must pay.
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.
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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 he or she meets the conditions below:
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.
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.
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.
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:
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.
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, but aren't limited to:
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.
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.
The self-employment tax (also referred to as the Social Security and Medicare tax) often varies from year to year. The current self-employment income tax is 15.3%.
From that amount of tax, 12.4% of it will go to Social Security. It will also be collectible of a maximum of $118,500 for the net earnings. The last 2.9% will go to Medicare, having no limit to collectible earnings.
Independent contractors have to pay Social Security and Medicare for both the employer and the employee. In other words, they will pay their own taxes, along with the portion for their clients. As a regular worker, they'd only pay 7.65% - but as a regular worker, that amount doubles.
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.
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.
As a result, it is recommended that as an independent contractor, you should save somewhere around 25%-30% of your earnings to pay your taxes. Obviously, the amount of income tax money can depend on exactly how much you earn.
The more you earn, the more tax money you will have to pay. This is why you might want to keep an eye on your earnings, as well as any changes in the tax law. In many cases, the Internal Revenue Service (IRS) will offer you a tax calculator so that you will know exactly how much you should file. Read our guide on how to pay less taxes in California to discover more ways to save money on your taxes.
If you are an independent contractor, then you are the one responsible for paying your taxes on their due date. With that in mind, depending on your income, you may need to pay both annual returns and file California quarterly taxes.
You are also responsible for paying your state and federal income tax, where it is applicable. Bear in mind that the more deductions you can determine, the more money you should be able to save in the long run. Read more about hacks to lower your taxes.
If you owe less than $1,000, then you will only have to file for your annual return after paying your yearly taxes. To file for those taxes, you will need to get your hands on the Schedule C form (here are the instructions to file it).
Use the income that was calculated on this form and determine how much you should pay in Social Security and Medicare taxes. Independent contractors should use form 1040 or form 1040-ES in order to report these taxes
If you owe more than $1,000, then as an independent contractor, you need to file your taxes quarterly rather than yearly. The first thing is determining your adjusted gross income that came from self-employment during the tax year.
The more tax deductible expenses you may find, the less you will have to pay in terms of taxes. Form 1040 provided by the IRS can work as a spreadsheet for you, to help you determine exactly how much you will have to pay in estimated Taxes
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:
California may also impose its own tax, provided you have a business or an LLC.
Technically speaking, the Social Security and Medicare taxes in California are the same as with the other states. That being said, the difference is in the other taxes that California has you paying. Surprise or not, the state of California has some of the nation's highest 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.
If a worker was classified as an independent contractor, then the hiring party should provide the worker with potential different forms:
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 typically contains the gross income that was received as a result of a third-party transaction. This will also include gig party transactions.
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 is used for elements such as royalties, rents, workers' compensation, and other types of income. Independent contractors have no Social Security and Medicare withholding, but they need to take care of their own federal tax returns.
Unemployment insurance tax is not necessarily required to be paid by the worker. That being said, if they want it, they may choose to do so as well.
Independent contractors in California are different from regular workers, as they have the right to control their manner of business. That being said, they still need to put money aside for taxes, because after all, the IRS spares no one. Calculate how much you must pay every year so that you may avoid a potential penalty. Make sure that you are not misclassified either, as it may cause you to pay a whole load of different taxes.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?