Independent Contractors are self-employed individuals. Many of them function and pay their taxes as sole proprietorships. As an independent contractor, you have different tax obligations than if you file as a company employee. Here are the tax responsibilities you have as a self-employed independent contractor.
Besides filing personal tax returns using Form 1040, independent contractors must file Schedule C, which reports profit and loss from your one-person business. Instead of the W-2 form you would receive as an employee of a company, you receive 1099-MISC forms from the clients for whom you have worked. If the yearly earnings are 600 hundred dollars or less, you won’t receive a 1099-MISC. However, you are still obligated to report the income. For this reason, you should keep meticulous records of all the income you receive throughout the year.
You may be able to claim certain business deductions. These include deductions for your home office, phone bill, mileage for work-related travel, and health insurance. Be sure to claim whatever deductions apply to your situation because they will reduce your tax bill.
Independent contractors pay income tax like everyone else. In addition, they have to pay self-employment taxes. Those are reported on Schedule SE at tax time. When you work for a company, your employer pays half of your Social Security and Medicare taxes. You have to pay the entire amount on your own since you are self-employed. The current self-employment tax rate is 15.3 percent, but you can claim a deduction from your total income of half this amount.
Make Quarterly Payments
Employees have income taxes regularly withheld by their employers. As an independent contractor, you have to make quarterly estimated tax payments on your own. These are due on April 15, June 15, September 15, and January 15. Estimate your quarterly payments either by calculating your probable year’s income or using the previous year’s income as an indicator. Keep in mind too that depending on the state you live in you may also need to file forms and make quarterly payments for state taxes.
For more tax advice for independent contractors, contact Porter Capital Group.