Independent Contractor Taxes: What Employers Need to Know

Getting paid as an independent contractor means you are a freelancer or self-employed individual. Therefore, your overall earnings will be subject to self-employment tax. So, as an independent contractor, you will need to read and clearly understand all the tax obligations you're subject to.

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For every business, it is important to clearly define whether they are providing their services as independent contractors or employees. However, when it comes to independent contractor taxes, you are generally expected to withhold and deposit income taxes, Medicare taxes, and social security taxes from the wages paid to each employee.

So, before we discuss how independent contractors pay taxes, let’s first define who qualifies as an independent contractor.

Who Qualifies as an Independent Contractor?

According to the IRS definition, independent contractors include Doctors, Subcontractors, Dentists, Auctioneers, Veterinarians, Accountants, Contractors, Lawyers, and public stenographers. All these people have to be in an independent business, trade, or profession.

The facts of each of the above cases will define whether that individual qualifies as an independent contractor. However, the IRS's general definition based on the "general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

If you are doing tasks or providing services that an employer is controlling, then you aren't an independent contractor. This means your earnings as employees may be subject to income tax withholding and FICA (social security tax and Medicare).

Tax Tips for Independent Contractors

Here are some of the important tax tips to help ensure you meet all your tax obligations as an independent contractor:

• The first and essential tip is to work with a financial advisor. A professional financial advisor will enable you to effectively handle your independent contractor taxes. They will guide you through what tax bracket you fall under, how to file taxes as a freelancer, and everything you need to know about managing business income.

• Get a financial advisor specializing in tax planning to help you harvest your losses to lower your 1099 income.

• Ensure the record-keeping that you are using in your business is good. This is essential because it helps you have accurate information on all your income, expenses, and losses.

With these three tips, you can minimize taxable income and save more money while meeting all your tax obligations.

How Is Independent Contractor Income Paid and Reported?

According to IRS, Independent contractors are expected to:

• Report their income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).

• File Schedule SE (Form 1040), Self-Employment Tax if net earnings from self-employment are $400 or more. This is important in that it helps you find Medicare and social security tax due on your net income.

Calculating Your Income Taxes as an Independent Contractor

To help you calculate and determine how much you owe as an independent contractor at each deadline, you can use Schedule SE on Form 1040. Furthermore, filing Schedule C will also help calculate how much tax does an independent contractor pay.

As of 2021, the self-employment tax rate is 15.3% which comprises 12.4% for social security and 2.9% for Medicare. Furthermore, you may be subject to an additional 0.9% Medicare surtax.

How Does an Independent Contractor Pay Taxes?

As an independent contractor, filing taxes will be a more complicated process compared to an employee. This is simply because you will have extra documents to file and sign throughout the tax filing process. So, here are the key points about how an independent contractor pays taxes.

• An independent contractor is considered self-employed; this means your business's profits will be taxed. So, as a freelancer, you will be required to file Schedule C (which shows profit and loss) along with your personal tax return.

• If you have any business deductions, ensure to include them in order to reduce the total profit you pay income taxes on. The deduction should be included in your Schedule C

• A total of 15.3% in tax is what you are subject to as an independent contractor. This is more than what an employee does pay, as a significant percentage of this 15% will be covered by employers. However, you can take off half of that as deductions from your income.

Overall, when it comes to handling tax, an employee is lucky since their employers are responsible for holding their taxes. Therefore, how does an independent contractor pay taxes? Well, as an independent contractor, you will have to pay the government regularly through quarterly estimated income tax payments. This is according to the pay-as-you-go tax system used by the U.S. tax system. To make quarterly payments use Form 1040-ES, Estimated Tax for Individuals.

That’s all about how to pay taxes as independent contractor, let’s now move on to tax deadlines.

Independent Contractor Tax Deadlines

Along with April 15, the deadline for your personal income tax, you will have other quarterly tax deadlines both for the federal and state. The deadlines for making payments are as follows:

• January 15: for September through December income for the prior year.

• April 15: for January and March income.

• June 15: for April and May income.

• September 15: for June to August income.

Apart from these deadlines, it is crucial that keep the following things in mind:

• Check if your state has income taxes regulations. If there are, check how they are paid and when it is paid and calculate and estimate your payments to the state.

• All your personal income as an independent contractor is just similar to the employee's salary and is filed on April 15 of each year. File your taxes with Form 1040.

• If you have difficulties meeting the April 15 deadline, use file an automatic six-month extension using Form 4868.

Conclusions

One essential part that you need to learn as a self-employed individual is how to file taxes as an independent contractor. You will have saved yourself from most tax-related issues by simply knowing this.

Keep in mind that independent contractor taxes are handled differently from employee taxes. As a freelancer, you will be the one with complete control of the entire tax filing process. Therefore, you will need to calculate self-employment taxes based on your business income. And because of this, you will need to have a good bookkeeping system to help you ensure you capture all your income, expenses, and losses.