As an independent contractor, you get to be in control of how, when and where you work.
You also get paid differently than you would as an employee of someone else’s business, and that affects how you file and pay your taxes. You have some additional responsibilities your W-2 counterparts don’t have to worry about.
It’s important to understand what they are, so you don’t get slapped with fines and penalties by the IRS.
Getting paid as an independent contractor
Employees who work for someone else have state, federal, Social Security and Medicare taxes withheld from every paycheck they receive. But if you’re an independent contractor, it doesn’t work that way.
When your clients send payment for your work, no one takes money out of your paycheck for taxes. Instead, you’re responsible for setting aside enough money to pay your taxes when they’re due. We’ll talk more about how to pay your taxes in a little bit.
Independent contractor tax forms
When tax time rolls around, if you earned $400 or more during the year, you’ll need to file a tax return using the forms listed below. In some situations, you might also be required to file a tax return even if your net income was less than $400.
1099 contractor form
If you weren’t self-employed, your employer would send you a W-2 form that lists your income and all the deductions that were withheld from your pay throughout the year, including federal, state, Social Security and Medicare taxes.
As an independent contractor, you won’t get a W-2 with a tidy list of your income and deductions. Instead, every client that paid you more than $600 is required to send you a 1099 contractor form. Clients that paid you less than $600 don’t have to send one.
In theory, if you add up all the 1099s you receive, it should be equal to your gross income for the year. But don’t rely solely on your 1099s.
Remember, clients that paid you less than $600 don’t have to issue one. And some clients may not send one, even though they’re supposed to.
Ultimately, you’re responsible for reporting all the income you earned during the year to the IRS, whether you received a 1099 or not. It’s important to independently keep track of the money you earn throughout the year.
A form 1040 This is the main form you use to file your taxes. Much of the information you need to include on form 1040 will be calculated using the schedules listed below.
Schedule C or C-EZ
Schedule C is used to report your income and expenses, so you can calculate whether your business earned a profit or reported a loss for the year.
One of the benefits of being self-employed is that you can deduct business-related expenses to reduce your taxable income.
The tax deductions you can claim vary based on the type of business you have. For example, if you’re a contractor, you can deduct the cost of tools and equipment you need to replace siding, repair roofs or install cabinets.
If you’re a personal trainer, the fitness equipment you use to whip your clients into shape is deductible. And if you’re a consultant who works from a home office, your office furniture, computer and phone are deductible.
No matter what type of business you run, you can typically deduct any business insurance premiums you pay.
It’s important to keep receipts for your business expenses to make sure you have an accurate record of what to deduct. And if you get audited, the IRS will want to see them.
A Schedule SE form is used to calculate the amount you have to pay in Social Security and Medicare taxes. You’ll use the income or loss calculated on Schedule C to determine how much you owe.
Typically, employers and employees are each responsible for paying half of these taxes. But as a self-employed professional, you’re responsible for making both the employer and employee contributions.
How does an independent contractor pay taxes?
When you file your annual tax return, you can estimate your taxes for the next year using form 1040-ES. If you’re expected to owe more than $1,000 in taxes, you’ll need to make quarterly tax payments.
You can use the vouchers in the 1040-ES booklet to make your payments by mail or you can pay online. Quarterly payments are due in April, June, September and January of the following year.
It’s important to calculate your payments accurately because if you don’t pay enough throughout the year — before you file your annual tax return — you may have to pay a penalty.
You can avoid the penalty if you make quarterly payments of at least 90% of the amount you owe for the current tax year or 100% of the taxes you paid the previous year — whichever is smaller.
When you file your annual tax return, if you’ve paid too much you’ll get a refund, and if you paid too little, you’ll owe additional taxes.
All of the forms we discussed in this article come with instructions that explain how and when you need to complete them. And the IRS website has up-to-date tax information for self-employed professionals.
We recommend working with a licensed tax professional to make sure your taxes are filed properly, and you don’t incur any penalties from the IRS.
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