As an independent contractor, paying your business taxes can be challenging. You'll be required to complete loads of documentation, confirm that you appropriately pay the government throughout the year, and pay a self-employment tax.
In this article, the Workee experts explain independent contractor tax in detail.
Who is an independent contractor?
What criteria does a corporation use to determine whether you are an independent contractor or an employee? The IRS has regulations and standards to assist in making a choice, but at a high level, if a corporation can only control the product of the job you perform, not how you do it, you may be deemed an independent contractor.
Independent contractors are considered self-employed by the IRS since they are not employees of any firm. You may operate as an independent contractor as a single proprietor, a limited liability company (LLC), or an S-corporation. We'll focus on single proprietorships in this post since they account for most enterprises in the United States.
How does a self-employed individual pay taxes?
Your tax position gets more difficult when you operate as an independent contractor. You'll need to complete extra paperwork and estimate your taxes regularly. Four significant differences exist between filing taxes as an employee and an independent contractor. Here are a few examples:
Schedule C is used to record income and deductions from self-employment.
Schedule SE is used to pay self-employment tax.
Taxes are estimated and paid quarterly.
Receiving a 1099-MISC rather than a W-2.
Earnings from self-employment must be recorded
How you record your income as an independent contractor varies from an employee's. You must submit Schedule C with your personal tax return as an independent contractor. Schedule C shows your company's earnings and losses.
Remember that as an independent contractor, you are considered self-employed. Therefore you are basically operating your own one-person company. Schedule C must be used to disclose any earnings as an independent contractor. The overall profit will, after that, be subject to income taxation.
While working as an independent contractor means paying more in self-employment taxes, there is one advantage: you may claim business deductions. These tax breaks for businesses minimize the amount of profit that must be taxed.
These deductions will be recorded on Schedule C, along with your income.
As an independent contractor, you may deduct business expenses like health insurance, home office expenses, transportation, and phone bills.
Paying self-employment taxes is a substantial financial drawback of working for oneself. These taxes are the same as the Medicare and Social Security taxes you would pay as an employee. As an employee, though, your employer pays half of your taxes. As a self-employed person, you must pay the whole tax.
Quarterly tax payments are estimated
The US tax system is a pay-as-you-go system, which means you must make tax payments regularly throughout the year. When you work for someone else, it is your employer's obligation to deduct and remit income taxes from your salary.
So, how does a self-employed individual pay their taxes? When you operate as an independent contractor, you must consistently pay the government throughout the year. This is performed by paying due income taxes every quarter. You may estimate your entire income for the year or use the amount you paid in estimated taxes the previous year to determine how much you owe the government each quarter. You won't know how much tax you owe until you submit your personal tax return at the end of the year. However, you should estimate this carefully since penalties may apply if you underpay your expected taxes.
Don't forget to pay your state's projected taxes as well. In addition to paying federal anticipated income tax payments, you'll have to pay state taxes throughout the year.
Each year, as an employee, you will get a W-2 form detailing how much you made and how much was deducted from your paycheck for taxes.
As an independent contractor, you will be issued a 1099-MISC rather than a W-2. This form provides information on how much you were paid throughout the year. You may use that information to ensure that you have reported all your annual income.
If you receive less than $600 from a customer throughout the year, you will not get a 1099-MISC, but you must still record that revenue on your Schedule C. That is why it is vital to have a robust accounting system.
Independent contractor tax deadlines
You should be aware of any extra tax deadlines as an independent contractor. In addition to the personal income tax deadline, you will now have federal and state quarterly tax deadlines.
Quarterly tax filing is anticipated
You must make scheduled tax payments four times a year. Schedule SE may help you determine how much you owe at each deadline.
The following are the deadlines for making quarterly estimated tax payments for the United States:
For revenue generated between January and March, the deadline is April 15.
The deadline for money generated in April and May is June 15.
September 15: for money generated between June and August.
January 15: for income received between September and December of the previous year
Remember that if your state levies income taxes, you must also make estimated tax payments to the state. Consult your state's business resources for deadlines and any needed paperwork.
Personal income tax returns must be filed before the deadline
As an independent contractor, your personal income tax deadline is the same for employees. Every year, on April 15, all personal income tax returns, including Form 1040, are due. If April 15 occurs on a weekend or holiday, they must be filed the next working day.
With your Form 1040, you'll include Schedule C, Profit and Loss from Business, and Schedule SE, Self Employment Tax.
If you cannot submit your taxes by the April 15 deadline, you may seek an automatic six-month extension using Form 4868. However, this is simply a filing extension; if you owe taxes, you must pay them by the April 15 deadline to avoid a penalty.
Your state's tax deadline
If your state has an income tax, you must also file and pay it. Contact your state to determine when and how you must pay state taxes on your earnings as an independent contractor.
An illustration of independent contractor taxes So, how do you figure up your own independent contractor taxes?
This article assumes that if you make $40,000 per year as an independent contractor for two firms. You don't work somewhere else since they are your only jobs. Each business should issue you a 1099-MISC certifying how much they paid you throughout the fiscal year. This income will be recorded on Schedule C, Part 1 of your tax return.
In addition, you have various costs that may be deducted from your profits. Using the simple approach, you operate from a 200-square-foot qualifying home office, and you may deduct $5 per square foot. You may deduct $1,000 for a home office.
You also traveled 600 miles for mandatory tasks throughout the year, so you may deduct $348 (using the $0.58 per mile IRS deduction). You deducted $1,348 in total. Therefore your total net profit as an independent contractor reported on Schedule C is $38,652. This amount will be recorded as taxable income on Form 1040.
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