Are you an independent contractor? If so, then you’re probably wondering what your tax obligations are. In this post, we’ll outline the taxes paid by independent contractors. So, whether you’re just starting out as an independent contractor or you’ve been doing it for a while, this blog post is for you! To start, let’s discuss what an independent contractor is.
Who is an independent contractor?
What criteria does a company use to establish whether you are an independent contractor or a full-time employee? The Internal Revenue Service (IRS) has guidelines and standards to assist in making this determination, but at a high level, if a firm only has the authority to control the outcome of the job you complete, rather than how you conduct the work, you may be regarded to be an independent contractor.
If you work as an independent contractor, the IRS considers you to be self-employed, as you are not an employee of any one business. If you are an independent contractor, you have the option of operating as a single proprietor, a limited liability company (LLC), or an S-corporation.
How much taxes do I pay as an independent contractor?
So you’re basically wondering how much tax do you pay as a contractor? Independent contractors, as opposed to employees, are responsible for paying their own income taxes as well as self-employment taxes. Social Security and Medicare taxes are included in the self-employment taxes. With regard to self-employment taxes, the current rate is 15.3% of the wages earned by independent contractors, with 12.4% of that rate going to Social Security and 2.9% going toward Medicare.
According to general guidelines, independent contractors should set aside one-third of their earnings to cover these taxes. However, depending on the unique financial conditions of the contractor, the amount of withholding that is necessary may be greater or lesser. The IRS provides a worksheet to determine the amount of withholding for the self-employment tax (IRS Schedule SE Form 1040). Individuals should also consult with a knowledgeable tax accountant to determine the amount of withholding to be withheld.
Independent contractors who receive income that is not subject to withholding are required to make estimated tax payments on such income. Independent contractors must pay self-employment taxes on the wages they get even if they work full-time for an employer who withholds taxes from their paychecks. This is true even if they work for an employer who withholds taxes from their payments. Payments of estimated tax liabilities are paid quarterly, with particular due dates established by the IRS. Interest and penalties may be imposed on late payments at the end of the tax year if they are not received by the due date.
What tax do I pay as a contractor?
People who work for themselves are responsible for both state and federal income taxes, as well as self-employment tax. This tax is made up of your federal Social Security tax (12.4 percent) and your federal Medicare tax (2.9 percent), for a combined self-employment tax rate of 15.3 percent of your net company revenue.
As a freelancer, you are responsible for both the percentage of FICA that you would ordinarily pay as an employee and the portion of FICA that your employer would match if you worked for someone else. Schedule SE of Form 1040 is used to file your self-employment tax return.
How to report tax on contractor income?
When you work as an independent contractor, your tax situation becomes a little more complicated. You’ll have to complete additional paperwork, and you’ll have to file approximated tax payments on a regular basis. It is important to know the distinction between filing tax returns as an employee and filing taxes as an independent contractor. There are four major distinctions between the two. These are some examples:
· Reporting self-employment income and deductions on Schedule C.
· Paying self-employment tax on Schedule SE.
· Paying quarterly estimated taxes.
· Receiving form 1099-MISC rather than a W-2.
The way you report the income you receive as an independent contractor differs from the way you would report it if you were working as an employee. As an independent contractor, you are obliged to file Schedule C with your personal tax return, in addition to your regular tax return. Schedule C contains information about your company’s profit and loss.
Keep in mind that as an independent contractor, you are regarded to be self-employed, which means that you are effectively running your own one-man firm. If you make money as an independent contractor, you must declare it on Schedule C of your tax return. After that, you’ll have to pay income taxes on the total amount of money you made.
When to file taxes as an independent contractor?
As an independent contractor, you should be aware of any additional tax deadlines that may apply. In addition to your personal income tax deadline of April 15, you’ll also have quarterly tax deadlines for both the federal and state governments to meet. It is necessary to make estimated tax payments four times a year. Schedule SE can assist you in calculating the amount of money you owe at each of the deadlines. The deadlines for making your quarterly estimated tax payments are:
· April 15: for income earned from January through March.
· June 15: for income earned in April and May.
· Sept. 15: for income earned from June through August.
· Jan. 15: for income earned from September through December in the prior year.
If your state levies income taxes, you’ll be required to make estimated tax payments to your state as well. Make sure to check with your state’s business resources to find out about deadlines and any forms that are necessary.
If you need assistance with independent contractor taxes or need tips on how you can minimize paying taxes as an independent contractor, be sure to contact a reliable and trustworthy tax professional as soon as possible.