As a first-time small business owner, navigating the complex world of taxes can be daunting. However, understanding your tax obligations and implementing effective strategies can save you time, money, and stress in the long run. Our quick guide to independent contractor taxes will provide you with expert advice on tax filing, helping you demystify the process, and set your business up for financial success.
Are You an Independent Contractor?
Before diving into the intricacies of filing taxes, it’s crucial to determine whether you qualify as an independent contractor. The Internal Revenue Service (IRS) has specific criteria to distinguish between employees and independent contractors.
Generally, you’re considered an independent contractor if you have control over how you perform your work, use your own equipment, and work for multiple clients. Key factors include:
- Behavioral control: Do you decide when, where, and how to complete your work?
- Financial control: Are you responsible for your own business expenses and investments?
- Relationship type: Do you have written contracts, receive benefits, or work on a project basis?
If you’re unsure about your status, the IRS provides Form SS-8, which you can file to request a determination. It’s essential to clarify your classification, as it significantly impacts your tax obligations and available deductions.
Independent Contractor vs. Sole Proprietor
Although the terms “independent contractor” and “sole proprietor” are often used interchangeably, there are subtle distinctions between the two. Understanding these differences can help you properly classify your business and fulfill your tax responsibilities.
Independent Contractor:
- Works on a contract basis for other businesses or individuals
- Typically provides specialized services
- May work for multiple clients simultaneously
- Reports income on Schedule C of Form 1040
Sole Proprietor:
- Owns and operates an unincorporated business
- May have employees
- Can be an independent contractor, but not all sole proprietors are contractors
- Also reports income on Schedule C of Form 1040
The primary difference lies in the nature of the work and business structure. Although all independent contractors are essentially sole proprietors for tax purposes, not all sole proprietors are independent contractors. This distinction becomes important when considering liability and potential business growth.
What is Self-Employment Tax?
When you work as an employee for another business, they are required to withhold employment taxes (Medicare and Social Security) from your paycheck. Your employer also pays a portion of these taxes. As an independent contractor, however, you are required to pay the full 15.3% self-employment tax. The good news is that you’ll typically be able to take a tax deduction for 50% of the self-employment tax you pay.
How to File Taxes as an Independent Contractor
Independent contractors must file various taxes. This includes self-employment and estimated taxes. You will also be required to file federal income taxes and state taxes (if applicable).
Steps For Filing Your Taxes
Filing your taxes when you are self-employed is pretty straightforward. You’ll use Form 1040 and complete the necessary business forms. Just follow these simple steps to file your taxes:
1. Gather your 1099s and calculate your income. You should receive Form 1099-NEC from anyone who paid you $600 or more during the tax year. If you haven’t received one by January 31 or you’ve misplaced it, request a copy. When you tally up your total, be sure to include all income earned regardless if you have a 1099 or not.
2. Track business expenses. Throughout the year, keep a running total of your business expenses. Be sure to keep copies of your invoices, receipts, and other financial statements. You’ll need these if you are audited. Do not include any personal expenses, as these are not deductible.
3. Determine your business deductions. In addition to ordinary business expenses, you may also have other deductions that can help reduce your taxes. You can deduct 7.65% of your self-employment taxes. You may also be eligible for the home office deduction if you use a portion of your house to conduct business. For a list of other common tax deductions available to independent contractors, download our Tax Deductions For Small Business Owners guide.
4. Complete the required tax forms. Each year, you’ll need to submit your state income tax return (if applicable) and file federal taxes. For the IRS, you’ll submit Form 1040 and the following schedules:
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- Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) – Use this form to determine your profits and losses.
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- Schedule SE (Form 1040), Self-Employment Tax – This is where you’ll calculate your self-employment tax. If you’ve been making your quarterly estimated tax payments, you should be in good shape.
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- Schedule 1 (Form 1040), Additional Income and Adjustments to Income – Schedule 1 is where you’ll report income or loss from your business, unemployment compensation, and other income not listed on your Form 1040. You also include the deductible part of your self-employment taxes, health insurance premiums, and other eligible deductions.
You can use a tax software program to help you complete the necessary forms, or consult with a tax professional to ensure you’ve listed all income and taken every available credit and deduction.
Don’t Forget About Estimated Taxes!
If you expect to owe $1,000 or more in taxes when you file, you should be making estimated tax payments throughout the year by filing Form 1040-ES. These payments include your estimated income taxes, as well as employment taxes (SSI & Medicare). Be sure to calculate them correctly. If you don’t pay enough throughout the year, you could be hit with an IRS underpayment penalty.
Although payments are typically made quarterly, you can send them in more frequently if desired. The quarterly estimated tax payment due dates are as follows:
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- April 15
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- June 15
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- September 15
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- January 15 (following year)
If the 15th falls on a weekend or holiday, however, the due date will be the next business day. To learn more about estimated tax payments and how to submit them, check out our Form 1040-ES page.
Final Thoughts
For federal tax purposes, the IRS considers any income earned as an independent contractor to be your personal income. This means that they can come after your personal assets to satisfy any unpaid tax debt. This includes, but is not limited to, your home, vehicles, retirement, and other financial accounts. If you’re facing a tax bill that you can’t pay, contact Tax Defense Network ASAP. We offer affordable tax relief services and may be able to help you settle your tax debt for less. For a free consultation, call 855-476-6920 today!