One of the first lessons you learn as a young adult is that there are only two things that are certain in life: death and taxes. You can’t avoid taxes all together, so you might as well spend some time getting ready for tax season. As an independent contractor, you’re in an interesting position in terms of taxes. At the end of the year, you’ll be dealing with a 1099-MISC instead of a W2 for tax dues. Let’s dive into some of the more complex aspects of taxes for independent contractors.
Who is considered an independent contractor?
An independent contractor is a person who may supply services or products to someone else but who isn’t an employee. In the eyes of tax law, you’re considered a sole proprietor which is a small business designation.
Here are some common examples of who might be considered an independent contractor:
- Barber or hairdresser
- Court reporter
- Personal trainer
- Pro Athlete
- Freelance creator (for example, freelance writer, graphic artist, photographer)
What does being an independent contractor mean for my pay?
While you get paid for work for you do in your business, your earnings are not considered a salary or wages. The money you get is categorized as business income. Because you’re considered a “business” and not an employee, you don’t have any federal tax withholdings associated with your earnings. There are also no deductions taken for Social Security or Medicare.
The tax for Social Security and Medicare combined is called the self-employment tax and it represents about 15.3% of your earnings.
In a traditional job, your employer splits the cost of Social Security and Medicare taxes with you but if you’re in charge of your own income as a sole proprietor, you’re responsible for the full amount.
How does being an independent contractor affect my taxes?
When you’re filing your taxes, you’ll have to fill out a Schedule C form to declare your business earnings but subtracting any expenses. Most independent contractors can fill out a Schedule C-EZ where you can simply declare your total earnings and give a full summary of your expenses.
What counts as an expense?
Here are some examples of business expenses:
- Accounting costs
- Advertising expenses
- Commissions and fees
- Books, magazines, software
- Transportation expenses
As a reminder, it’s important to keep immaculate records of all of your expenses. Not only is this for your own peace-of-mind but it provides hard evidence for your expenses that you can’t recreate any other way.
Should the IRS do an audit, you’ll have everything you need to show you’ve been above board.
Do I pay a quarterly estimated tax?
You may be required to pay a quarterly estimated tax if your business makes a profit. However, if you receive additional earnings from another job, you may be able to increase your withholdings from that job to make up for the income tax and self-employment tax obligations you have to pay.
Do I need a tax professional?
The answer to this question depends on the setup of your business. You may need to pay tax preparation fees to sort out the intricacies involved in the Schedule C or Schedule C-EZ forms. In some cases, however, electronic tax filing might be an option.
What about state income taxes?
In addition to federal taxes, you are also expected to pay state income taxes. Keep this in mind if you plan on setting aside money for taxes.
How does the self-employment tax get calculated?
The profit from your schedule C is used to calculate the money you owe for self-employment taxes. The calculation is done on the Schedule SE.
Although taxes can be a complicated process, especially if you’re an independent contractor, it doesn’t have to be a hassle. To put your best foot forward this tax season, you should plan early, outline all of your expenses, and talk to a tax professional if you are confused. If you do end up deciding you want a professional tax preparer, you can find one on apps like Thumbtack which searches for pros in your area. With these tips, you’ll be on your way to being a tax wizard in no time.