Independent contractor taxes are a bit different than just receiving a W-2 as an employee. Different forms and different taxes. It’s not more complex than being an employee but it’s certainly not the same. We will break it down so you will understand filing taxes as an independent contractor, how it is different and what to look out for.
What is an Independent Contractor?
It’s first helpful to set the baseline for what the IRS defines as an independent contractor. Determining if someone is an independent contractor really depends on the facts at hand. Often the IRS determines an individual to be an independent contractor if, “the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Another key point to realize is that if you are an independent contractor then you are self-employed. That is a simple test.
What isn’t an independent contractor? If an employer controls your services or your day-to-day actions then you aren’t an independent contractor.
If you are a gig employee in the gig economy then chances are you will receive a 1099-K, 1099-NEC or 1099-MISC as an independent contractor. Etsy, Upwork and Fiverr are all marketplaces where people act as independent contractors and need to file taxes.
Read More:
How Do I File Sole Proprietor Taxes: Self Employed Tax Guide
Understanding Independent Contractor Taxes
As an independent contractor, you are considered self-employed. This means you need to pay both income tax and self-employment tax. This is one of the stark differences compared to being an employee where you aren’t subject to self-employment tax.
Income tax is calculated based on your net earnings, while self-employment tax is calculated based on your net self-employment earnings and is used to fund social security and medicare.
Conversely, if you were an employee, your earnings could be subject to social security and medicare.
How to Pay Taxes as An Independent Contractor (Key Dates)
As an independent contractor, the responsibility lies on you to make estimated taxes throughout the year. Failure to do so can result in penalties and interest charges. The IRS requires you to make quarterly payments if you expect to owe more than $1,000 in taxes for the year.
The key dates for quarterly tax filing at the federal level are:
- Jan. 15: for income earned from September through December in the prior year.
- 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.
Keep Records as an Independent Contractor
As an independent contractor, it’s essential to keep accurate records of all your income and expenses. If you do go the route of a CPA to file your taxes, records will help them immensely on the expense side of things. It will also make it easier if you use an online tax filing software.
Some common deductions for independent contractors include:
- equipment expenses (computers etc)
- home office expenses
- vehicle expenses
Keep in mind that you need to keep records if you want to claim deductions. Be meticulous and the more you can provide to your tax preparer, the better. For vehicles, mileage should be tracked. For home office expenses, at least have an idea of how many sqft your home office is.
Read More:
How to File a Tax Extension (The Steps You Need to Know)
Independent Contractor State Taxes (Setting Aside $)
We’ve touched on federal taxes and paying estimates but you may be required to pay state taxes too. The rules for state taxes vary depending on where you live and work, so it’s essential to do your research and understand the requirements for your state.
If you need help beyond your extent then always consult a CPA. They can spend a little time with you and it can be rather inexpensive to stay in compliance by just answering a few questions.
What Forms Do You Need to File as An Independent Contract?
As an independent contractor, you can expect a 1099-K, 1099-MISC or 1099-NEC instead of a W-2.
A 1099-K goes on Schedule D of a Form 1040 if you sold at a gain or schedule 1 if you sold items at a loss.
1099-MISC income is reported on Box 3 on Schedule C. 1099-NEC income is also reported on Schedule C.
Do You Need a CPA as an Independent Contractor?
Does this all sound a bit complex? Do you want to claim all your deductions as an independent contractor? If so, using a CPA to file your taxes might be the best route.
Consider hiring a tax professional who specializes in working with self-employed individuals, people in the gig economy or that are working online. You can even hire a CPA that is solely online.
File Taxes as an Independent Contractor: Final Thoughts
As an independent contractor, it’s really on you to manage your tax situation. If it feels like a bit much then you ought to be using a CPA. A CPA can help you stay on top of your withholdings, estimated payments and tax filing. Ask yourself, do you want to focus on taxes or making money as an independent contractor? Stay on top of your taxes as an independent contractor but remember to spend your time wisely!
