The Ultimate Tax Guide for Independent Contractors
Several advantages that regular employees may not have are available to self-employed people. Often, employers want their employees to work a set schedule under their direct supervision. Yet, employees are exempt from the independent contractor tax filing requirements. You can set your schedule as a freelancer or independent contractor. You can decide the projects you want to work on. The additional obligation of filing taxes as an independent contractor comes with this freedom, too. In addition to filing their annual forms, the majority of independent contractors will now need to pay quarterly anticipated taxes. Let’s go over the fundamentals of contract employment tax filing.
Taxes for Independent Contractors: Income Requirements
Don’t assume that because you make a small living from independent labor, you won’t need to file taxes. You should be informed of the income tax regulations whether you’re just getting started in business or working freelance on the side.
How much money must an independent contractor make to submit taxes? Independent contractors are required by the IRS to file taxes if their net earnings are $400 or more. You can determine your net earnings, also known as net income, by deducting your total revenue from the cost of your goods.
The standard income requirement for independent contractor taxes is this amount, however, there are also additional criteria that can be found in the instructions for Forms 1040 and 1040-SR. These may vary depending on your marital status, your income as a dependant, or whether you owe any additional taxes.
Two Taxes an Independent Contractor Must Pay
Taxes and other business costs are the responsibility of independent contractors. These taxes are typically taken out of an employee’s paycheck by a typical business. However, taxes for 1099 contractors will differ slightly.
The IRS lists the following taxes for self-employed people:
- Self-employment tax: This covers Medicare and Social Security taxes. 15.3% is the tax rate, of which 12.4% is used to pay for Social Security and 2.9% is used to pay for Medicare expenses. To compute this tax, use Form 1040 or 1040-SR.
- Income tax: For both workers and independent contractors, this is a fundamental obligation. If you conducted business as a sole proprietorship, fill out a Schedule C form to disclose your profit or loss.
Recall Key Tax Deadlines
Independent contractors, as was already said, have a little more work to do when it comes to paying taxes. Throughout the year, independent contractors must pay quarterly estimated taxes instead of employees who handle income taxes in April. These are computed utilizing Form 1040-ES; accuracy is best ensured by consulting an accountant.
The dates listed below are for 2023’s quarterly anticipated tax payments:
- Q1: April 18, 2023
- Q2: June 15, 2023
- Q3: September 15, 2023
- Q4: January 16, 2024
You can choose to submit your tax return before January 31, 2023, and pay the entire sum at that time to save time. The fourth quarter projected tax, which is due on January 17, won’t be required if you choose this course of action.
Seven Typical Tax Deductions for Independent Contractors
Working for yourself can occasionally be stressful, particularly when it comes to tax preparation. Most independent contractors and freelancers aren’t bookkeeping specialists. So they could miss out on a few standard tax deductions.
You are responsible for paying your business expenses, therefore don’t forget about these tax deductions for independent contractors:
1. Office at Home
Take into account all of the costs associated with a home office, including supplies and services like phone and internet. It might be difficult to figure out deductions for a home office, so it’s essential to speak with a business tax professional who can provide guidance.
2. Health Protection
Independent contractors may deduct healthcare insurance premiums because they are not eligible for employer-sponsored healthcare.
3. Contributions to Retirement
Your retirement payments, which are not being deducted from your pay by your company, may follow the same pattern as your health insurance premiums.
You should keep track of any expenses related to your marketing or advertising responsibilities since you may be able to deduct them from your taxes.
5. Qualified Services
You might need to hire a lawyer to analyze legal documents or an accountant to take care of your small business taxes at some point if you need to outsource some services. You can deduct these costs from your taxes, so keep track of them!
If you subscribe to an industry-specific newspaper or pay dues to a professional association, you can certainly deduct these costs as business-related expenses.
7. Travel Independent
Contractors may need to travel for professional reasons, such as attending a trade event or meeting with a client. Keep track of these trip expenses so you can write them off on your taxes.
But, keep in mind that travel expenses incurred when driving between your house and your place of employment are not deductible. Travel costs between your main office and other work locations are deductible.
Submitting Quarterly Taxes as a Self-Employed Individual
As you can see, submitting taxes involves several steps. You must not only file an annual return but also pay anticipated taxes every quarter.
To help you stay on track with your quarterly taxes, follow these easy steps:
- Make sure to account for any deductions you wish to claim when calculating your net profit or net loss. This should be done first because it will reveal if you have to pay income and self-employment taxes.
- Fill out Form 1040-ES to figure out your quarterly estimated tax if your net income is over $400.
Use the following calculation to get your taxable income for the SE tax: projected total income x 92.35% = taxable income. After that, you can multiply your taxable income by 15.3% to determine how much SE tax you must pay.
To determine your total projected taxes, add your income taxes and SE taxes. To calculate your projected quarterly tax payment, divide this amount by four.
Consult a Seasoned CPA to Help You With Taxes
The process of filing taxes as an independent contractor entails numerous calculations and stages, but it’s an essential one that makes sure you’re complying with IRS regulations. Contact a qualified CPA who knows how to keep your taxes structured and effective if the process feels daunting.
The Your Part Time Accountant staff has collaborated with numerous independent contractors. Maximizing tax savings is our forte. Start today with a free consultation to learn more about how we can simplify your independent contractor taxes while also providing ongoing support.