Independent Contractor Taxes: A Complete Guide
An independent contractor is someone who works for a business or company but is not an employee. The IRS uses three categories of evidence to determine if someone is an independent contractor or employee: behavioral control, financial control and the relationship of the parties.
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Learn the details of what it means to be this kind of worker, and everything you need to know about how to file taxes if you’re an independent contractor.
What Is an Independent Contractor?
According to the IRS, you can determine whether someone is an independent contractor by looking at three factors:
- Behavioral control: If the employer dictates how, when or where to do the work, then this suggests that the worker might be an employee.
- Financial control: If the business does not reimburse the worker for business expenses, or the work has the possibility to incur a loss, then the worker might be an independent contractor.
- Relationship of the parties: A written contract, or independent contractor agreement, will often state clearly that the worker is not an employee, and independent contractors typically do not receive employee benefits such as paid time off.
How Does an Independent Contractor Pay Taxes?
As an employee, the employer is required to withhold income tax, Social Security tax and Medicare tax from your pay. As an employee, the employer pays half of the total Social Security taxes and Medicare taxes on behalf of the employee. At the end of the year, the employer is required to provide a Form W-2 to the employee detailing all wages, and the amount of taxes withheld.
As an independent contractor, the employer does not withhold any taxes. The contractor is responsible for paying all taxes, including the other half of Social Security taxes and Medicare taxes typically paid for by an employer. These taxes are often referred to as self-employment taxes.
To comply with IRS rules, the contractor might need to make quarterly tax payments on their income. Estimated tax payments are due four times per year on the 15th of the month following each quarter. For example, the estimated tax payment for the first quarter — Jan. 1 through March 31 — is due on April 15.
Estimated tax payments are required from independent contractors who expect to owe taxes of $1,000 or more when their tax return is filed. Unlike an employee, whose employer calculates tax withholdings, the independent contractor must estimate their own quarterly tax payments. Also, whereas an employee’s taxes are withheld from pay by the employer, an independent contractor must make their own payments directly to the IRS. The IRS recommends contractors use previous year’s income and deductions as a starting point for these calculations. The IRS provides an options Form 1040-ES worksheet to assist in the calculations.
Although an independent contractor does not get a W-2 form, a business is required to report the income of independent contractors who earn at least $600 during the year on a Form 1099-MISC.
What Tax Form Does an Independent Contractor Use?
Like most employees, the taxes for an independent contractor are typically due on April 15 of each year. The independent contractor files a Form 1040, just like an employee. However, there is a significant difference in how income is reported for contractors.
Income earned as an independent contractor is typically reported with the contractor’s Form 1040 on a Schedule C. The total amount of all income reported on 1099-MISC forms is included on Line 1 of the Income part of the Schedule C. As a business, the contractor can deduct certain expenses on this form as well.
Unlike an employee, the independent contractor must pay self-employment tax on income minus deductions. The self-employment tax rate is 12.4% for Social Security and 2.9% for Medicare taxes as a percentage of net earnings, for a total self-employment tax of 15.3%. This rate applies to the first $137,700 of earnings. After that amount, only Medicare taxes are collected at a rate of 2.9%.
This tax is calculated on Schedule SE, Self-Employment Tax. This calculated tax is reported on the independent contractor’s Form 1040 on Line 57, Self-Employment tax under Other Taxes.
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