Independent Contractor Taxes: How to File and Pay

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An employer is required to withhold income, Social Security and Medicare tax from their employee’s pay. They also pay half of the employee’s Social Security and Medicare taxes. At the end of the year, the employer is required to provide a Form W-2 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.

Quarterly Tax Payments

If you owe more than $1,000 in taxes, the IRS can require you to pay quarterly. In that case, you would be responsible for calculating how much you owe each quarter. However, a professional tax preparer can also help you. You can also use Form 1040-ES worksheet to assist in the calculations.

Estimated tax payments are due four times per year on the 15th of the month following each quarter.

Taxes for:

• Jan. 1 – March 31 are due April 15
• April 1- May 31 are due by June 15
• June 1 – Aug. 31 are due by Sept. 15
• Sept.1 – Dec. 31 are due by Jan. 15

What Tax Forms Do Independent Contractors 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.

• You’ll receive a Form 1099-NEC from each company you did contract work with
• Your 15.3% self employment tax is calculated on Schedule SE
• If you have deductions, those are reported on Schedule C
• If you pay taxes quarterly, fill out from 1040-ES

Tax Deductions for Independent Contractors

As independent contractors are technically business owners, they’re allowed to take numerous tax deductions that don’t apply to most wage and salary earners. The most common of these include:

• Home office expenses. You can deduct qualifying home expenses, such as a percentage of your mortgage interest, utilities and homeowners insurance if you work from a dedicated space in your home.
• Business supplies and equipment. Common office expenses like printer paper, ink, pens and postage are deductible. Professional instruments and equipment that will be used within one year are fully deductible, while those expected to last longer can still generate a depreciation deduction.
• Internet and phone costs. If you have a phone and/or internet that’s used for business expenses, those costs are deductible.
• Mileage and travel expenses. Traveling to and from business meetings can result in deductible mileage and travel expenses.
• Health insurance premiums. If you’re self-employed and pay your own health insurance premiums, those can be deductible.

Tips for Filing Taxes as an Independent Contractor

The process of filing taxes as an independent contractor is the same as if you were an individual filer. But you’ll generally have more deductions to organize, and oftentimes more sources of income to keep track of. Here’s a step-by-step guide to filing:

• Organize all your tax forms. Make sure to include all 1099-NEC forms that you receive, along with any other that show any type of income paid to you directly.
• List all of your expenses. This is the single step that can likely save you the most on your taxes, so it’s important to find every deduction that you’re entitled to.
• Choose the right software, or use a tax professional. Filing taxes as an independent contractor can be a land mine. To get the best results, it’s usually a good idea to hire a professional or at least use good tax software. 
• Provide all your information to your professional, or enter it into your software. From there, the process should be fairly straightforward.
• File your taxes online. The safest, fastest, easiest and best way to file your taxes is electronically. 

Avoiding Common Tax Mistakes

Tax reporting can be a more difficult process for independent contractors because there are so many opportunities to make errors. Here’s a list of some of the most common mistakes you’ll want to try to avoid:

• Underreporting income. This is one of the things that’s easiest to do but it’s one of the main red flags that could lead you to an IRS audit. If you receive multiple 1099-NEC forms, it can be hard to keep track of them all sometimes, particularly if a few were one-off projects or jobs that paid small amounts.
• Failing to meet tax-filing deadlines. A regular W-2 employee has taxes deducted from each paycheck, making the tax-filing process easier. Independent contractors must usually file quarterly estimated taxes, as none of their income is withheld. 
• Failing to keep receipts. Although independent contractors are entitled to a wide range of deductions, if you can’t substantiate them by keeping diligent records and receipts, they may be disallowed by the IRS. 
• Mixing business and personal expenses. This is another IRS red flag that can often lead to an audit. It’s usually a good idea to keep separate checking accounts for your business and personal finances – and separate credit cards as well – so you can more easily document your claimed business expenses. 

The Bottom Line

Filing taxes as an independent contractor is a year-round job. Keep diligent records of both income and expenses – and be mindful of tax-filing deadlines – and you can make the process much easier to handle. You’ll also avoid penalties and get all of the tax deductions to which you’re entitled.

John Csiszar contributed to the reporting of this article.

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