Whether you are a freelance web designer, eBay store owner, or any self-employed specialist, this guide is for you. By the time you finish reading this guide, you will know everything about handling your independent contractor tax stuff. First and foremost, you should know who an independent contractor is?
Independent contractor
According to the IRS, an independent contractor is a person who controls the direct results of his work, without focussing on what needs to be done and how will it happen. The concept works well for both contracts and the individuals who want things done. Often, the line between a worker and contractor gets erased. For instance, will working from home and making your timetable make you an employee or contractor?
Two people can do the same job, and one gets tagged a freelancer while the other can be identified as an administrative assistant. So, who gets to choose, and in which group do you fall in? Well, you can seek guidance from the IRS. Here are a few points to access the degree of control in what you are doing and how you do it.
Behaviorally
It helps to detect a sensible amount of independence or control of the work done. The question you need to ask here is: does the payer or company control the tasks being done, or how is the worker doing the job?
Financially
Who is responsible for making the payments and supplying the basic tools for the task?
Relationally
Do you enjoy benefits like vacations, retirement plans, and insurance? If yes, you are an employee and not a 1099 worker? According to the IRS, you should also consider the period for which the relationship will last. Is it a one-time project or continuous work?
The payer should efficiently segment workers. After assessing your work nature, submit the IRS Form SS-8 to find out about worker classification, if you still feel confused. It offers good guidance. However, some situations need to be assessed on a case-by-case basis.
How do you pay an independent contractor?
Independent contractors are paid normally like regular workers. Some may get paid virtually depending on their project, while others may get paid hourly. They may be subjected to formal arrangements if there is ongoing work for a time.
Are you a DJ or podcast host? Have you offered a service for a private company? If yes, you may have to file a Form W-9. It collects the taxpayer's details to allow companies to maintain precise records and report payments done in a specific tax year on 1099.
Some contractors get paid after completing the task, while others are paid daily. A freelancer doesn't have a tax of any type suspended.
Tax liability as an independent contractor
Checking out the federal income tax code decked with thousands of pages marked as an evergreen document because of its constant revisions, it is unspecific of exactly what you need to do to follow the regulations.
If you are working on an ecommerce platform, you may get help with a sales tax when selling things. But, generally, you need to get familiar with what you are paying and to whom you are paying.
The taxes you have to pay
A self-employed person should pay self-employment tax, around 15.3% of your net earnings, and state and federal income tax.
Self-employment tax
FICA includes federal Social Security taxes and Medicare tax, 12.4% and 2.9%, respectively, totaling 15.3% of your net earnings. While paying self-employment taxes on your income, you pay FICA both parts, a portion you would have casually paid as an employee and the portion your employer would. Even if your employer covers up FICA from your side venture income, you still have to pay the tax on the income you have earned.
The self-employment tax is filed using Schedule SE, Form 1040.
Income Tax
Independent contractors have to pay income tax like other taxpayers, along with self-employment taxes. The taxable income amounts to the aggregate income for subtracting all deductions. You need to check out the tax table for the particular year to find your income tax rate.
Calculating and paying taxes
All taxes can be paid together, quarterly. To calculate the tax you need to pay; you can use Estimated tax worksheets included in the Form 1040-ES. The simplest method to file quarterly taxes is virtual. You can use the IRS website or EFTPS. There is tax software to help you calculate quarterly estimated payments.
You should anticipate a tax refund if you earn totally as an independent contractor. Quarterly estimated taxes help you pay according to the tax system and avoid unexpected tax bills while filing an annual tax return.
Federal taxes vs state and local taxes
The state and municipality also demand you to pay taxes. As every state and local taxes are different, you should check with the US state's tax authority to find yours.
Tax deductions for independent contractors
Before proceeding with this, you should know what a tax deduction is? A tax deduction lowers your taxable income and helps you keep more money with you. Taxable deductions are a major part of your taxable income calculations. They should be considered when calculating taxes.
Employees cannot deduct business expenditure. However, an independent contractor can! Here is a list of qualified business income deductions you may qualify for as an independent contractor.
- Promotional expenses
- Fees and commissions
- Interest
- Meals
- Depreciation
- Car and truck expenditure
- Health insurance without premiums
- Repairs and maintenance
- Phone and internet usage
- Home office tax deductions
There is a specific set of instructions for how they should be calculated and sometimes, restrictions on what can be subtracted for every expense. For instance, car and truck usage is subjected to miles traveled. If you travel too much, you should calculate your miles and see if it is a deductible business expense or not.
Some deductions, such as depreciation, have specific rules. Depreciation is a yearly income tax deductible that helps you recover your asset cost over time. The IRS marks expenditures deductible only when they are important and ordinary.
Deadlines for Contractor Tax
It is essential to remember the state and local taxes deadlines as the IRS differently sets them.
Quarterly estimated tax payments tax filing for 2022:
After you commence making quarterly tax payments for 2022 tax, the deadlines are:
- 18 April 2022
- 15 June 2022
- 15 September 2022
- 16 January 2023
Personal Income Tax For 1040
Tax filing for 2022 opens on 1st January. Your income tax for 2021 can be filed by April 2022. If you need some time to file your taxes, you can ask for an extension. Once you get an extension, your can file by October 2022.
Make sure you pay on time, or you may be charged with a tax penalty.
How to file taxes as a contractor?
- Doing it on your own
Self-employed individuals can file taxes on their own. if you haven't changed your business in the past two years, you can file tax yourself.
It can be done online or by mail:
- For mail filing, you need to get the tax forms by ordering them online, filling them out, and submit to the IRS. The taxes are paid via check or money order.
- For online filing, you have to create a profile on the IRS website and pay directly.
Online filing is simple and convenient as it speedy, saves paper and you don't have to leave the comfort of your home.
- Hire a tax professional
If you don't know how to file income taxes, you should hire a professional to do it for you. Even if you don't want to hire tax professionals, you can seek tax advice about filing taxes and do it yourself.
- Document collection
Being an independent contractor, you will file tax under the 1099-K or 1099-MISC form. You may also be earning income, dividends, or interest. You need to collect all the information for tax preparation.
- Assess and organize the records
Bookkeeping is a critical procedure. You should have all the receipts needed for tax filing. It may have for tax deductions and give you a gist of your business expenses.
- File your tax return
The last step of tax filing is filing your return. An effective way to submit your tax return is e-filing.
Here are some tips to keep a check on your taxes. It is important to place your system accurately as it makes managing your tax obligations easier.
- Keep your bank account, well-maintained. You should always have a separate bank account for your business and personal use. It will never create confusion and keep things in good flow. You can use apps and software to track everything. Right from sales, returns to gross income, you can keep everything organized.
- It is suggested to conduct an assessment somewhere in the middle of the year. It will help you get an idea of how much tax you own till that period. Reviewing your documents prevents any chance of errors and chaos as the end of the tax year.
Self employment income tax preparation checklist
The 1099 tax checklist includes:
- Record of all the income received.
- Record of all business expenses
- Draft estimated quarterly taxes.
- File annual tax return.
- Congrats yourself for fulfilling your tax responsibilities well.
Always remember that every taxpayer should honestly pay his/her taxes. You should never withhold taxes. Paying taxes is your duty towards your country. If you need any advice for tax payment, contact a tax professional.
