Paying taxes in any industry is both stressful and nerve-racking. Although, when it comes to the regular old 9-5, in most cases, your taxes are taken out, given to the government, and then at the end of the tax season, you get your refund. That’s great! I’m sure at some point we’ve all been there. But, switching from that to being an Independent Contractor can be quite the change.
Being an Independent Contractor can be amazing but can also be a little more stressful during tax time.
It's scary to rely solely on the small tax training you have to make sure that you don’t miss out on anything important.
Thankfully, there are people out there who literally do this as a job. And, guess what, in many cases, they’re also Independent Contractors. So take it from the experts, don’t get lost in the tax-paying game, and never let your anxiety determine any part of your taxes.
By coming to this article, you’ve already taken the first step to successfully getting your taxes under control. So, follow along with this guide, which is just a guide. It’s not in any form of legal tax advice. If by the end of this article you’re still not feeling so great or confident, reach out to a professional!
There’s no shame, and it’s actually highly recommended. For professional advice, you could reach out to a licensed accountant, bookkeeper, or even a representative of the IRS. Taxes are no joke and shouldn’t be taken lightly. Before deciding, read this guide and try to get a bit more of an understanding.
Who qualifies as an independent contractor?
Becoming an Independent Contractor is actually a really special leap into the modern business world. According to the US Bureau of Labor Statistics, a 2015 study showed that “15 million people were self-employed . . . 10.1% of all US workers.” Ten percent is quite a high number when you think about it.
That means that becoming an Independent Contractor is becoming easier and easier for the lower and middle-class, everyday citizens. That’s pretty awesome! So what exactly qualifies as an Independent Contractor? Basically, it’s someone who provides a service, form of work, or any other means for receiving money on a contractual basis. This is important to note because as an Independent Contractor, you’re still working for someone. Whether this someone is a client, a student, or an agency, it doesn’t matter, but the work is done through a contract.
Pretty cool, right? So what types of Independent Contractor jobs are out there? Let’s take a look at the top ten Independent Contractor jobs available:
- Virtual assistant
- Online writer
- Real estate agent
- Online teacher / tutor
- Social media marketer
- Online Content editor
- Amazon reseller
This list provides a bit of a look into the different jobs that can be and, in most cases, are Independent Contractors. There are many, many more out there!
Why is becoming an independent contractor worth the business taxes
No matter what position you’re working in, one will ALWAYS have tax responsibilities that they must hold up to. There are many perks and awesome things that come with being an Independent Contractor, but tax obligations aren’t really the most fun part. Either way, that doesn’t make being an Independent Contractor any less desirable. Here are the top 3 reasons why becoming an Independent Contractor is totally worth paying the tax bill that comes at the end of the year.
1. Be your own boss
There’s no doubt that one of the most desirable perks of becoming an Independent Contractor is that you are essentially your own boss. Yes, in most cases, you’re still completing tasks for clients, but it’s on your time frame. It’s on your rules. You get to decide which clients you take and which ones you hold up a peace sign to. Either way, being your own boss has tons of perks, even with the tax responsibilities that tag along behind.
2. Tax deduction
This is addressed more in-depth later in the article, but tax deductions are a huge asset to being an Independent Contractor. Whether you buy a new laptop or rent out an office space, including all business expenses in your tax return is vital to running a successful business and paying the least possible amount of taxes.
Flexibility is a huge part of being a business owner and Independent Contractor. Of course, there is always going to be a schedule in order to make small businesses work, but it feels fantastic to do that in the desired time.
Paying self-employment tax
Alright, now the good stuff. Paying taxes as an Independent Contractor takes a lot of time and patience, especially when you’re just starting out. Don’t worry if it becomes too confusing or stressful; hire a professional if it does! There’s absolutely no shame in hiring someone to help you file your taxes. Whether you hire someone or do it yourself, all the following are important to know and understand to get the most out of your personal tax return.
Reporting self-employment income
First things first, you must report your self-employment income to the government. If you don’t, it could get intense, and you could end up paying a much larger tax bill depending on your net earnings. In most cases, Independent Contractors will need to file a form 1099 with the IRS. A 1099 form is the most common way to report self-employment income to the Internal Revenue Service (the IRS).
The 1099 form is directly sent from the company, brand, or business you received payment from. There may be points in your freelance or self-employment career that a 1099 Form will not be received from clients. That’s okay, but you still need to report the income.
It’s essential that you find a way that works for you to keep track of all earnings throughout the year. Do not solely rely on receiving a 1099 form from an employer, client, or business.
Estimated quarterly taxes | not optional, but essential
Another vital term that you’ll inevitably hear throughout your time talking or researching about paying taxes as an Independent Contractor is Estimated Quarterly Taxes. Although these payments can be a hassle, they are ultimately very beneficial. This is the government's way of making sure that they get their money and that you’re on target for the upcoming self-employed tax season.
Basically, once you’re established as an Independent Contractor, you will have filed taxes and have a basic understanding of how much money you’ll average in a year. This taxable income is then divided into four parts (four quarters). These are the estimated taxes of your business income for the following year.
The quarterly taxes are set up to pay estimated taxes over the course of the year, so there isn’t one large lump sum of money due when it comes time to pay the income taxes.
The idea is that by the end of the current tax year, you’ll have the money sitting in an account and ready to go. It’s important to keep in mind that these are estimated payments. If you make more or less money throughout that year, the payment structures will vary. Some years you might have money left over, while other years, you might have to add a little bit more to your fund. It all depends on the overall success of the business income.
Are quarterly tax payments mandatory?
The simple answer is yes, you will need to pay quarterly estimated taxes. The IRS requires 1099 workers to pay them by the end of the tax-paying year on the condition that the business or freelancer will owe at least $1,000 in federal income taxes.
Unfortunately, if you don’t pay those quarterly estimated taxes, the IRS can actually charge you. Typically, the IRS will charge somewhere around 0.5% of the overall taxable income owed. In order to avoid this, it’s important to just pay the Quarterly taxes on time.
Where do I pay quarterly estimated taxes?
In order to pay the estimated taxes, you’ll just need to visit the IRS website and decide which is the best and most convenient way for you to pay. You can still pay by mail, but it’s often easier to pay directly from the IRS2Go application, available for iOS and Android. It’s pretty simple to set up these payments, and overall, they’re to help make sure you don’t fall behind or risk underpaying your taxes when tax time comes around. The estimated tax is both helpful and vital to making sure that all US citizens pay income tax without being overwhelmed with fees.
Tax-deductible conditions for independent contractors
Tax deductions are definitely one of the perks of any business in general. As an Independent Contractor, you get your very own personal tax deductions! These can be so much help in keeping your business strong and financially stable. Here is a list of the most typical tax deductions as an Independent Contractor:
- Office supplies
- Wifi, phone, internet, and other related bills deduction
- Health insurance deductions
- Travel deductions
- Vehicle mileage deductions
- Subscription platform deductions
- Education deductions
- Various business insurances
- Office space/work space, rent deductions
- Advertising deductions
Independent contractors love deadlines
As with almost everything else in the life of Independent Contractors, there are definite deadlines that need to be met for paying your taxes. Missing these deadlines could cause heavy fines and overall financial burdens that aren’t worth it. Keep track of the deadlines, study them, know them, and do not miss them.
- Personal income tax is always due on April 15th of each year, unless, of course, April 15th falls on a weekend. They are then due on the following business day.
It’s important to note that sometimes the government has the power to extend the deadline for taxes. Overall, unexpected life changes (COVID, for example) can alter everyone’s plans and lives. But this should never be expected, and you should be ready to have your taxes finished by April 15th. Paying taxes is a timed event that does not have an extendable deadline. The best way to ensure paying taxes on time is to stick with those estimated tax payments throughout the year. While tax season may get pretty hectic, you can make things easier by using Indy’s Calendar tool. It’ll help remind you of all incoming tax deadlines.
Send better invoices with Indy
Indy Invoices makes it easier than ever to send invoices that look great and help you get paid fast. Accept major payment methods like PayPal and Stripe.
How much should I expect to pay in taxes?
Honestly, the tax system is pretty straightforward. As confusing and irritating as it can become for outside expenses, paying personal income tax rarely varies much. A general rule of thumb is that 25-30% of everything you make should be kept for tax purposes.
There are a variety of ways to keep track of this (and plenty of online calculators or programs to help), but just taking out that 25-30% of each payment/paycheck could be the simplest and least expensive way to do it. It’s sometimes beneficial to have a bank account set up strictly for funds that will eventually pay income taxes or self-employment taxes. This is especially important for the first year before quarterly estimated tax payments are established.
Is it possible to lower my taxes or get a tax refund?
Lowering taxes is definitely possible, but it also takes research and effort. In many cases, just keeping track of all of your deductions will help you save a lot of money on your taxes. But there are also a variety of different options out there. The most promised way to keep your taxes low and simple is to be prepared. Take the proper amount out, don’t miss the deadlines, and do what the IRS wants and expects of you.
Getting a tax refund as an Independent Contractor should be expected. Unfortunately, that’s one downside, but on occasion, if you pay estimated taxes quarterly, but your estimation was off, you could end up with money left over. This fund can either be used as a tax refund or rolled over into funding for the following year's quarterly estimated tax payments.
Tax forms you should know about as an independent contractor
There’s no doubt that the IRS loves forms. There is a form for everything, which ultimately is more helpful than harmful. These forms can definitely be confusing at times, so understanding them is vital to any Independent Contractor. Let’s look at some of the top forms that Independent Contractors will see:
1. Form W-9
This form is a simple way to share the correct TIN (Taxpayer Identification Number) with clients that have received businesses or services from you or your company.
2. Form 1099-NEC
This is the most common form seen as an Independent Contractor. This is the way that non-employees report their income to the government. These forms are normally completed by the client or company that bought work from you. They will be mailed and should be used as a reference of income when paying taxes.
3. Form 1099-K
The 1099-K is different compared to the other two as this form comes directly from third-party processors that are handling any money given or received by the Independent Contractor.
4. Schedule C | 1040 Form
Schedule C is the form for deductible expenses. This form is the place where the self-employed report their profit and loss tax-deductible income expenses.
In conclusion, filing taxes as an Independent Contractor isn’t always easy, but it is no doubt vital and totally required by the government. Whether you decide to file them yourself or hire someone to do it for you, it’s important to know and understand what paying taxes means and the basic process.
If you’ve come to this article, you’ve already taken the first step toward being a responsible, tax-paying, Independent Contractor. That is the first and most important step. Take a minute to take all the information from this article and get ready to take on the world of paying taxes as an Independent Contractor. Take precautions, stay prepared, and never miss a deadline. Both your income and peace of mind will thank you.