An Independent Contractor’s Guide to Taxes
If you’re self-employed or a consultant, you likely make money as an independent service provider rather than an employee. The IRS defines an independent professional as a person who performs help someone else, while controlling the method which the work is done. In other words, someone pays you to carry out a service or provide a product, yet they only have a say in the final outcome.
As an independent specialist, there are some unique obligations where taxes are worried. Recognizing the standards for filing and paying taxes as an independent contractor can help you stay clear of concerns with the Internal Revenue Service.
Who Qualifies as an Independent Contractor?
The key attribute of an independent contractor is maintaining control of how the work they’re being paid to do is performed. With that said standard in mind, there are a selection of jobs that offer the capability to work as an independent professional, such as:
- Accountants
- Freelance writers
- Hairstylists
- Lawn care providers
- Electricians
- Physicians
- Dentists
- Attorneys
Independent professional status can use despite how your business is structured. You could be thought about an independent professional if you operate as a sole proprietor, create a minimal responsibility business, or LLC, or adopt a company structure. As long as you’re not categorized as an employee, you can be taken into consideration an independent professional.
Take note: If you work with people to benefit you in your business, you’ll need to determine whether to identify those people as independent professionals or staff members. Improperly identifying an employee as an independent specialist could cause a tax penalty. The IRS takes into consideration a person to be an employee if the person who’s paying them to work can regulate what will be done by that employee as well as how it will certainly be done.
How Is Independent Contractor Income Paid And Reported?
Employees commonly make money on a regular schedule, such as weekly, twice monthly or monthly. As an independent specialist, it depends on you and also the payer to find to a contract on when you’ll be paid and also how that deal will certainly occur. For instance, the payer might mail you a check, pay you through cable transfer or send payment via an ACH deposit.
These payments are ruled out an income or incomes for tax obligation objectives due to the fact that the payer does not deduct any kind of money for tax obligations from the payment. That suggests no federal revenue taxes, Social Security taxes or Medicare tax obligations are obtained before you receive the money. Be mindful of how you decide to receive the payment however– some solutions like PayPal might charge a charge.
Come earnings tax period, the payer is called for to send you a Kind 1099-MISC reporting every one of the income they paid you the previous fiscal year. This Kind 1099-MISC replaces a W-2, which commonly utilized people receive from their companies. There is one exemption to this policy though. If you made less than $600, you’re still called for to report the earnings, but the payer does not have to send you a Form 1099-MISC. If you deal with multiple individuals or businesses throughout the year, you may receive several duplicates of this form. Payers are called for to have these completed and also postmarked by the end of January yearly.
Paying Taxes as an Independent Contractor
For tax obligation functions, the Internal Revenue Service treats independent service providers as self-employed people. That implies you undergo a various set of tax payment as well as declaring policies than employees.
You’ll require to file a yearly income tax return to pay government revenue tax obligation if your web earnings from self-employment are $400 or even more. In addition to your Type 1040, you’ll submit a Schedule C to calculate your earnings or loss for your business. You can file a Set up C-EZ type if you have much less than $5,000 in overhead.
You’ll additionally be required to pay self-employment tax, which covers the quantities you owe for Social Security as well as Medicare taxes for the year. Since 2019, the self-employment tax obligation rate is 15.3%. Self-employment tax is calculated making use of Set up SE on Form 1040.
An added 0.9% Medicare surtax puts on high-income earners. For 2019, the Medicare surtax relates to solitary filers and heads of family whose revenue goes beyond $200,000, married couples filing jointly whose earnings goes beyond $250,000 as well as couples submitting separately with income of $125,000 or more.
If you’re self-employed as an independent specialist and you expect to owe $1,000 or more in tax obligations when you submit your annual return, you’re called for to make estimated quarterly tax payments. These repayments are designed to cover your self-employment tax as well as your income tax obligation for the year. The very first quarterly tax payment for each tax obligation year is due in April. Subsequent repayments are due in June as well as September, and then January of the list below year.
Falling short to pay your estimated quarterly tax obligations or underpaying them may result in a tax obligation penalty. If a penalty is owed, it will be calculated when you submit your yearly return in April.
And also keep in mind, you’ll need to pay income tax obligation and also estimated quarterly taxes at the state degree, as well. Stopping working to pay state earnings tax obligations or quarterly taxes, or underpaying each quarter, can additionally cause a tax obligation penalty.
Tax Deductions for Independent Contractors
Reductions lower your gross income for the year and also there are several deductions that you might be able to insurance claim as an independent service provider. Depending upon the sort of business you own, your deductible expenditures might include:
- Advertising costs
- Business insurance
- Vehicle-related expenses
- Legal expenses
- Home office expenses
- Rent or lease payments
- Equipment purchases
Independent contractors can additionally claim a deduction for health insurance costs they pay out of pocket. That consists of premiums spent for clinical, dental as well as long-term treatment insurance. If you’re wed and/or have youngsters, and spend for their insurance also, you might have the ability to subtract premiums paid on their part, also. The exception to the rule is that you can’t subtract premiums for health insurance if you’re qualified to be covered by a partner’s insurance plan.
As an independent contractor, you can additionally deduct personal expenditures, such as mortgage interest paid, passion paid to student loans and also real estate taxes. You can also get a tax break for contributing to a self-employed retirement or a traditional IRA. If you’re looking for a retirement option, take into consideration a STRAIGHTFORWARD IRA, SEP IRA or a solo 401( k). These plans permit deductible payments, with qualified withdrawals taxed at your regular revenue tax rate in retirement.
Filing Your Taxes: DIY or Hire a Pro?
If you’re discussing in between submitting your own taxes as an independent service provider or hiring a tax obligation expert, consider your business revenue and expenditures. If you have a relatively straightforward tax situation and also do not assert several personal or business deductions, then it might be simpler as well as more economical to use a tax obligation declaring software application to do them yourself. On the other hand, if you have several business expenditures to deduct, are a high-income earner or subcontract job to various other independent professionals in your business, it might deserve the investment to work with a tax obligation pro to prevent any errors or errors in your filing.
The Bottom Line
The tax regulations for independent service providers and self-employed people are created to make sure that you’re paying an appropriate quantity in tax obligations, based on what you gain. While they’re different from what a traditional employee experiences, they’re not excessively complicated. Obtaining familiar with the fundamentals can make filing your tax obligations as an independent specialist easier to navigate.
