Independent contractor taxes can be a bit tricky if you’re used to filing a traditional 1040 form like most “regular” full-time employees.
As with most taxation, there’s a lot of confusion (and even deception) around the topic.
That’s because, when you’re a sole proprietorship, business owner, or self-employed individual you’re taxed differently than when you’re simply an employee.
So it can get tricky.
But don’t worry: Understanding and dealing with independent contractor taxes can be simpler than you think and getting a handle on independent contractor taxes is definitely NOT a good reason to avoid working for yourself.
With the help of our in-depth article below, you’ve got this. Soon you’ll be handling your taxes without a problem.
Note: these tips are primarily for independent contractors paying taxes in the United States. While the generic advice may be helpful, please investigate the rules and regulations in your own area to assure you’re abiding by local laws.
Are you an independent contractor? (2 questions to answer):
Before we get into the (sometimes dull) topic of independent contractor taxes, let’s make sure you’re in the right place.
If you answer yes to either of these 2 questions, then you should be paying independent contractor taxes:
- Are you self-employed (including partnerships or part-time businesses like a side-hustle)?
- Have you accurately received a 1099-Misc tax form?
If the answer to either of these questions is “yes,” then you’re in the right place. We’ll walk you through what you need to do in order to pay taxes as an independent contractor.
Independent contractor taxes vs. employee taxes
It might be that you’re not a full-time business owner, but instead making a little extra money on the side of your job. In that case, you’ll have your traditional day job taxes as always plus some additional independent contractor taxes to pay.
Here’s the basic difference between independent contractor taxes and employee taxes:
As an employee, you don’t actually take home your full salary or an hourly wage. (You probably noticed this the first time you got paid as a teenager. Grr.) That’s because your employer sets aside taxes for you to cover your tax liability.
But as an independent contractor, your clients don’t set aside payments for your tax liability, which means you’re responsible to pay those taxes yourself (still, Grr.) or you’ll incur a penalty.
In short, you may have a hands-off approach to taxes, forgetting about them until April each year when you scan a few docs into some accounting software and then get a nice tax return check a few weeks later.
When you’re an independent contractor, the hands-off approach doesn’t work. You’ve got to know what’s going on with your money and your tax liability.
Keep reading and we’ll walk you through the whole thing.
Independent contractor tax basics
Let’s explore a few basic truths you should know about paying taxes as a self-employed individual, sole proprietor, or independent contractor.
You must pay taxes on your business income
First, it’s critical to understand that you must pay taxes on any income you make from your own business. Here are a few myths you may have heard in the past:
Myth: If you don’t call yourself a business or don’t have a business license, you don’t have to pay taxes. Wrong. Any income you make doing any kind of hobby or side-hustle should be reported to the IRS or you could incur fines, jail time, or other penalties.
Myth: You don’t have to report income under $600. Wrong. You’re responsible to report any and all income you make to the IRS regardless of the amount.
The moral of the story is this: if you make any money at all as an independent contractor, you must report it to the IRS and pay taxes on it.
Bummer, we know. But true nonetheless.
You should pay quarterly taxes
As a typical employee, you’re used to reviewing your taxes on an annual basis. But when you’re paying taxes as an independent contractor, you’re required to pay taxes quarterly.
Basically, the government knows what we all do deep down in our hearts: We’re terrible at managing our money.
That’s why employers take a small bit out of your paycheck to pay the government each time you get paid.
In actuality, as an employee, you’ve been paying taxes all along (sneaky government) and you just reconcile your tax liability on an annual basis.
Since you function as your own boss when you’re an independent contractor, you have to pay quarterly business taxes so you’re not stuck without funds come “tax time” in the spring.
How to pay independent contractor taxes
Now that you understand a bit more about how independent contractor taxes work, let’s get down to the tactical stuff.
Here’s exactly how to pay independent contractor taxes.
Step 1: Estimate your quarterly tax liability
First, you have to make an educated guess about how much money you’ll make (and therefore how much money you’ll owe) in any given quarter.
The IRS recommends using form 1040-ES but you can also use a quarterly tax calculator to estimate.
Remember, this number doesn’t have to be perfect. If you estimate too high or too low one quarter, just adjust for the next quarter.
Step 2: Make estimated quarterly tax payments
Once you’ve estimated your tax liability as an independent contractor, you have to actually make a quarterly tax payment.
You can send a check payment along with the aforementioned Form 1040-ES by mail, or (if you’re not ninety years old) you can pay online, by phone, or from your mobile device using the IRS2Go app.
Lots of tax services like Turbo Tax, HR Block, or your tax preparer also have quarterly options.
Step 3: Receive 1099-Misc forms from clients (if applicable)
Once the tax year comes to a close (Dec. 31 of any given year), any client you worked with over the previous year should send you a 1099-Misc Form to comply with IRS standards.
It’s your clients’ job to understand who gets a 1099 form, but if they’re not used to working with independent contractors, you may need to remind them.
Store these forms together in a safe place since you’ll need them to file your taxes.
Step 4: File Schedule-C at tax time
Finally, when the time comes to reconcile and report your tax status to the government, you’ll need to file a Schedule-C form—an appendage to the traditional 1040 forms used to report income.
A Schedule-C reports profit (or loss) from a sole-proprietorship or other personal business. As an independent contractor, this means you.
File your taxes as always—using a CPA or tax software—ensuring the extra information is accounted for.
Bonus: basic tax deductions for independent contractors
The joy of running your own business is that some expenses which otherwise wouldn’t have helped your tax liability can amount to a nice deduction on your taxes as an independent contractor.
Here are just a few common tax deductions for independent contractors:
- Online services such as project management tools or invoicing software.
- Domain registration and web hosting to keep your website running.
- Your home office (sometimes) counts as a deduction. For WAY more detail on that, click here.
- Marketing, advertising, and promotions you ran to promote your services.
- Computer, phone, and other “tools of the trade” you need to complete work for your customers.
- Business insurance and health insurance.
Where to go from here?
Now that we’ve covered the basics of independent contractor taxes, you might be wondering where you go from here.
Here’s what you have to do: Take control of your business money.
I don’t care how bad you’ve been with money in the past, or how much you hate tax forms, or how scary the government sounds.
You have to take control.
Use the information in this article to begin your journey of accounting for, estimating, and paying your independent contractor taxes on a regular basis and you’ll avoid the headache, frustration, and penalties that come from neglect.
If all else fails (and you have the money for it) consider hiring a CPA to walk you through exactly what you should be doing—at least during your first few years.
From there, you’ll learn. A few small fines will whip you into shape and soon you’ll be handling your independent contractor taxes like a seasoned pro.