Since you are not an employee of any business, the IRS views independent contractors as self-employed. As an independent contractor, you can operate as a sole proprietor, a limited liability company (LLC), or an S-corporation. The key characteristic of an independent contractor is retaining control of how the work they’re being paid to do is performed.
How Does An Independent Contractor Pay Taxes?
There are four main differences between filing taxes as an employee and filing taxes as an independent contractor. These include:
Reporting self-employment income and deductions on Schedule C.
Paying self-employment tax on Schedule SE.
Paying quarterly estimated taxes.
Receiving form 1099-MISC rather than a W-2.
How to File Taxes As An Independent Contractor
Independent contractors generally file Schedule C, “Profit or Loss from Business” with their individual tax returns to report income and expenses to the IRS. An independent contractor who structures their business as a corporation, a partnership, or an LLC with more than one member may file a separate business tax return.
Independent Contractor Taxes: Important Concepts
Self-employment tax– Self-employment tax covers Social Security and Medicare taxes for yourself. In an employee-employer situation, both parties pay a portion of these taxes. For the tax year 2021, the self-employment tax rate is 15.3%. This rate is made up of 12.4% for social security, which includes old-age, survivors, and disability insurance; and 2.9% for Medicare. Since you’re self-employed, you’re responsible for it whole. You’ll actually get to deduct the employer portion in the end.
Quarterly estimated taxes – The U.S. tax system is a pay-as-you-go tax system, meaning you need to make tax payments regularly throughout the year – April 15, June 15, September 15, and January 15 of the next year. When you’re an independent contractor, paying the government regularly throughout the year is your responsibility. You do this by making quarterly estimated income tax payments. You can estimate how much you need to pay the government each quarter by guessing what your total income for the year will be or by using the amount you’ve paid in estimated taxes the previous year.
Independent contractor tax deductions – Each potential tax deduction will cater to what the independent contractor does for a living. Self-employed health insurance deduction, qualified business income deduction, car and driving related deductions – mileage or actual expenses, home-office deduction, internet, and phone advertising are a few tax benefits that independent contractors may apply on their tax returns.
Resolve Your Tax Bills
If you’ve found yourself in a nasty mess with the IRS, take a deep breath. For taxpayers who may have difficulty paying off an excessive amount of tax debt, there’s a new and improved relief program that consolidates many major relief programs into a one-size-fits-all assistance program. Any issues regarding back taxes, unfiled years, or any other tax-related problems may be solved through one program; the IRS Fresh Start Program!
How Simple Is Qualifying?
Considering that the Fresh Start Program is a federal program, you would think meeting the qualifications may be very difficult, but really, it’s a lot simpler and quicker than you think. Take the following steps in order to find out if you are eligible in as little as 3 minutes.
- Fill out some basic information about yourself and your back taxes here.
- Have a representative reach out to you to discuss your eligibility.
- Go through the enrollment process and finally reduce or eliminate your tax liabilities.