How To File Independent Contractor Taxes 2022
Disclaimer: This blog post is intended to provide generalized information designed to educate a broad segment of the public. Its not personalized tax, investment, legal, or other business or professional advice. If you have questions, speak with a qualified professional.
Every month, employers all over the US withhold taxes from their employees paychecks. But for an independent contractor like you, the IRS expects you to pay your own federal and state taxes as a self-employed person.
Its easy to feel alone in the complicated world of taxes when theres no employer in the picture . Not to worry, though weve got you covered! In this post, well explain everything you need to knowincluding independent contractor taxes you should pay, deductions you can claim, the forms you need to submit, and other best practices.
What About Independent Contractor Form 1099
As an independent contractor, you dont fill out Form 1099 you receive it from your clients.
In other words, business owners need to report payments to nonemployees through Form 1099-NEC if the payment totaled $600 or more per tax year.
So, if youve received $600 or more from a single client during the year, they are obliged to file Form 1099-NEC to the IRS and provide you with a copy as well.
You can then use the information in the form to report your income and calculate your taxes.
If the payer neglects to send you Form 1099-NEC, be sure to remind them on time.
However, bear in mind that if a client paid you more than $600 during the year and didnt send you a 1099, youre in no trouble. Form 1099 is their tax obligation, and theyre the one who will be facing penalties for neglecting to report nonemployee compensation.
NOTE: Even when a client doesnt have to report yearly payments to you , you still need to report all your income, even if you did not receive a 1099 for it. Likewise, if you are due a 1099 and dont receive it, you still need to report the payment to the IRS.
What Are The Tax Implications For An Independent Contractor
Unlike employees, independent contractors are required to pay their own income taxes and self-employment taxes. Self-employment taxes include Social Security and Medicare taxes. The current rate of self-employment taxes is 15.3% of the independent contractors wages, with 12.4% of that rate going towards Social Security and 2.9% going towards Medicare.
Generally, independent contractors should keep back one third of their income to pay these taxes. However, the required withholding could be more or less depending on the individual financial circumstances of the contractor. The IRS provides a worksheet to determine the amount of withholding for the self-employment tax. Individuals also should speak with an experienced tax professional to determine the amount of the withholding.
Independent contractors are required to make estimated tax payments on any income that is not subject to withholding. Individuals who work only part time as independent contractors must pay self-employment taxes on those wages, even if they hold full-time jobs with employers who withhold taxes from their paychecks. Estimated tax payments are made quarterly with specific due dates set by the IRS. Payments not received by the due date may be subject to interest and penalties at the end of the tax year.
DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.
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Hiring A Tax Professional
If you have any questions about filing your taxes or if your business has undergone recent growth, itâs a good idea to consult with a Certified Public Accountant . When youâre a potential new client, many CPAs are willing to sit down with you for a free consultation.
Even if you donât hire an accountant to do your tax preparation, they can help advise youâfor instance, on the best way to estimate your quarterly taxes. Learn more about how to hire an accountant.
You can also find tax professionals who can file for you and provide some tax advice for less than what a CPA would cost. With Bench, you can add tax advice and filing to your subscription and get unlimited, on-demand access to our in-house tax professionals.
Further reading:Choosing a Tax Advisor: Everything You Need to Know
Ensuring New Employees Provide Correct Information
When you hire new employees always verify the nameand Social Security number.
Ask them to show you their Social Securitycard if it’s available.
It’s okay for you to photocopy the Social Security cardbut as I said before it isn’t required.
Keep your payroll records up to date.
This applies to both new and existing employees.
Remind employees to report any name change due to marriage,adoption, divorce, or other circumstances,first to the Social Security Administrationand then to you.
Make sure employees know that notifying their employerof a name change is not enough.
They must complete Form SS 5, Applicationfor a Social Security Card to have the change made on theirSocial Security record.
Form SS 5 and additional informationare available at www.ssa.gov.
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How Much Social Security And Medicare Taxes Does An Independent Contractor Pay In California
The self-employment tax often varies from year to year. The current self-employment income tax is 15.3%.
From that amount of tax, 12.4% of it will go to Social Security. It will also be collectible of a maximum of $118,500 for the net earnings. The last 2.9% will go to Medicare, having no limit to collectible earnings.
Independent contractors have to pay Social Security and Medicare for both the employer and the employee. In other words, they will pay their own taxes, along with the portion for their clients. As a regular worker, they’d only pay 7.65% – but as a regular worker, that amount doubles.
Try our California 1099 tax calculator to quickly see how much you’ll owe at the end of the year.
In order to reduce the total liability, you’ll want to take advantage of tax deductions by itemizing your expenses at the end of the year.
How Do You File A Tax Extension
If you dont have your tax paperwork done in time, you can request a tax-filing extension online for free. However, note that this extension grants you more time to file, not extra time to pay taxes. In other words, you still have to pay your taxes on timeyoure just delaying the paperwork by a few months.
The easiest way to get an extension is by paying your estimated taxes using the IRSs online payment portal. Just look for the extension tab while moving through the portal. Tax extensions bump your paperwork-filing deadline back six months. If you apply for an extension, expect to have your paperwork in order no later than October 15, 2021.
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Independent Contractor Tax Deductions
As a self-employed person, you are eligible to write off business expensesmeaning you can deduct certain costs of running your business from your taxable income. This effectively reduces the income you pay taxes on at the end of the year. You may want to work with an accountant to ensure youre aware of all of the tax write-offs available to you. Common tax-deductible business expenses include:
- Advertising and marketing costs
- Mobile phone and internet costs
- Continued education
- Home office expenses
- Tax advice and preparation fees
Getting Paid As An Independent Contractor
Employees who work for someone else have state, federal, Social Security and Medicare taxes withheld from every paycheck they receive. But if youre an independent contractor, it doesnt work that way.
When your clients send payment for your work, no one takes money out of your paycheck for taxes. Instead, as a self-employed person, youre responsible for setting aside enough money to pay your taxes when theyre due. Well talk more about how to pay your taxes in a little bit.
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Independent Contractor Taxes: An Example
So, how does calculating your own independent contractor taxes work?
Lets say during the year you earn $40,000 as an independent contractor from working with two companies. These are your only jobs and youre not an employee anywhere else. You should receive a 1099-MISC from each company confirming how much they paid you during the year. Youll include this income on Part 1 of your Schedule C.
You also have some expenses that you can deduct from your income. You work from a qualified home office, which is 200 square feet and using the simplified method, you can deduct $5 per square foot. Your home office deduction is $1,000.
You also drove 600 miles during the year for some required assignments, so you can take a deduction of $348 . In total, you have $1,348 in deductions so the total net profit as an independent contractor that you report on Schedule C is $38,652. That income amount will be included on Form 1040 as your taxable income.
Once you know how much you earned, youll need to figure out how much you must pay in self-employment taxes. Using Schedule SE, you calculate that you owe self-employment taxes of $5,914. Half of this tax that you pay is taken as a deduction on Page 1 of your Form 1040.
Now that youve completed your Schedule C and Schedule SE, you have the income and deduction information you need to finish filing your 1040 personal tax return.
Tax Accountants For Independent Contractors In Roseville And Sacramento Ca
Complying with tax laws can be tricky, particularly if this is your first time operating a sole proprietorship or working as an independent contractor. If you are self-employed, make sure you have small business accounting support from a skilled and experienced tax professional.
Cook CPA Group works with independent contractors in all types of industries throughout the Sacramento and Roseville, CA areas. For a free consultation about taxes for independent contractors in California, contact our Sacramento CPA firm online, or call our law offices today at 432-2218.
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File Form 1040 And Appropriate Schedules
Independent contractors use Form 1040 to report and pay their small business taxes. Sole proprietorships and single-member LLCs report business income on Schedule C.
Report your business deductions in part two of Form 1040 Schedule C. Image source: Author
Have your accounting software open as you file your business taxes. Tax software can help you identify additional business tax deductions reported in part two of Schedule C.
How Is Independent Contractor Income Paid And Reported
Employees typically get paid on a consistent schedule, such as weekly, biweekly or monthly. As an independent contractor, its up to you and the payer to come to an agreement on when youll be paid and how that transaction will take place. For example, the payer may mail you a check, pay you via wire transfer or send payment through an ACH deposit.
These payments are not considered a salary or wages for tax purposes because the vendor doesnt deduct taxes. That means no federal income taxes, Social Security taxes or Medicare taxes are taken out before you receive the money. Be mindful of how you decide to receive the payment though some services like PayPal may charge a fee.
Come income tax season, the payer is required to send you a Form 1099-MISC reporting all of the income they paid you the previous calendar year. This Form 1099-MISC takes the place of a W-2, which traditionally employed individuals receive from their companies. There is one exception to this rule though. If you earned less than $600, you still must report the income, but the payer doesnt have to send you a Form 1099-MISC. If you work with multiple people or businesses throughout the year, you may receive multiple copies of this form. Payers are required to have these completed and postmarked by the end of January each year.
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Pros And Cons Of Being An Independent Contractor
The pros of being an independent contractor generally relate to the greater freedom they enjoy. They can set their hours, pursue work they love, and decide what work they will and will not accept. Those who can work from home may save money on transportation and the wardrobe needed to work in an office. They may also get the home office tax deduction that allows them to deduct the business portion of their bills for such things as insurance, rent, repairs, security systems, and utilities and services.
They have complete control over building their business, from hiring and firing to choosing clients. Unlike employees who have a set annual salary, there’s no limit on how much money they can earn. Finally, they can enjoy the sense of pride and accomplishment in building a successful business enterprise that belongs to no one but them.
The cons of being an independent contractor are related to the risk of going bankrupt and the opportunity cost of a regular career. They aren’t supported by a regular salary when business is terrible, and their income is unpredictable and highly volatile month over and year over year. This income fluctuation undermines them vis-a-vis banks and lenders for mortgages, car loans, and other types of loans. They are responsible for all business costsno reimbursable expense reports for themand if working alone, they lack the support and camaraderie of coworkers.
Lowering Your Business Tax Bill
No one likes paying income taxes, but you can keep your business tax bill lower by deducting all legitimate expenses possible. In addition to taking all of the deductions possible, you may be able to apply for tax credits for various business activities. Some examples are a work opportunity tax credit for hiring disadvantaged workers or credit for giving employees health insurance.
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When Do Independent Contractors Need To Pay Taxes
An independent contractor who expects to earn $1,000 or more in tax liability will have to file quarterly tax estimates. They must pay taxes by each quarterly due date, or they can face penalties when they file their total income at the end of the year.
Although you may have to submit estimates at the appropriate deadlines, all freelancers share the same tax deadline with W-2 employees: April 15th.
- Taxes are due for income earned between January 1st and March 31st.
- Taxes are due for income earned between April 1st and May 31st.
- Taxes are due for income earned between June 1st and August 31st.
- Taxes are due for income earned between September 1st and December 31st.
If you cannot make any quarterly tax payment, you can submit an IRS Form 2210 to waive the fee. You will have to explain why you could not make a payment and include proof, such as:
- Bank statements
- Evidence of disability, injury, or hospitalization
- Retirement documents
The IRS will disperse any overpayments through a refund when you file your annual income.
If you cannot file your independent contractor taxes by April 15th, you can submit Form 4686 to request a six-month extension. However, it is important to note that this is only an extension to submit paperwork.
To avoid penalties, you must pay all taxes you owe to the IRS by April 15th.
What Taxes An Independent Contractor Pays
In addition to the regular taxes you pay on your 1040 for the income you received, you must also pay self-employment taxes. They take the place of Medicare and Social Security, which you pay as an employee. You pay the full amount of self-employment tax instead of sharing the equivalent with an employer.
According to the IRS, the current rate for self-employment tax is 15.3 percent. Of that, 12.4 percent is for Social Security, and 2.9 percent is for Medicare. You are allowed to deduct half of this tax.
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Set Up The Right Bank Accounts
Maintaining a separate bank account will help you keep business and personal expenses separate. This also helps with the record keeping part of things. While youâre at the bank, set up a separate savings account too. Itâll make it even easier to transfer your 25 to 30 cents for every dollar you earn to pay for taxes.
How To Keep Tax Records As An Independent Contractor
A benefit of being an employee is that there is likely an HR and Payroll department that ensures all of your requisite tax is paid. However you, my friend, are your own boss! Whether all of your income comes from independent contracting or just a portion of it, itâll be up to you to hold on to your paperwork.
One of the most frustrating aspects of being an independent contractor is having tax season roll around and feeling bewildered by all that must be done. You might feel overwhelmed about possibly being hit with steep penalties and fees .
The goal with this article is to make your tax situation and filing your 1099 taxes as seamless as possible while avoiding any tax penalty
Your records should include a summary of all your business transactions and clearly indicate gross income and total expenses.
If you perform work on a platform, they may provide you with an annual statement of activity which makes things quick and easy. For independent contractors who perform work on multiple platforms or operate as a sole proprietorship, you may want to create an email inbox to hold anything that might be needed when itâs time to organize your tax information. Remember, tips and cash payments also need to be accounted for.
Depending on the kind of work you do, managing expenses may require a little more planning. I get it, itâs easy to forget about the ink cartridge you bought last minute, or the expedited shipping you paid for to make sure an order arrived in time.
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