The Independent Contractor's Guide to USA Taxes

Tax season looks a lot different for independent contractors – and for many, it lasts the entire year. Getting paid as an independent contractor means you’re on your own when paying income taxes. Without an employer doing the withholdings for you, figuring out how much to pay when April 15 rolls around is a daunting and stressful task.

Tax season looks a lot different for independent contractors – and for many, it lasts the entire year. Getting paid as an independent contractor means you’re on your own when paying income taxes. Without an employer doing the withholdings for you, figuring out how much to pay when April 15 rolls around is a daunting and stressful task. 

Use this comprehensive guide to independent contractor taxes and feel worry-free this tax season. 

Why Do Independent Contractors Pay Taxes?

You may be doing work for one company, but you are not technically an employee as an independent contractor. Independent contractors are classified as self-employed individuals, so they do not receive an employee benefits package. More importantly, employers won’t withhold taxes on your paycheck, so it’s up to you to pay the IRS. 

If you own your own business or work for yourself (i.e., you own a medical or law practice), you fall under the independent contractor category. You must also pay taxes in the form of estimated quarterly payments. 

How to Pay Independent Contractor Taxes

If you’re new to independent contractor taxes or need a refresher, use this guide to submit your payments and understand what goes into paying taxes as a self-employed individual. 

Understand Your Business Structure

There are four main ways independent contractors operate: 

  • As a sole proprietorship
  • Using an LLC (limited liability company)
  • In a partnership
  • As an S corporation

It’s essential to understand the difference between each type of business structure so you can properly report your income to the IRS. While each of these structures involves reporting earnings as personal income, they differ when it comes to how much you’re paying in taxes. 

Sole Proprietorship Businesses

Just about 73% of businesses in the United States operate as sole proprietorships. It’s the most common way to start a business because it’s simple to set one up. You don’t need to do anything to form a sole proprietorship apart from reporting business earnings to the IRS. Most independent contractors fall under this business structure. 

Limited Liability Company (LLC)

An LLC differs from a sole proprietorship in that the business owner is not liable for the company’s financial obligations. To form an LLC, you must file paperwork with the state you plan to operate before performing any business operations. 

Partnerships

Only about eight percent of U.S. businesses are considered partnerships. A partnership involves a formal agreement between multiple people to share a company’s financial responsibility and profits. 

S Corporations

S corporations are a less common business structure, but still important to know about. S corporations can pass profits, losses, and credits to shareholders without paying taxes. To be an S corporation, a business must meet several strict requirements upheld by the U.S. government. 

Know Which Taxes You Must Pay

Independent contractors must pay a self-employment tax as well as state and federal income taxes.

Self-Employment Tax

Every business must pay the FICA tax, which covers Medicare and Social Security benefits. Employers must pay this tax, but they will split the costs by withholding half from their employees’ paychecks. As an independent contractor, paying the total FICA tax is up to you, and it comes in the form of the self-employment (SE) tax

The Medicare tax takes 2.9% of a business’s net income, while the Social Security tax takes 12.4%. Self-employed individuals must therefore pay 15.3% of their net income to go toward these benefits. You’re essentially paying what your employer would pay on top of what would be withheld from a paycheck. 

If you have a regular job outside of your self-employment work that withholds the FICA tax, you still need to pay the tax on your self-employment income. 

Income Tax

Every individual working in the U.S., regardless of whether they’re employed or contracted, must pay an income tax on all income minus deductions. The percentage of your income that goes to taxes depends on your position in the IRS tax bracket table. When calculating estimated quarterly payments, use this table to determine your income tax rate. 

Calculate Your Estimated Quarterly Tax Payments

The majority of independent contractors must pay the above taxes four times a year with estimated quarterly payments. The IRS provides Form 1040-ES to calculate and file your quarterly taxes. The form comes with detailed instructions and vouchers to send with a check (if you plan on paying by mail). 

Important Forms to Use

Form 1040-ES is the form you use when filing independent contractor taxes, but there are a few more to familiarize yourself with when tax time comes around. 

Schedule C

Schedule C is the section of form 1040 where you report all tax deductions. You can write all business expenses on this form to reduce your tax bill. Schedule C does not get filed until the end of the year when you pay your fourth and final quarterly tax. 

Form 1099-NEC

If you’re a freelancer, you’re likely familiar with form 1099-NEC. Any business that pays you more than $600 in a given tax year must fill out a 1099 form to report the money paid to you. They will file it with the IRS and give you a copy to calculate your total taxable income. 

On the flip side, you may have to file this form for subcontractors, but only if you paid them more than $600.

You must file the 1099-NEC with the IRS and give it to each subcontractor or freelancer by January 31 following the tax year. 

Form 1065

Those in partnerships file taxes individually. However, you must report the business’ financial status together using form 1065

Form 1120s

If you’re a shareholder of an S corporation, you are responsible for filing form 1120s. This filing informs the IRS of the business’s financial activities and how many shares you have in the company. 

Do I Need to Pay Estimated Quarterly Taxes?

When calculating your estimated quarterly taxes, keep in mind that you may not have to pay them. If you don’t expect to owe more than $1,000 in taxes for a given year, then you don’t have to file estimated quarterly payments. You’ll report your income the following April and pay those taxes then. 

The only way to determine if you need to file estimated quarterly payments is to fill out Form 1040-ES and figure out your income tax bracket. 

If you don’t file quarterly taxes when you should, the IRS will add a hefty penalty to what you already owe. 

Taking Advantage of Tax Deductions

Having to pay the total FICA tax on top of income tax means independent contractors take a big financial hit every quarter. Fortunately, independent contractors have a lot of freedom for determining various tax deductions that can reduce your tax liability and keep some dollars in your pocket. 

There are numerous business expenses you can report on Schedule C to get a break from hefty taxes. Here are a few: 

  • Advertising
  • Business meals
  • Small business insurance
  • Bank fees and interest
  • Business-use vehicle and miles driven
  • Contracted labour
  • Business-related education
  • Home office and supplies
  • Legal/professional fees
  • Moving/rent expenses
  • Employee salaries/benefits
  • Telephone/internet
  • Travel
  • Personal expenses 

The above tax deductions are available to independent contractors who identify as sole proprietors or hold an LLC. Partnerships and S corporations have limitations to deductions. 

Each type of deduction comes with its own set of rules for how you can use them. For example, you can only deduct 50% of each eligible business meal, not the entire bill. 

Personal Deductions Explained

Personal deduction is a vague term for miscellaneous business-related expenses you can use to minimize your tax bill. These are the most common personal tax deductions you can claim: 

  • Charitable contributions: You can claim up to $300 in charitable donations made to qualified organizations.
  • Childcare: You can claim up to $3,000 for one child or up to $6,000 for two or more children who require childcare while you work. 
  • Retirement: Claim a deduction from your retirement contributions. The IRS offers tips on how to calculate it as a self-employed worker. 
  • Healthcare: You can deduct health insurance as well as out-of-pocket expenses surrounding healthcare. You can deduct premiums for yourself, your spouse, and your dependents. 

How to Add Tax Deductions 

If you plan on adding numerous tax deductions, you must keep track of every expense related to your business. Write down each time you have a five-minute phone call, keep every receipt from meetings over coffee, and track your car’s odometer reading every time you make a business trip. 

Having a comprehensive list of every potential deduction will help you exponentially when it comes time to file Schedule C. 

To add your deductions, fill out each expense in the corresponding boxes on Schedule C. Follow the form’s instructions for calculating the expense total, and then add it to the corresponding line on form 1040. 

Don’t Forget State Taxes

State income taxes are just as necessary as federal taxes, so don’t forget about them! Each state has different guidelines for independent contractor taxes. Be sure to check with your state’s department of revenue to understand what you owe. 

Most states require you to pay estimated quarterly taxes. To file taxes in your respective state, go online to its department of revenue website, where there are forms and information on how to file. You can find a list of every state’s department of revenue here

Visit your municipality’s website to determine if there are additional taxes on wages where you live locally.

Filing Taxes If You Work in Multiple States

Whether you’ve moved in the middle of the year or work remotely from numerous states, you may have to file multiple taxes for multiple states. First of all, your federal taxes will stay the same, and you don’t need to file them more than once. 

For the most part, you’ll have to file a tax return for every state you work or live in. If you claim one state as a residence but work in another, you must file a return for each. The same goes for if you work in multiple states. 

However, some states only require a return if you earn above a certain threshold while in that state. Check each state’s department of revenue to understand their independent contractor guidelines fully.  

If you work remotely in a state different from your company’s headquarters, you must pay estimated quarterly taxes. 

Taxes for Subcontractors

If you have subcontractors, you are likely responsible for filing their taxes, depending on how much you pay them. You must file form 1099-NEC for every subcontractor you pay more than $600 in a year. 

Before you begin working with subcontractors, work out an agreement so that you both understand what to expect of each other. In the case of an audit, the IRS will determine whether each party is getting a fair deal. If the IRS determines that a subcontractor is performing an employee’s duties, you may be subject to penalties for not withholding the FICA tax. 

How to File Taxes

You have the forms you need, and you know what you can deduct, so it’s time to start paying your taxes! There are three common ways self-employed individuals pay their taxes:

File Yourself

Filing yourself is the most challenging way to pay taxes. Still, if your income is reasonably straightforward and deductions aren’t complicated, you shouldn’t have a significant problem filing taxes yourself. All you need are the forms listed above and an itemized list of your income and expenses. If you filed independent contractor taxes last year, you’d need that, too. 

You can either file your taxes by mail or online using the IRS website. To file online, all you need to do is create an account, fill out your personal information, and enter your credit card or bank account information. 

To file by mail, you need to order the correct tax forms. The IRS will send them to your address promptly. Once you receive them, you can fill out the forms and mail them by following the instructions on the first few pages. Remember that you need form 1040-ES and Schedule C as an independent contractor. 

Hire an Accountant

If you’re not so good at math, there are thousands of accountants across the country who love crunching numbers and helping you bookkeep and file. A Certified Public Accountant (CPA) is ideal for those whose businesses are growing or if you’ve had many changes in the last year, making taxes a bit more complicated. 

If you don’t want an accountant to file taxes for you, they can still help with advice, particularly on the best ways to estimate your quarterly tax payments. 

Use a Tax Software Program

Online tax software programs like TurboTax and H&R Block offer an easy way to file taxes using the internet. They help you estimate payments and send the information to the IRS for you. All you need to do is fill out your income, expenses, and a few other details. 

If you like help from accountants, these programs offer live sessions and help in the case of an audit – for an extra cost, of course. 

The biggest downside to these software programs is the costs. They charge a hefty price, particularly for independent contractors who will need to use the site a lot. 

Tax Deadlines for Independent Contractors

Anyone who pays taxes in the U.S. knows about the April 15 deadline to get their return, but independent contractors need to be mindful of additional deadlines, especially quarterly payments. Bookmark these deadlines so you never miss a payment. 

The deadlines may change each year, but the IRS typically keeps the exact dates, so it’s not likely. State and municipal taxes may be different from the following deadlines. 

Estimated Quarterly Taxes

The four payments for estimated quarterly taxes are typically due as follows

  • Quarter 1: April 15
  • Quarter 2: June 15
  • Quarter 3: September 15
  • Quarter 4: January 15 (following year)

Personal Income Tax

Your income tax must be filed using form 1040 by April 15 following the taxable year. This day is also when you submit deductions using Schedule C. If you paid quarterly taxes, you would likely receive a return – unless you paid less than you owed. 

S Corporations

S corporation shareholders must file form 1120s by March 15 following the taxable year. 

Partnerships

Individuals in a business partnership must file taxes together using form 1065. This payment is due March 15, following the taxable year. You file individual taxes from a partnership quarterly.

Subcontractors

If you hired and paid a subcontractor more than $600 in a given year, you must fill out and return form 1099-NEC to the IRS and the subcontractor by January 31 following the taxable year. You must fill out a separate form for each subcontractor. If you’re a subcontractor, you’ll receive the same document from your employer by January 31. 

Extensions

Do you need more time to file your taxes? The IRS allows you to request an extension using form 4868. You can easily file for an extension online using the IRS’ Free File software. 

Once accepted (it usually takes about 30 minutes), you will have until October 15 to file your income taxes from the previous year. A whole six months is an excellent extension for those who need more time to save money or gather their books. 

Keep in mind this is an extension to file, not pay. If you receive an extension to file your taxes, you must pay the quarterly taxes by their deadlines.  

FAQs

Do you still have questions about independent contractor taxes? Keep reading below for more tips on filing and paying. 

How Much Taxes Do You Pay as an Independent Contractor?

Independent contractors have to pay the FICA (Federal Insurance Contributions Act) and income tax every quarter if they expect to owe more than $1,000. The amount you pay depends on your income, expenses, and tax bracket. 

On the other hand, if you make under $400 a year in independent contractor work, you do not need to file taxes with the federal government. States typically don’t require tax payments, though it varies state-by-state. 

How Much Money Should I Set Aside for Taxes as an Independent Contractor?

You don’t want to be caught empty-handed when it’s time to pay taxes. Aim to set aside about 30% of your taxable income (total income minus deductions) so that you’re worry-free come tax season. 

Can Independent Contractors Avoid Paying Taxes?

Not paying taxes is illegal, and independent contractors are no exception. If you don’t pay quarterly taxes or file your income tax, you risk hefty fines, audits, and even jail time. 

How Do I Know if I Need to Pay Estimated Quarterly Taxes?

You’ll need to pay estimated quarterly taxes if you expect to owe the IRS more than $1,000. You can calculate this using form 1040-ES and by looking at your previous year’s tax payments if you filed self-employment taxes. 

Do Independent Contractors Pay More Taxes Than Standard Employees? 

Independent contractors can end up paying more taxes than salaried employees because they have to pay the entire amount of the FICA tax. However, you can minimize what you owe by adding various tax deductions. 

Do I Need to File a W-2 as an Independent Contractor? 

No, independent contractors do not have W-2s. Employers will instead file a 1099-NEC for you.

Do Independent Contractors Get Tax Refunds? 

It is possible to get a tax refund, even if you didn’t pay estimated quarterly taxes. If you paid more in quarterly taxes than you owed, you would get a refund. However, if you underpaid on quarterly taxes, you may owe them come April 15. 

The most likely scenario where you would receive a refund without paying quarterly taxes is to hold a salaried job outside of your independent contractor work. In this case, the government would owe you more in return than you owe in independent contractor taxes.

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