If you work as a freelancer or self-employed person, you likely get paid as an independent contractor rather than an employee. This kind of work affects the way you file and pay your taxes. You’ll have extra responsibilities, file additional forms to make sure you’re paying the government enough during the year, and pay a self-employment tax.
It’s important to understand independent contractors’ taxes correctly so you won’t get slapped with fines and penalties by the IRS. This article will give you an overview of independent contractors’ taxes and a step-by-step guide on how to file as an independent contractor.
What is an independent contractor?
An independent contractor refers to a person, business, or corporation that provides products or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work for an employer on a regular basis but rather on a project-by-project basis, when they may be subject to the agency’s laws.
The key characteristic of an independent contractor is the ability to retain control over the work they’re being paid to complete. According to that guideline, there is a wide range of careers that allows you to work as an independent contractor, including, but not limited to:
- Freelance accountants or bookkeepers
- Freelance writers
- Virtual assistants
- Lawn care providers
- Personal trainers
You may qualify as an independent contractor regardless of your business’s structure. For example, you could be considered an independent contractor if you work as a sole proprietor, form a limited liability company (LLC), or a corporation. In short, you can be considered an independent contractor as long as you’re not classified as an employee.
Note: If you run a small business and hire people to work for you, you’ll have to classify them as independent contractors or employees. Misclassifying an employee as an independent contractor could trigger an IRS tax penalty.
How to file taxes as an independent contractor
Before you start gathering paperwork and crunching the numbers in preparation for tax season, you need to be sure if you need to file taxes. In the US, you’ll only need to file a tax return if your annual net earnings as an independent contractor total more than $400.
Filing independent contractor taxes will take different steps depending on your business structure. However, they generally share the same steps in common that you need to follow.
Specify tax deductions for independent contractors
As an independent contractor, you may be eligible for certain deductions for both business and personal expenses. Those deductions can significantly lower your taxable income for the year, so be sure to save these kinds of receipts:
- Business travel, accommodations, and meals expenses
- Marketing and advertising expenses
- Gas, car mileage, and other vehicle-related expenses
- Equipment purchases
- Rental or lease payments
- Home office expenses, including mortgage and property taxes
- Self-employment retirement plan expenses
- Business insurance
- Phone and internet bills
- Legal expenses
Independent contractors can also claim a deduction for out-of-pocket health insurance premiums. This deduction includes medical, dental, and long-term care insurance premiums. You may also be eligible to deduct the expenses for your spouse’s and children’s insurance. However, there is an exception that if you have access to a spouse’s insurance plan, you can’t deduct health insurance premiums.
Other independent contractors’ deductions include mortgage interest, student loan interest, and real estate taxes. An independent contractor can also get a tax break for contributing to a self-employed retirement plan or a traditional IRA (Individual Retirement Account.)
Fill out essential tax forms for independent contractors
There are hundreds of IRS forms when it comes to filing taxes. Fortunately, as an independent contractor, you only need to focus on a couple of essential documents. Let’s take a closer look at the essential records that an independent contractor needs to complete for tax season:
- Form 1040: Both traditional employees and independent contractors must complete and submit Form 1040 before the tax deadline each year. This form records the details and specifics of your gross income and calculates how much you owe Uncle Sam or how much of a refund you can get back.
- Schedule C: You need to submit this form together with your Form 1040 if you work as a sole proprietor or are the only owner of an LLC. You’ll have to provide precise details regarding your income, mileage records, inventories, and business expenses in this form.
- Schedule SE: This document helps you determine the amount you owe in self-employment taxes based on your net income for the year.
- Form 1099-MISC: While Form 1040 and Schedule C are the paperwork you submit to the IRS, Form 1099-MISC is the document you receive from clients you’ve done business with throughout the year. It’s a record of the payment you received from the companies who hired your services.
Set up a practical timeline to pay your taxes
Now that you have a better understanding of what is an independent contractor and how to file taxes as an independent contractor, let’s make your tax-filing process more efficient with a practical timeline.
- Keep track of your business expenses and earnings
An independent contractor usually works with many different projects, contracts, and clients. This makes staying on top of all these earnings and expenses a bit tricky. Using a meticulous tracking tool of your business’s inflows and outflows throughout the year will help make tax season less stressful.
- Set up a payment plan
Instead of paying a sizable amount of taxes at the end of the fiscal year, you can consider planning as soon as you receive your first paycheck of the year. Try estimating how much money you expect to make and how much you anticipate owing for taxes at the start of the year. Based on this estimate, you can make payments quarterly to reduce the expected total of your tax liability.
As payments come in, set aside a certain amount to a separate account to get ahead of your tax bills. You can avoid overspending that part of your income by saving them for a later date.
- Note your deadline
When you run your own business, you’ll be accountable for keeping track of various critical deadlines. One of them is the deadline by which you must file your taxes. It could be a good idea to mark your calendar for April 15th, the last day to submit your taxes to the IRS.
You might also be interested in:
- How To File Taxes For The First Time: A Complete Guide To All Your Questions.
- Your Complete Guide to the US Tax Return Definition.
The bottom line
After knowing how to file taxes as an independent contractor, it’s time to start gathering all your tax information, receipts, and other expenses documents, storing them all in a safe place before filing your taxes.
Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.