How to File Taxes as an Independent Contractor: A Step-by-Step Guide

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
  • Hairstylists
  • Lawn care providers
  • Physicians
  • Dentists
  • Mechanics
  • Carpenters
  • Manicurists 
  • Personal trainers
  • Therapists

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.

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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.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

‘The IRS Lost My Tax Return’: What You Should Do To Get Your Refund Money Back

Yes, it’s no joke that the IRS can lose your tax return. 

If you have completed your tax return and sent it to the IRS, but they then say they never received it — don’t panic. We’re here to help you, and remember, you’re not the only one caught up in this frustrating and worrying situation. 

We all know it’s not your fault, but this is Uncle Sam we’re dealing with, so keep reading to learn how to fix this problem and claim your refund back.

What should I do if the IRS lost my tax return? 

If you got a notice from the IRS saying that they never received your tax return (they most likely did receive it and lost it in the system), respond and do what they request you to do ASAP. They will likely ask you to resend a signed copy of your tax return. 

In case the IRS didn’t contact you, what you should do next depends on the original method you opted to file your tax return.

  • If you e-filed your tax return:

Whether you filed your tax return directly on the IRS website or through a third-party tax company or service like TurboTax or H&R Block, log into the account that you used to file your tax and check the status of your return. 

  • If your return was rejected: you would need to either correct the issues causing the rejections and e-file your return again or file the return by mail.
  • If the return was accepted: find and write down your declaration control number (DCN). It is a 14-digit number that is given to each tax return. Then contact the IRS at 800-829-1040 and tell them your DCN and the date you e-filed.

BONUS TIP: How to call the IRS 

To contact the IRS, dial 800-829-1040 between 7 a.m. and 7 p.m. local time, Monday to Friday. 

After choosing your language (press 1 for English), do NOT choose option 1, “Refund,” otherwise, you’ll be directed to an automated phone line. Instead, press 2 for “Personal Income Tax.” Then, press 1 for “Form, Tax History, or Payment,” ? press 3 “for all other questions,” ? press 2 “for all other questions.”  

After that, you should be connected with an agent.

  • If you sent your tax return by post:

If you mailed your return, print another copy and re-mail it to the IRS. Any copies of Forms W-2 for the return should be attached. If you paid the tax you owed, include a copy of your canceled check and confirmation of processed payment 

Sometimes, you may need to prove that you did put your return in the mail and sent it, so it’s best to use certified or registered mail. This way, you will be able to track your document and have a paper trail confirming you have sent it by post. 

More importantly, keep all of your receipts and photocopies of the envelope with a postmark or anything that can prove you sent it. They will serve as your concrete evidence if you need them to prove your tax return was indeed sent and the IRS lost it. 

If you’re looking for a tool to help you store those vital documents, Shoeboxed is your best choice. Shoeboxed is an online application that can quickly and securely digitize your receipts and documents and store them in the cloud. On top of that, it automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over your records anytime with ease. Shoeboxed ensures it provides you with accurate data and always keeps your receipts securely backed up and ready for tax purposes. 

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What’s next: When will I get my tax refund? 

Once you’ve resolved all the problems related to your returns, you enter the next ‘worrying stage’: When will I get my tax refund? No wonder why everyone hates dealing with taxes. 

Honestly, there’s nothing much you can do apart from waiting to hear from the IRS. According to the IRS, most tax refunds are issued within 21 days, while some may take longer if the return requires further review, which may be prompted by the following issues::

  • Your return includes errors
  • Your return is incomplete.
  • Your return is affected by identity theft or fraud.

The IRS will contact you by mail if extra information is needed to process your tax return.

To track and stay updated about the process of your refund, consider one of the following methods: 

  • Visit Where’s My Refund?: enter your Social Security number (SSN) or individual taxpayer identification number (ITIN), filing status, and the exact amount of your refund to check your refund status. 
  • Download the IRS’s mobile app IRS2go: prepare the same above-mentioned personal information details to track your refund. 
  • Call the IRS at 1-800-829-1040 (least recommended because as you probably know, you can easily get stuck waiting to speak to an agent.) 

Final thoughts 

It’s totally understandable if you feel panicked and stressed out when the IRS doesn’t receive your tax return. However, try to remain calm, re-file your tax return or prove to the IRS you did send it, then the IRS should quickly process your refund money.  
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Tips To Avoid Errors On IRS’s Recovery Rebate Credit

WASHINGTON –– In response to errors showing up on early tax filings, the Internal Revenue Service today urged taxpayers and tax preparers to make sure they properly determine eligibility for the recovery rebate credit before they file their 2008 federal tax returns.

Some individuals who did not get the economic stimulus payment, and a smaller number of those who did, may be eligible for the recovery rebate credit. However, most taxpayers who received the economic stimulus payment last year will not qualify for the recovery rebate credit on their 2008 federal income tax return.

An early sampling of tax returns shows about 15 percent have errors involving the recovery rebate credit. Some tax returns erroneously claim the credit, do not claim the proper amount of recovery rebate credit or mistakenly enter the amount of the stimulus payment they received on the recovery rebate credit line.

To avoid delays in tax refunds, it is critical that taxpayers know the correct amount of the stimulus payment they received last year, if any, to help determine whether they qualify for the recovery rebate credit now.

The amount of the stimulus payment will not be entered directly on the tax return. For people using a paper tax return, the stimulus payment amount will be required when completing a related worksheet. For people using tax software, the stimulus payment amount will be needed as part of the return preparation process.

How to Get the Recovery Rebate Credit Right

The IRS sent taxpayers nearly 119 million stimulus payments last year. There are three ways individuals can find out how much they received:

  • Check the amount listed on Notice 1378, which the IRS mailed last year to individuals who received the economic stimulus payment.
  • Go to the How Much Was My Stimulus Payment? tool that is available on the IRS Web site, IRS.gov. This can provide the correct amount in a matter of a few seconds.
  • Individuals can call the IRS at 1-866-234-2942. After a brief recorded announcement they can select option one to find out the amount of their economic stimulus payment. They will need to provide their filing status, Social Security Number and number of exemptions.

With the amount of last year’s economic stimulus payment in hand, the taxpayer can then enter the figure on the recovery rebate credit worksheet or in the appropriate location when tax preparation software requests it.

If the taxpayer or preparer is using tax software, the amount of the rebate recovery credit will automatically be calculated and reported properly. If the taxpayer is using the paper method, the rebate recovery credit, as determined through the worksheet, should be reported on Line 70 of Form 1040, Line 42 of Form 1040A or Line 9 of Form 1040EZ.

For most taxpayers, the correct entry for the recovery rebate credit will either be blank or zero.

If there is any question at all as to the amount that should be reported for the recovery rebate credit, the taxpayer or preparer should enter a zero on the appropriate line above, and the IRS will determine whether a recovery rebate credit is due, and, if so, how much.

Some of the major factors that could qualify you for the recovery rebate credit include:

  • Your financial situation changed dramatically from 2007 to 2008.
  • You did not file a 2007 tax return.
  • Your family gained an additional qualifying child in 2008.
  • You were claimed as a dependent on someone else’s return in 2007 but cannot be claimed as dependent by someone else in 2008.

Stimulus Payments Not Taxable; Reports of Extensive Refund Delays False

The IRS has received a number of recurring questions involving stimulus payments and the recovery rebate credit. Here are some important tips to keep in mind:

Taxability. The economic stimulus payment is not taxable and it should not be reported as income on the 2008 Form 1040, 1040A or 1040EZ.

Refund delays. IRS personnel are aware of reports that errors in claiming the recovery rebate credit could delay tax refunds for as much as eight to 12 weeks. These reports are false. As the IRS detects and corrects return errors concerning the recovery rebate credit, refund delays are currently no longer than about one week.

One payment. In addition, the IRS notes taxpayers will receive a single refund that includes any recovery rebate credit to which they are entitled. The IRS will not be issuing separate recovery rebate credit payments.

Refund amounts. The IRS reminds taxpayers they should not use their regular refund from last year in calculating the recovery rebate credit. Some taxpayers may be confusing their regular tax refunds with the economic stimulus payment they received when completing their 2008 tax return.

Direct Deposit Requests. Taxpayers who request a direct deposit will receive the refund in the form of a direct deposit even if errors are detected.

For more information, visit the Recovery Rebate Credit Information Center as well as the rebate questions and answers.