Disclaimer: This blog post is intended to provide generalized information designed to educate a broad segment of the public. It’s 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.
It’s easy to feel alone in the complicated world of taxes when there’s no employer in the picture (you are your own boss remember?). Not to worry, though; we’ve got you covered! In this post, we’ll explain everything you need to know—including independent contractor taxes you should pay, deductions you can claim, the forms you need to submit, and other best practices.
Learn the basics of independent contractor taxes
As an independent contractor, you’re responsible for paying both personal income and self-employment taxes.
Your personal income tax as an independent contractor is the tax return you pay if your net self-employment earnings add up to $400 or more. The amount you’ll have to pay varies and is dependent on which of the seven federal tax brackets (from 10% to 37%) you fall into. In most states you will also owe state income tax.
Self-employment tax is comprised of Medicare and Social Security taxes. These taxes are usually shared between employers and employees, however as an independent contractor you are responsible for both the employer and employee portions.
The current (2022) self-employment tax rate is 15.3% of your taxable income—a combination of 2.9% for Medicare and 12.4% for Social Security (on your first $147k of taxable income); however 2021 is on your first $142.8k of taxable income. Even if you’re only an independent contractor as a side hustle and have a part-time or full-time job, you’ll still need to pay these self-employment taxes for your side-hustle earnings.
Later, we’ll discuss IRS tax forms and deductions you can claim when filing your annual tax returns. But beyond income deductions, the government also offers other forms of tax relief—including general business credits, exemptions, and tax lien forgiveness.
Be religious about correctly calculating and paying your taxes, so you don’t end up underpaying and getting penalized by the IRS. It is better to overpay and request a tax refund than to underpay and be subject to possible penalties and interest.
Generally, you can avoid underpayment penalties by paying 100% of your tax owed from the previous year or at least 90% of taxes for the current year. Learn more about this IRS rule here.
Federal tax deadlines for independent contractors 2022
Your calendar year 2021 tax return is due on April 18, 2022, however you can request an automatic extension for up to 6 months by filing an IRS Form 4868. The extension allows you to file your return later but it does not provide you an extension to pay your taxes due.
If you expect to owe up to $1,000 in taxes when you file your return, you have to pay estimated taxes. You can either make all your estimated tax payments as an independent contractor (personal income + self-employment) on April 18 or pay in four equal installments on:
- April 18 for prior year annual return date and first estimated tax due date for calendar year taxpayers
- June 15
- September 15
- January 17 (of the next year)
If any tax due date falls on a holiday or weekend, your taxes will be due on the next business day. If you’re in Massachusetts or Maine, where Patriots’ Day is observed, for example, you have until April 19 to file your taxes. Also, you don’t have to make the fourth payment on January 17—as long as you file your tax return and pay the amount due with it by January 31.
Fill in your W-9 forms
You should provide a W-9 form to every company you work for as an independent contractor. Fill in your correct name and Tax Identification Number (TIN) and send it back. Your payer will then use the info in your W-9 to complete a 1099 form.
Collect complete 1099 forms from clients
Before filling out your own tax forms, you’ll need to collect and review a few completed ones from individuals and businesses that you worked for throughout the year. The information outlined in these forms will help you complete your Form 1040 when filing taxes.
If you received over 200 separate payments and more than $20,000 in payments from a marketplace or partner such as Ebay or Amazon in 2021, you should receive a completed Form 1099-K. from the company.
Some of these companies may still send you this filled-out form even if they don’t meet these payment requirements. But generally, you need to personally report the income made from them to the IRS even if they don’t send you the 1099-K. The limit is currently expected to be reduced to only $600 with any number of transactions for 2022 and future years.
Every client that paid you within the last year should send you a Form 1099-NEC detailing all payments made to you as an independent contractor. These payments will be subject to self-employment tax. Even if a client does not provide you a 1099-NEC, you are still responsible to declare this income on your return.
Before the IRS reintroduced the 1099-NEC in 2020, the Form 1099-MISC was used by clients, tenants, and other payers to record non-employee compensation or one-off payments made to you during the year. Now, 1099-MISC is used by your payers to report payments made to you as non-taxable royalties or for activities like speaking at an event.
Note: If these forms seem confusing, check out these resources on the difference between Form 1099-NEC and 1099-K and why you may receive a Form 1099-NEC instead of 1099-MISC. Don’t stress about it though— you aren’t the one to determine which form(s) you get. Just file your tax returns with any form the client sends you.
Submit mandatory IRS forms
File your annual income tax return using Form 1040 (or Form 1040-SR for seniors—65 years and above—and Form 1040-NR for nonresident aliens). With the 1040 form, you’ll need to submit two schedules: Schedule C for business profits and losses and Schedule SE for self-employment taxes.
Schedule C is a form that shows the profit and loss from your business. The IRS uses this form to determine the amount of taxable profit you earned, so you should report all of your income and losses as an independent contractor on Schedule C.
Reduce your tax payments as an independent contractor by claiming deductions on your Schedule C. For example, you can deduct half of what you pay as self-employment tax from your business income and reduce your income tax.
Other tax deductions you claim as an independent contractor include:
- Health Insurance Premiums: This deduction is not applicable to group/company packages. But if you pay for your health insurance premium out of pocket, you may be able to reduce your taxable income by claiming them as an income deduction.
- Self-Employment Taxes: You can deduct 50% of your self-employment taxes.
- Contributions to a Retirement Accounting: You can deduct up to 20% of your net earnings, which contribute to a qualified retirement account, such as Keogh or SEP IRA. These contributions can be deducted for a given tax year as long as the contribution is made by the due date of your return (April 18, 2022) for the taxpayers calendar year 2021.
- Home Office: You will be able to deduct expenses for using part of your home for business. The home office deduction applies to every home type and can be claimed by homeowners and tenants alike.
- Certain Property: This deduction is called Section 179 property and can include as much as $500,000 of qualified business property. You can only claim the full deduction in the year you began using the property for work, though, so it’s a perfect deduction if you recently moved or bought new assets for business, research, transportation, or manufacturing purposes.
- Mileage: If you use your vehicle for business purposes and can document and prove it, you can deduct the costs it attracts.
- Phone Bill: Do you use your cellphone or house phone at all for business? If so, calculate how much of your phone time is spent on work. If it adds up to 25%, for instance, you can honestly deduct 25% of your phone bill.
- Education: Taking training sessions and additional classes can help you learn new ways to grow your business and attract new customers. You may be able to deduct money spent on continuing education like conferences, webinars, or books when you file your taxes.
If you earn above $400 as self-employment income in a year, you must file a Schedule SE form to determine how much you owe in self-employment taxes. The Social Security Administration also uses this form to calculate your SS benefits.
If your net profit from self-employment was less than $400, but you meet other filing requirements outlined in Form 1040 and 1040-SR, you are still obligated to file your income tax returns with Schedule SE.
Fill out a single Schedule SE form even if you have multiple sources of self-employment income. Add up the gross income and/or losses to complete the form.
If you work as an employee at another company, you’ll need to include the salary, wages, and tips earned from your job and the Social Security taxes you already paid on them in this form. You’ll then subtract this from the total amount of taxable self-employment income to reduce your Social Security tax liability.
Calculating Quarterly Estimated Tax Payments: Form 1040-ES
Estimate your tax liability each quarter using your tax payments in past years and your anticipated annual income.
Say you’re single and earned a total net income (gross income – expenses) of $15,000 in the first three months of the year, you can anticipate net earnings of about $60,000 by year-end (assuming most business conditions remain the same).
Your total net self-employment income: $15,000 x 4 quarters in a year = $60,000
Generally, 92.35% of your net self-employment profit—$55,410 in this case—is taxable for self-employment tax calculation purposes.
Your taxable self-employment income: 92.35/100 x $60,000 = $55,410
At the current 15.3% rate, your total self-employment tax would be $8,478—to be paid in equal parts of $2,120 per quarter.
Your total self-employment tax: 15.3/100 x $55,410 = $8,478
Your quarterly estimated self-employment tax: $8,478/4 = $2,120
On the other hand, your income tax liability is based on your filing status, tax rate, and income bracket. Your taxable income can also be reduced by your estimated deductions on Schedule C.
To start, at a minimum, you can deduct 50% of your self-employment tax liability ($4,239) from your taxable self-employment income, bringing your taxable income down to $51,171.
Self-employment tax deduction: 50/100 x $8,478 = $4,239
Taxable personal income: $55,410 – $4,239 = $51,171
Based on the income tax rates for 2022, you fall under the 22% bracket (your earnings are over $41,775 but under $89,075.) At a 22% rate, that brings your total income tax to $11,258—to be paid in equal parts of $2,815 per quarter.
Your total income tax: 22/100 x $51,171 = $11,258
Your quarterly income tax: $11,258/4 = $2,815
That means your total tax liability is $19,736 (self-employment tax + income tax), and your quarterly estimated tax is $4,934.
Total tax liability: $8,478 + $11,258 = $19,736
Your annual quarterly estimated taxes: $19,736/4 = $4,934 per quarter
Source: The IRS
Other Possible Tax Forms
In special cases, you may have to file any of these forms or schedules with your tax return:
- Schedule E to report profits and/or losses from rental real estate or non-taxable royalty income. If you receive rent on any building or space you own, get paid royalties, or earn income from an S corporation, you have to add Schedule E to your tax return.
- Form 461 to report any abnormal business loss. Find out if you need to fill out Form 461 here.
- Form 3800 to claim general business tax credits.
- Form 4562 to claim deductions on the depreciation or amortization of your assets.
- Form 4868 to file for a six-month extension if you are unable to file your taxes on time.
Independent Contractor Tax Sample
You know the basics of independent contractor taxes, but you might be wondering how to apply these rules when your next deadline comes up. Here’s a quick independent contractor tax example you can use as a template when filing yours:
Say you work for three companies as an independent contractor and earn $55,000 during the year. Here’s how to figure out your tax return.
Schedule C: You should receive a 1099-NEC from each company you worked for, where they detail how much they each paid you. Note the total amount they paid down in Part 1 (income) of your Schedule C. If there are any deductions you can claim, like working from your home office, calculate and include them.
You can get a deduction of $5 on every square foot in your home office and $0.58 per mile for business mileage. So, if your office is 250 square feet and you drive 700 miles for business in the year, you can take a total of $1,250 as your home office deduction and $406 for mileage.
Home office deduction: $5 x 250 = $1,250
Mileage deduction: $0.58 x 700 = $406
Total deduction: $1,250 + $406 = $1,656
That brings your net income as an independent contractor to $53,344, and you’ll report that on your Schedule C.
Net income: $55,000 – $1,656 = $53,344
Schedule SE: Then, with your Schedule SE, you can figure out your self-employment tax—15.3% of your taxable net self-employment income (92.35%)—as $7,538.
Taxable self-employment income: 92.35/100 x $53,344 = $49,264
Self-employment tax: 15.3% x $49,264 = $7,538
You should then deduct half of this tax ($3,769) on the first page of your Form 1040.
Self-employment tax deduction: $7,538/2 = $3,769
With your completed Schedule C and Schedule SE, you have the needed information to file your income tax return.
Prepare for tax time
You don’t need to be a tax professional to handle your own taxes or dedicate countless hours to doing so—no matter how tricky it may seem. All you need is adequate knowledge and, ideally, a bookkeeping software provider. A tool like Neat will help you organize your income and business expenses in preparation for tax season.
Neat is easy to use and will help you with tax preparation.
Ready to take control of your financial record-keeping and tax prep as an independent contractor? Start a free Neat trial to see if it’s the right cloud accounting software for you.