If you work alone and provide services to people or businesses, you are most likely self-employed, an independent contractor, or a gig worker. You must pay income taxes in addition to other taxes since the money you earn is regarded as company income. If you have employees, you must pay additional taxes. Knowing the taxes you'll need to record and pay helps you prepare for tax season if you're thinking about becoming an independent contractor or are already one.
What Exactly Is a Freelancer?
A person who directly provides services to the general public is known as an independent contractor (IC). People who work as independent contractors could be dentists, physicians, or lawyers. They might also work in the construction, electrical, or plumbing industries. They might also consist of other gig or service workers, such as freelancers or drivers for ridesharing services. The Internal Revenue Service (IRS) views independent contractors as self-employed individuals who work for themselves as opposed to being classified as someone else's employee. Your company does not need to be classified in any way.A sole proprietorship—a one-person business that isn't organized as a corporation—is the standard business type for tax purposes. The single-member (owner) limited liability company is another typical business structure for ICs (SMLLC).What Taxes Are Owed by Independent Contractors?
You must pay several different sorts of taxes as a self-employed person operating as a sole proprietor:Tax on Self-Employment
Social Security and Medicare taxes are due on everyone who works in the United States. These taxes are known as "self-employment taxes" for freelancers and other self-employed individuals. These taxes are computed using the net income of your company (profits). The self-employment tax rate is 15.3 percent, with 12.4 percent going toward Social Security and 2.9 percent going toward Medicare.Half of the total, or the amount an employer would shell out for these taxes, is deductible. The Social Security portion has an annual cap that is set at a specified amount. To avoid penalties (if applicable), you must pay an additional 0.9 percent Medicare tax on your total combined income as an IC and employee if your IC and employee earnings for the year exceed $200,000 To figure out how much self-employment tax you owe overall, utilize Schedule SE. Then, you must include this sum on Form 1040/1040-SR, your individual tax return Self-employment income is used for Social Security credits each year. You don't have to pay self-employment taxes if you don't have any company income for the year, but you won't receive Social Security credits based on that income.taxes on federal income
Business owners are regarded as independent contractors. Any personal income you receive from your firm, as well as business tax deductions, must be reported to the government on your return. The majority of independent contractors file their federal income taxes on Schedule C as part of Form 1040 and are either sole proprietors or LLCs with one member. To determine your net profit or loss, add your business income to other sources of income (such as wages or investment income) on Schedule C. This will give you your net taxable income for the year. You must include the income on Schedule C and report it on your tax return if you get a Form 1099-NEC from a client indicating payments paid to you and tax withheld as part of your business income.taxes on state income
Most states require you to report and pay state income taxes on your business income. There is no state income tax in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming. Earned income is not subject to taxation in New Hampshire, although dividends and interest are. 5. For details on how your state's income taxes operate, get in touch with the tax authority there.Taxes projected
As a business owner, you often do not have money deducted from your pay over the year for income taxes and Social Security/Medicare taxes, unlike employees. Estimated taxes and self-employment taxes can be computed using the tax spreadsheets on IRS Form 1040-ES. To prevent underpayment penalties, you must pay estimated taxes throughout the year. The due dates are typically April 15, June 15, September 15, and January 15 of the following year for most taxpayers and most years. Due to Hurricane Ida, residents and company owners in Louisiana, as well as some areas of Mississippi, New York, and New Jersey, received extensions on their IRS filing and payment due dates. Taxpayers in certain parts of Kentucky were also given extensions as a result of the tornado in December 2021. To find out if you qualify, visit the IRS's disaster relief announcements.Taxes on Employment
If you have employees, you must deduct federal income taxes from their salaries, pay various employment taxes, and file tax returns with the Social Security Administration and the Internal Revenue Service (SSA). FICA taxes for Social Security and Medicare must be split equally between you and your employees. Based on the employee's taxable income, the rate is the same as the self-employment tax (15.3%). From employee paychecks, you deduct the employee portion and set aside money as the employer to pay the IRS. Federal income tax withholding and FICA taxes must be paid at least monthly, and you must submit IRS Schedule D, Form 941.7, quarterly. Employers are responsible for funding unemployment benefits for workers who lose their jobs through federal and state unemployment taxes. That tax is not paid by employees. On employee salaries of over $1,500 in any calendar quarter, the rate is 6 percent. To report and pay those taxes each year, you must complete IRS Form 940.Independent contractor tax deductions
By deducting business expenses, you can lower your business income. These costs must be incurred with the intention of turning a profit in order to be deductible. Additionally, they must be common and required (helpful and appropriate). See Schedule C's list of permitted expenditure deductions. Depending on your business condition, you may be eligible to take the following significant deductions. For supplies, labor, shipping, and other costs associated with creating goods for resale, a separate estimate for "cost of goods sold" is made on Schedule C. The cost of running a home business relates to the area you utilize for your office or other business purposes. Only the space you routinely and solely use can be deducted (only for business purposes). This deduction is computed on Schedule C using a simplified formula for smaller locations or IRS Form 8829 for real expenses. In your independent contractor firm, work-related driving expenses are tax deductible. If you use a car for both work and personal travel, you can only deduct the business portion of the cost, either through actual expenses or an annualized standard mileage rate. Include these costs on Schedule C. You can spread out the costs of large assets that your company owns across several years, such as a car, a building, furnishings, or equipment. It is a non-cash deduction that is reported separately and is referred to as "depreciation." Depreciation should be computed using IRS Form 4562 and reported on Schedule C. Based on their business net income, independent contractors are also eligible for a 20 percent tax deduction known as a "qualified business income deduction." This deduction is in addition to the typical company deductions and is available through the 2025 tax year. This deduction must be computed using IRS Form 8995 and added to your Form 1040.11How to File Income Taxes as a Self-Employed Person
You'll need information on your income and expenses for the year before you start the process of completing your company income tax return. To justify all the deductions you want to make, create a profit-and-loss statement (sometimes called an "income statement") and keep thorough records of all your costs. To include business information on Form 1040, many small businesses use tax preparation software that guides you through the various sections of Schedule C, Schedule SE, and other schedules and forms.Advice for Independent Contractors Filing Taxes
Here are some suggestions to lower your tax burden and prevent problems with a tax audit. Getting Your Business Taxes Paid Less Nobody likes paying income taxes, but by deducting all allowable company expenses, you can reduce your personal tax burden. You may be able to claim tax credits for different company operations in addition to taking all allowable deductions. A work opportunity tax credit or a credit for providing health insurance to employees are a couple of examples. Keeping Records From the Beginning to Tax Filing When you file your tax return, you are not required to include all of your company's records, but what if you are audited? It's crucial to keep thorough records since the IRS scrutinizes deductions for things like home office space and travel expenses, among other things. For instance, you must maintain at-the-time records of your driving expenses that contain the date, the mileage, and the business objective. Obtaining Tax Assistance for Independent Contractors Business taxes are complicated, and there are several restrictions, thresholds, and exclusions to take into account. For instance, even an apparently straightforward deduction, such as the one for home usage for business purposes, has numerous problems. You can save money and avoid a tax audit by hiring a certified tax advisor to assist you with your business taxes.Questions and Answers (FAQs)
How do I pay taxes as a self-employed person? Online payment of federal taxes, including projected taxes, is the most convenient option. The IRS accepts debit or credit card payments made directly from a bank account, and it also provides businesses with the Electronic Federal Tax Payment System (EFTPS). Mail-in payments are another option. Federal employment taxes, including FICA and federal unemployment taxes, must be paid using the EFTPS system or another online means accepted by the IRS. How much money can an independent contractor earn before taxes are due? You must be aware of the following information before determining whether you must file a tax return and pay income taxes for the year:- Your status as a filer
- Any deductible sums?
- Your annual income sources, including those from self-employment.
- Self-employment taxes are not due on earnings of up to $400 per year from self-employment.
