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Being self-employed comes with a certain amount of freedom. As an independent contractor, you can forget about the standard 9 to 5 and set your own hours. Instead of getting an annual salary, it’s up to you to pay for your work and sell it. Instead of receiving work from a manager, you can choose who you work with and what kind of work you do. 

Of course, with more freedom comes more responsibility. If you make more than $400 a year as an independent contractor, managing your business finances also means managing your taxes. 

While you don’t need to become a tax code expert except for running your own business, understanding the basics of your personal tax system can help you make better financial decisions. You will avoid unnecessary penalties, finally allowing you to take full advantage of your expertise, reducing the pressure of additional work.

 What is an independent contractor?

According to the Internal Revenue Service (IRS), an independent contractor is a person who provides work to another person and controls how the work is done, such as what, how, and when it will be done. . The payer, or the client, has the sole right to control the outcome of the work. This means that the client can control what you create for them, but not the timeline in which you create it. 

 If you are an independent contractor, you are considered self-employed and must pay self-employment tax, in addition to other types of taxes, depending on your business structure. 

Types of independent contractors 

There are several ways to structure your business as an independent contractor. Two of the most common include: 

Paying taxes as an independent contractor or as a full-time employee 

Independent contractors and full-time employees share some key similarities when it comes to the types of taxes they pay. But there are differences when it comes to specific types of taxes, taxation, taxation, and tax deductions available.

 Tax forms 

 

Application 

 

Paying taxes 

Taxes and deductions 

 

Tax exemptions for independent contractors 

As a self-employed person, you have the right to “deduct” business expenses, which means you can deduct some of the costs of running your business from your payroll. This significantly reduces the amount you pay in taxes at the end of the year. You can work with an accountant to make sure you know about all the tax deductions available to you. Common tax-deductible business expenses include: 

 

  1. Pay the estimated tax bill in 40 installments 

If you expect to pay more than $1,000 in taxes each year as an independent contractor, the IRS requires you to pay quarterly tax returns (covering both self-employment tax and income tax), or pay unpaid bills during tax season. Fees vary based on the amount you paid, the due date, and the current interest rate for late payments, which the IRS publishes quarterly. You can use Form 1040-ES to calculate and pay your estimated state and federal taxes, based on your gross income. 

 Deadlines for plan payments are usually April 15, June 15, September 15 and January 15, unless those dates fall on weekends or public holidays (in which case they will be extended to the next business day ). 

  1. File the annual return 

If you make at least $400 in net profit as an independent contractor, the IRS requires you to file an annual tax return. Even if you earn less than $400, you can still file a tax return; double check to see if you meet any requirements for IRS Form 1040 and Form 1040-SR (for those born before January 2, 1957). To file an annual return, use Schedule C to report your business income and expenses. You must also file Schedule SE (Form 1040) to report your self-employment taxes.

 The deadline for submitting your annual report is usually April 15 of the following year.

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