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What Is an Independent Contractor?
If you work for yourself and take on work from other companies as a freelancer, you’re probably considered an independent contractor. You’re an independent contractor if you’ve been hired by a company to do work but you haven’t been hired on as an employee.
Even if you haven’t necessarily gone through the steps to becoming an independent contractor, if you’re receiving 1099 forms from companies you worked for throughout the year, you’ll need to file your taxes as an independent contractor. Examples of independent contractors may include artists, freelance writers or editors, website designers, or software developers.
If you’re an occasional freelancer and you’re not sure whether you’re classified as an independent contractor, consider submitting Form SS-8 to the Internal Revenue Service (IRS) before filing your taxes. When you complete and submit this form, it allows the IRS to review your information and confirm or deny your status as an independent contractor. When you file taxes as an independent contractor, it’s important to claim all your taxable income and take advantage of deductions you qualify for.
How Do Independent Contractors Get Paid?
If you’re an independent contractor, you don’t receive a paycheck from an employer for a salary or hourly wage. You’re self-employed and when your clients pay you for the work you completed, you put it into your business’s separate bank account. This allows you to keep track of the income you earned throughout the year so you can ensure you pay the proper federal income taxes.
Tax Payment and Filing Rules
As an independent contractor, the clients you work for aren’t responsible for taking out taxes from your pay throughout the year. Therefore, you must calculate your taxable income and deductions so you can pay the IRS the taxes you owe.
Independent Contractor Taxable Income
Your taxable income is the money you earned throughout the year. However, as an independent contractor, you’re entitled to deductions for expenses you incurred, which may include:
- Advertising costs: The money you spend to advertise your business is considered a tax deduction.
- Equipment costs: If you needed to buy equipment for your business, such as a printer or computer program, you can deduct it from your taxes.
- Vehicle-related costs: When you travel to conduct business, you can deduct vehicle-related expenses, such as gas.
- Legal expenses: Legal fees you paid to ensure your business remained in good standing are also tax deductible.
- Home office costs: If you work from home, you can deduct a portion of your home office costs, such as internet service or printer paper.
- Rent or lease payments: If you conduct business at home, you can deduct a portion of your rent or lease payments. If you lease an office space, these payments are also deductions.
- Business insurance: Your business insurance policy premiums also qualify as tax deductions, since they’re considered business expenses.
As an independent contractor, you don’t qualify for group health insurance with an employer. If you purchase your own health insurance, you may be eligible to deduct the health insurance premium costs you incur.
Others Tips on Filing Taxes as an Independent Contractor
Since you don’t have an employer taking federal income taxes from your paycheck every two weeks, filing taxes on your own may get complicated. As an independent contractor, it’s important to keep your income and expenses separate from your personal account. You should also:
- Keep your receipts: If you deduct expenses on your tax return, keep the receipts that correspond to these deductions. The IRS may ask to see proof of the expenses you incurred to confirm they’re related to your business.
- Report all of your income: Even if a client doesn’t produce a 1099 for income provided to you, you’re still responsible for reporting it. You must report all taxable income to the IRS or you risk being subjected to penalty fees or interest charges.
- Remember to pay your taxes quarterly: As an independent contractor, if your tax liability will be more than $1,000 for the year, you’re required to pay taxes in April, June, September and January. Estimate your taxes each quarter and pay the IRS how much you think you’ll owe. At the end of the year, you may owe more or you may get a refund, depending on the calculations. This ensures you’re not stuck with a huge tax liability at the end of the year that you can’t afford to pay.
- Verify your independent contractor status: If the company or client you’re working for not only hires you but also directs your work, you may be considered an employee and not an independent contractor. Verify with the IRS and the company that you’re an independent contractor before filing taxes as one.
It’s important to understand if you’re considered an independent contractor or an employee. If you confirm your status as an independent contractor, you’re responsible for filing your own taxes with the IRS. To ensure you file your taxes accurately, you must maintain good records and keep your business expenses and income separate from your personal bank accounts.
When you file taxes as an independent contractor, you’re required to pay every quarter. You’re eligible for tax deductions on many expenses related to your business. However, you must keep the receipts for these transactions and be able to justify how they relate to your business. While you have more freedom as a self-employed contractor, it’s important to ensure you’re following the IRS tax laws to avoid penalty fees, interest charges, or a surprising tax bill at the end of the year.
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