Umbrella SolutionDecember 6, 2024How To File Taxes as an Independent Contractor?

Let’s be real — being an independent contractor is pretty cool. You set your own schedule, choose the projects you love, and, best of all, you’re your own boss. But with that freedom comes a big responsibility: taxes. If you’re used to getting a paycheck with taxes taken out, you may be wondering how to file taxes as an independent contractor.

In this guide, we’ll explain everything you need to know about independent contractor taxes to the best deductions you can claim. We’ll also break down the differences between independent contractor forms and employee forms so you’re not left guessing when tax season comes around.

So, get to it! Freelancer, gig worker, or small business owner? Read on to learn how you can avoid penalties, all while maximizing your deductions for a better tax return.

As an independent contractor, no taxes are taken out of your payments like they are for employees. You get the full amount for the work you do—no state, federal, Social Security, or Medicare taxes. Sounds good, right? Well, not so fast—just because you get paid in full doesn’t mean you’re tax-free.

You still have to set aside money for your taxes. As a self-employed individual, it’s your job to track your income and save for your tax obligations, which include federal, state, and self-employment taxes (Social Security taxes and Medicare).

In short, as an independent contractor, you get paid differently than a regular employee. Instead of getting a W-2 with taxes taken out, you’ll get a 1099 from your clients that reports how much they paid you during the year. This means that as an independent contractor, you’re responsible for filing and paying your own taxes, federal and state (if applicable), without any automatic deductions from your earnings.

It’s a whole different ballgame compared to being a W-2 employee, and the tax filing process can be overwhelming at first. Don’t worry; we’ve got you covered!

Clients pay you on a schedule that works for both of you—whether that’s via check, wire transfer, or online services like PayPal. But here’s the catch: no taxes are withheld from those payments.

At the end of the year, your clients should send you a 1099-MISC form, which reports the total amount they paid you. If you earned less than $600 from a client, they’re not required to send you a 1099 form, but you still have to report the income.

As an independent contractor, you are in charge of your own business, so you also get to handle your own taxes. Unlike employees who have taxes withheld from their paychecks, you have to calculate income tax rates, fill up the independent contractor tax form, and pay your taxes. There are two main types of taxes you need to worry about self-employment tax and income tax.

1. Self-Employment Tax:

The self-employment tax is a big part of what independent contractors need to pay. This tax covers your Social Security and Medicare contributions, which are withheld from employee’s paychecks. But as a contractor you pay both the employee and employer portions of these taxes. The self-employment tax rate is 15.3% of your net business income.

• 12.4% goes towards Social Security.
• 2.9% is for Medicare. FICA 

So, unlike employees who only pay half of this tax, you pay the full amount. But there’s a little relief: the IRS allows you to deduct the employer’s portion of the self-employment tax (i.e. 7.65%) as a business expense when calculating your adjusted gross income. This will lower your taxable income and, therefore, the amount you owe.

2. Income Tax:

In addition to the self-employment tax, you’ll also need to pay federal and state income tax just like any other taxpayer. The amount you owe will depend on your total income for the year minus any deductions you claim (which we’ll get into later).

Your income tax is based on all the money you make from self-employment, whether it’s in cash, cryptocurrency, or even goods and property. The IRS considers all forms of payment taxable income, so make sure to include everything when filing your return. Now, you might be wondering how to do taxes as an independent contractor. Don’t worry. We have covered every bit here.

Check the IRS’s page for taxable and non-taxable income.

As an independent contractor, you don’t have an employer withholding taxes for you, so the IRS requires you to make quarterly estimated tax payments. These payments are based on an estimate of your income for the year and help you avoid a big tax bill at the end of the year.

You need to make these payments if:

• You’re filing as a sole proprietor, partnership, or corporation.
• You expect to owe $1,000 or more when you file.

Quarterly payments are due on:

• April 15th
• June 15th
• September 15th
• January 15th (of the following year)

You might be wondering how to file 1099 taxes to calculate your estimated taxes. You should use Form 1040-ES which has a worksheet to estimate your income and taxes. You can also pay income tax by mail using the vouchers in the form booklet or online through the IRS website.

Make sure you get it right to avoid penalties. The IRS recommends paying at least 90% of the tax owed for the current year or 100% of what you paid last year, whichever is smaller.

If you overpay, you’ll get a refund when you file. If you underpay, you’ll owe more.

Let’s go through an example to help illustrate how to do 1099 taxes.

You made $40,000 this year as a self employed contractor and worked with two companies. Since you don’t work anywhere else, both companies will send you a 1099-MISC by January 31st, showing how much they paid you. You’ll report that income on Part 1 of Schedule C.

• Home Office Deduction: You have a dedicated home office that’s 200 square feet. Using the simplified method, you can deduct $5 per square foot, so that’s $1,000.
• Mileage Deduction: You drove 600 miles for business purposes during the year. The IRS allows a deduction of $0.58 per mile so that you can deduct $348.

Total deductions are $1,348. Your net profit is now $38,652. That’s what the taxable profit you’ll report on Form 1040.

Check out our detailed guide on independent contractor tax deductions and how to claim them

• Now, you need to calculate your self-employment tax. That’s on Schedule SE. Using the net profit of $38,652, your self-employment tax is $5,914.

  Since you’re both the employee and the employer, you can deduct half of your self-employment tax ($2,957) on Form 1040, which will reduce your adjusted gross income.

Once you’ve filled out Schedule C (for your business income and expenses) and Schedule SE (for your self-employment tax), you now have all the numbers you need for Form 1040.

So, your taxable income would be the number left over after deductions and self-employment tax.

For filing independent contractor taxes, you need to know what forms you need to file. Each form has instructions that tell you how and when to file. Always check the IRS website for the most up-to-date tax info for self-employed professionals.

1. 1099 Contractor Forms:

Employees get a W-2 from their employer showing their income and taxes withheld. Independent contractors get 1099s from clients. If you earn over $600 from a client, they are required to send you a 1099 form. This could be one of the following:

• Form 1099-NEC (Non employee Compensation): This form reports the payments you received as a non employee (i.e., as an independent contractor).
• Form 1099-MISC: This form is for other types of income (like rent or royalties) but may also report non employee compensation in some cases.

But if a client pays you less than $600, they don’t have to send you a 1099. But regardless of whether you get one or not you are responsible for reporting all your income. Make sure to track all payments throughout the year, even if some clients still need to send 1099s.

2. Form 1040:

The Main Tax Form Form 1040 is the main tax form for contractors used by all U.S. taxpayers to file their taxes. This form collects your income, deductions, and credits to calculate your total tax liability.When you file many of the numbers you report on the 1040 will come from other forms like Schedule C or Schedule SE. Make sure to get your tax info correct to file your 1040 correctly.

3. Schedule C or C-EZ: Profit or Loss from Business:

As an independent contractor, you will use Schedule C (or Schedule C-EZ, a simpler version) to report your business income and expenses. This tax form for independent contractors will calculate if your business made a profit or loss for the year.

a. Income: You’ll report all the money you earned from your clients, including amounts reported on 1099s.

b. Expenses: As a self-employed individual, you can deduct business-related expenses, which will reduce your taxable income. Common expenses include:

• Tools and equipment (e.g., for contractors who repair roofs or install cabinets).
• Fitness equipment (for personal trainers).
• Home office expenses (if you work from home as a consultant).
• FICA tax: You can also deduct the employer portion of Social Security and Medicare taxes.
• Business insurance premiums: These are usually deductible regardless of your business type.

4. Schedule SE: Self-Employment Tax:

Independent contractors are responsible for paying self-employment tax, which covers Social Security and Medicare. Schedule SE is the form you use to calculate how much you owe in these taxes.

Even if you’re already receiving Social Security or Medicare benefits, you still have to pay these taxes on your earnings. The self-employment tax rate is 15.3% of your net business income, which includes both Social Security and Medicare.

By filing Schedule SE, you’ll calculate your self-employment taxes based on the income you report on Schedule C.

In recent years, the IRS has adjusted the reporting thresholds for Form 1099-K, which reports income received through payment cards and third-party platforms.

 For the 2024 tax year, the reporting threshold is set at $5,000. This means that if you receive over $5,000 in payments through platforms like PayPal or online marketplaces like Upwork, you will receive a Form 1099-K.

Looking ahead, the IRS plans to further reduce the threshold to $2,500 for the 2025 tax year, with the goal of reaching the statutory level of $600 in 2026.

It’s important to note that these thresholds apply to gross payments received. Even if you don’t receive a Form 1099-K, you are still required to report all taxable income on your tax return.

Given these changes, it’s advisable to consult with a tax professional to ensure you’re in compliance and to understand how these thresholds may impact your tax obligations.

If you earned $600 or more in a year, you’ll need to file a tax return even if you didn’t get a 1099. In some cases, you may even need to file a return if your net income is under $600.

Here’s a simple breakdown of how to do your business taxes:

1. Gather Your Documents:

As a 1099 independent contractor, your income is reported as part of your personal income. If you’re a sole proprietor, your social security number is your taxpayer ID number. But if you have employees and an EIN (Employer Identification Number), you’ll need that for tax filing.

Make sure to collect all your income records, including 1099’s, W-2’s, paid invoices, and any other income. Even if your clients are disorganized with paperwork, it’s still your responsibility to report all income to the IRS. Keep everything in one place to make the filing process easier.

2. Prepare Your Records:

Once you have your income documents in order, focus on your business expenses. This includes receipts for anything you spend on your business, such as office supplies, travel, or other business purchases.

Properly documenting your expenses allows you to take tax deductions which can reduce your taxable income — even get a refund. Keeping accurate records is important especially if you get audited.

3. File Your Taxes:

You can file your taxes for independent contractor yourself or work with a tax professional to make sure everything is done right. If your taxes are simple, you can file yourself. You can mail your tax forms or submit them online.

For online filing, you can use commercial tax software or create an account on the IRS website. If you owe taxes, you can make payments directly from a bank account, debit/credit card, or digital wallet. Online filing is the easiest way as it reduces errors, and you can track your payment history.

4. Do You File Taxes Yourself or Hire a Pro?

As an self employed contractor, you have two choices when it comes to filing taxes: you can do it yourself or hire a tax pro. It depends on your business income, expenses and how complicated your taxes are. If you have a simple tax situation with minimal deductions, tax software may be the way to go. But if you have complex expenses, higher income, or subcontracted workers, hiring a tax pro could save you time, stress, and potential errors in your filing.

Filing taxes and understanding the independent contractor taxes can be challenging. Still, with the right information, it doesn’t have to be. Know what you owe in self-employment and income taxes, stay organized with your income and expenses, and you’ll be good to go. Remember, even if you don’t get a 1099, you’re still required to report all your income.

The taxes for independent contractors are different than those for traditional employees, but they’re not impossible. With planning and attention to detail, you can avoid the stress and penalties that come with tax time. And if you find it all too much, a tax pro can help you get it done right.

Are you still wondering how to do 1099 taxes? At Pamgro, we understand that independent contractors have unique tax challenges. Whether you’re doing it yourself or looking for help, we have the resources and tools to help.

Want to maximize your deductions and simplify your tax filing as limited company contractor? Check out our guide to tax deductions for independent contractors for more ways to reduce your tax load.

Need help? Sign up with PamGro today and get your taxes under control and back to business.