Tax Time! How Much Will I Get Back As An Independent Contractor?
So, you are an independent contractor, and you are wondering how much of your hard-earned money the government will let you keep this year. Good question. It can be a bit of a complicated process regarding self employment tax. But don't worry, we have taken care of all the nitty gritty details for you!
There's no better time than tax season to assess what money you might be due from Uncle Sam. Here is what you need to know about taxes for independent contractors:
Back to BlogWhat is an Independent Contractor?
An independent contractor has a business of their own, chooses what work to do, and does not work exclusively for just one company. They also have full control over their own schedule and are responsible for their own expenses, self-employment taxes, and liability insurance. Independent contractors can be paid by the hour or by the job. The amount of money you earn as an independent contractor depends on how much time you put into your business, which in turn determines how much you pay in taxes. It's important to keep track of the self-employment tax that you will owe. Here are some examples of independent contractors:Freelancers
These people work for themselves, sometimes on a contract basis, and generally do not receive benefits like health insurance or sick days. They get paid by the project, rather than by an hourly wage.Contractors
Contractors may be hired by one company to work on a specific project for a set amount of time. They can also be hired by multiple companies to perform different jobs at one time. In either case, contractors are responsible for their own equipment and materials needed to complete their projects successfully.Consultants
Consultants often provide professional advice or services to businesses but don't necessarily do so on a regular basis or at all times during the year. The IRS has strict rules about when people can be considered consultants vs. employees but if you're providing services as an independent contractor there is no doubt that your income will be subject to self-employment taxes.What’s the Difference Between a Dependent and Independent Contractor?
There is a lot of confusion around tax time, and that is no surprise. The line between independent contractors and dependent contractors is blurry, and it can be hard to know whether you're right on the edge of being one or the other. So, what exactly is the difference between an independent contractor and a dependent contractor? And how will it affect your taxable income?Independent Contractors: Your Own Business
If you have your own business, you're probably an independent contractor. You report your income on Form 1099-MISC instead of on a W-2, and you file Schedule C with your taxes. You will need to make quarterly estimated tax payments throughout the year to avoid penalties.Dependent Contractors: Someone Else's Business
If someone else has hired you as an employee, but you are not technically employed by them (they don't withhold taxes from your paychecks), then you are likely a dependent contractor. You can report your income on a W-2 form, but not on Form 1099-MISC when you file your taxes. Dependent contractors still have to pay self-employment (SE) tax in addition to their regular income tax—but they won't need to pay estimated taxes quarterly.What’s the Difference Between Independent Contractors and Employees?
When it comes to taxes, there is one thing that all independent contractors have in common: they pay their own. While this may seem obvious, there are actually a few differences between being an employee and being an independent contractor worth knowing about. For starters, as an employee, your employer pays half of your Social Security taxes and Medicare taxes—it's part of what you make when you get paid. As an independent contractor, though, you are responsible for paying both halves of Social Security and Medicare taxes yourself. Another difference is how much tax you owe on your income. As an employee, you only pay taxes on your earnings above $2,500 per year (and then only up to $7,950). As an independent contractor? You are responsible for paying taxes on every penny you earn. The third major difference on income tax is in how much money you get back from the government at tax time. As an employee, you generally receive a refund when filing your taxes because the government withheld more than what was owed in taxes throughout the year (so they can give it back to you at the end of the year). But as an independent contractor, if you have a lot of deductions and credits, then you may be able to get quite a bit back from the government. But if you don't have many deductions and credits, there's a good chance that you won't get much—or any—money back from Uncle Sam.How is an Independent Contractor Income Tax Paid and Reported?
If you are an independent contractor, your income will be reported on a 1099-MISC form. This form is used to report miscellaneous income that is not subject to withholding or payroll taxes. The 1099 form reports income paid to non-employees. This includes people who are paid for their services in cash but also includes payments made by check, credit card, or direct deposit. If a company has a contract with an independent contractor that requires payment of fees on a regular basis (like a monthly retainer), the company must report all payments made under that contract on Form 1099-MISC. In addition to reporting all payments made under contracts for services, Form 1099-MISC can also be used by businesses to report other types of payments such as prize awards and interest paid on loans.Paying Taxes as an Independent Contractor
We know paying taxes can be a little bit intimidating if you're not used to doing it. Here is some handy information to help you figure out what your tax situation is so that you know what to expect:Tax Deductions for Independent Contractor Taxes
As an independent contractor, you are responsible for paying your own taxes. But that doesn't mean that there aren't some deductions available to you on your taxable income when you file your federal income taxes. The most common tax deduction for independent contractors is the home office deduction. You can deduct a portion of your rent or mortgage, as well as utilities and maintenance costs associated with your home office space. This can be another room in your house or a separate room with its own entrance. The IRS has strict rules about what qualifies as a home office, including the amount of time spent working at home and the nature of the work performed there. Other common tax deductions include:- Healthcare expenses (including premiums)
- Unreimbursed business expenses
- Travel expenses (including mileage)
