How to Report and Pay Independent Contractor Taxes
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If you work as self-employed or own small business as a barber-shop, plumber service or other construction services like air condition installation and repairs, it may be a Gig job as a freelancer, that can be a writer, a programmer or a graphic designer. Any work or service that you do or give to somebody else, and get paid for the job done or hours that you spent working for other business or people. You are classified as an independent contractor.
Investopedia: What Is an Independent Contractor?
An independent contractor is a person or entity contracted to perform work for—or provide services to—another entity as a nonemployee. As a result, independent contractors must pay their own Social Security and Medicare taxes. The payer must correctly classify each payee as either an independent contractor or employee. Another term for an independent contractor is a freelancer.
Understanding Independent Contractors
Doctors, dentists, veterinarians, lawyers, and many other professionals who provide independent services are classified as independent contractors by the Internal Revenue Service (IRS). However, the category also includes contractors, subcontractors, freelance writers, software designers, auctioneers, actors, musicians, and many others who provide independent services to the general public. Independent contractors have become increasingly prevalent in the rise of what has been dubbed “the gig economy.”
Self-employed people are often independent contractors; in other words, “an independent business person.” which is a different way of being paid for your work.
If a company employs you, you have to appear every day at the workplace in the working time as the company’s rules. If you are an independent contractor, you may work when you want. Your obligation is according to the contract you and the company or the person agreed on.
An employee has a more complicated relationship with the employer than the contractor. Benefits, vacations, sick days, and can be fired for a justified reason. Contractor gets paid only for his work has it was completed according to the agreed before starting the work. The contractor will pat by himself his vacation, benefits, and other needs, including the tools and equipment that is needed for doing his job.
The primary and most crucial difference is the way taxes managed. A regular employee pays the taxes by the employer withholding the tax from the salary paycheck. The employee pays stub will show all the with-holdings made by the employer.
The employer pays federal tax, State tax, Social security, and health care on behalf of the employee. The contractor’s pay stub will show only the total paid for the job made by the contractor.
The people that work as a contractor have to take care of the tax paying as a personal business. They have to make their yearly tax report where they can deduct the costs of there little business.
Independent Contractor Defined by IRS
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
If you are an independent contractor, you are self-employed. To find out what your tax obligations are, visit the Self-Employed Tax Center.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.
However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors or Employees.
As taxes are a serious issue, you should know how to manage your tax paying, and you should be avoiding problems with the tax authorities. Penalties by the IRS can be painful. Read this article and learn how to manage your income taxes as an independent contractor to avoid troubles, and save money by knowing what and how much you can deduct the business expenses.
Independent Contractor Is:
The tax authorities consider an independent contractor for income tax purposes as Sole proprietor. This definition comes as a default from a small business. You do not need to pay for registration at the state or the IRS, and you do not need to constitute any corporation.
When you work as an independent contractor, you are paid for the work you have done, but not as a salary or wages. You are paid as a business income. It is not a salary, and it is income to your business checking account. Once you start working as a contractor, you better open a bank account to deposit the money you get as an income. And to pay the expenses, you have for your work, like tools, equipment, and materials you use while working for yourself. The money you withdraw for yourself from the business bank account is called a“draw.” It is not a salary or wage because you are the owner of this little business that is called an independent contractor.
The money you take out from the bank account as an owner does not affect the taxes you will have to pay at the end of the year. You must pay tax on all the net income of your business.
Your classification for the state and federal tax systems as a contractor means that there are no with-holdings for tax from your paychecks. There will be no Social Security and Medicare deduction too.
You can not avoid paying the tax and deduction, and it is just a different way to manage taxation and deduction for SS and Medicare. The burden only changes sides; instead of the employer take responsibility for paying the withholding for the employees. You are both, the owner and the employee so you have to take care of these obligations. You must take care of the state and federal taxes on your income from your work as an independent contractor. You have to use the business tax return for the IRS and the Medicare and SS to be paid too. This tax is called self-employment tax for the independent contractors.
Preparing your income tax, you will add the Schedule C form which is your business income from your contracting work, less the expenses you bared this year. Another option is to use Schedule C-EZ. In which you merely list all your total income and the sum of your costs. All this form filling will not take more than a few minutes
Deductible Expenses as an Independent Contractor
You can deduct what you had paid for regular business expenses. Keep in mind that any cost must have the correct records made at the time you made the expenses, and the details on what was the money were spent. You may face an audit by the tax authorities, order and clear documentation is essential at this case. You can click here for the list of business tax deductions from A to Z.
There is no limit on the deduction of your expenses, as far as the money was spent and it was realty for the business purposes.
What Expenses Are Related to the Business?
The IRS accepts the deduction as business expenses only those who have a specific purpose to your kind of business. To be able to present the IRS that a cost was made for your work. You need to have a receipt from where you purchased the stuff or the person that gave you the service, with the date, amount, and the purpose of it for the work you were doing.
Hopefully, your business has some profit. You might need to pay the estimated amounts for your business taxes. But if you have other resources of income. You can increase your withholding on income from a job to account for additional income tax and self-employed tax that you might have to pay. Your payment for the estimated taxes must cover both, federal income tax and the self-employment tax for the Social security and Medicare.
The first step. Check if you can increase the amount withheld from your pay concerning other income sources in the case that you do not have any withholding amount to adjust. You may need help to figure out if you will need to pay estimated taxes on your income as your classification as an independent contractor. You can compare the last year’s income and tax return as a base for this year’s calculation of your estimated tax bill or get help from a taxation advisory person.
Help may be needed with:
a) Schedule C or Schedule C-EZ
b) Schedule SE to calculate the amount of self-employment taxes
c) The calculation of estimated taxes due.
In case you have a simple contractor’s tax return. Has no employees of yourself or inventory of products, you may find it easy to use one of the online business tax preparation services.
W-2 for Income Tax Purposes
In January you will receive a Form 1099-MISC form showing the total earning from every client that you worked during that year. Payment from a client that is less than $600, will not make you receiving the a1099-MISC form, but it is still obligatory to add those payments to your business tax return.
Paying Income Taxes as an Independent Contractor?
The first step about income tax is to know your “Net Income” from all your business activities. The income from your work is recorded on Schedule C. The income from your IC jobs will be listed. Then the deductions are reduced, and the result will be your net income total amount. You can see this number on Line 12 of your form 1040. It will be added in with any other income, and the tax will be calculated on your total adjusted gross income.
Most of the US states collect income tax from anyone that works or make money in any industry or kind of business. You must pay the state taxes as an independent contractor.
Learn to Calculate Self-Employment Tax and How to Include it on Your Tax Return?
The amount of the net income (The profit) from your Schedule C will determine The total amount of self-employment tax you will have to pay. Schedule SE is where it is calculated. The total of this tax calculation will be added to your total income tax that you must pay.
John is an independent contractor. He worked for several clients in the year 2018, and he earned the total amount of $18,000 for all year, as it is shown on the 1099-MISC he just received. John has no other income, but his wife Mary has a full-time job, and they file a joint tax return.
John filed a Schedule C-EZ for her 2018 business tax year. John can prove that he drove 250 miles to his client’s workplaces, where he had done the raper jobs he was contracted to do. The IRS mileage rate for this year was 0.455 cent per mile. 250 mile X 0.455 = $86.25 This makes the income to be $18,000-86.25= $17,913,75 This amount will go to the 1040 on line 12 as Business income or loss.
John also has to pay self-employment tax on $17,913,75. John can use the short form Schedule SE. The rate for self-employment tax is 15.5%, which makes the total of $2,687.05 that John have to pay. The Schedule SE calculation is a little different showing that John owes $2,687.05 (15.3%) for self-employment tax.
John gained credit for this amount of SS benefits. The half of this amount ($1,343.53) is deducted, as shown on page 1 of John’s income tax return, it reduces his total adjusted gross income for the year 2018. Half of this amount ($1,343.53) is deducted on Page 1 of her income tax return, to reduce her total adjusted gross income for the year.
To account for the additional self-employment tax, Mary John’s wife could increase here withholding from her work as an employee. John could start advancing taxes paying estimated taxes. Dividing the full amount of $2,687.05 into four payments, each quarter a payment. Paying at the 15th of each month starting at April 15th July 15th and October 15th ending on January 15th
That was only one example of how an independent contractor can manage to pay his or her taxes. Everyone can have many different situations. Please check with a tax professional or use one of the tax preparation software programs to help you prepare your taxes.
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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney and the content on the site is not given as legal advice. The website has readers from all US states which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only and never as