PRESENTED BY YOUR PAYSTUB MAKER
06-16-2019
Work as self-employed or own a 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 you do or give to somebody else, and get paid for the job done or hours you spent working for other businesses or people. You are 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 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 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 persons.” which is a different way of being paid for your work.
- If a company employs you, you must appear daily at the workplace working time per the company’s rules. If you are an independent contractor, you may work when you want. Your obligation is according to the contract you, the company, or the person agreed on.
- An employee has a more complicated relationship with the employer than the contractor. Benefits, vacations, and sick days can cause you to lose your job for a justified reason. The contractor gets paid only for his work according to the agreement before starting the work. The contractor will pay for his vacation, benefits, and other needs, including the tools and equipment for his job.
- The primary and most crucial difference is the way to pay taxes. 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 contractors must 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 their little business.
Independent Contractor Defined by IRS
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers in an independent trade, business, or profession where 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 work’s result rather than what you will do and how you will do it. The earnings of a person working as an indep
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 under an employer’s management (what is the job, and how will you do it)? That applies even if you have the freedom of action. What matters is that the employer has the legal right to control the details of how the contractor execute the services
Suppose an employer-employee relationship exists (regardless of what the relationship title. 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 Independent Contractors or Employees section.
As taxes are a severe issue, you should know how to manage your tax-paying and avoid 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.
How do Independent Contractors Pay the Taxes?
When you work as an independent contractor, you are paid for your work, but not as a salary or wage. You are paid as a business income. It is not a salary but 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 from the bank account as an owner does not affect the taxes you must pay at the year’s end. 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 no tax withholdings from your paychecks. There will be no Social Security and Medicare deductions too.
How Does Taxes Work for a Sole Proprietor/Independent Contractor?
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. Remember that any cost must have the correct records of when you made the expenses and the details of the money spent. You may face an audit by the tax authorities, order and clear documentation is essential in this case. You can click here for the business tax deductions from A to Z.
There is no limit on deducting your expenses, as far as you spend for business purposes.
What Expenses Are Related to the Business?
The IRS accepts the deduction as business expenses only for those who have a specific purpose for your kind of business. Present to the IRS the cost you paid 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 purpose for the work you were doing.
Will You Need to Pay Quarterly Estimated Tax?
Hopefully, your business has some profit. You should 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-employment 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 Social Security and Medicare.
The first step. Check if you can increase the amount withheld from your pay concerning other income sources if 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.
Will I Have to Pay Someone Else to Do My Taxes?
Help may be needed with the following:
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 earnings from every client you worked with during that year. Payment from a client of less than $600 will not make you receive the 1099-MISC form, but adding those payments to your business tax return is still obligatory.
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 the work you input on Schedule C. had the revenue from your IC jobs. Then the deductions are reduced, resulting in your total net income amount. You can see this number on Line 12 of your Form 1040. It will be with any other income, and these are the tax calculations on your total adjusted gross income.
State Income Taxes
Most US states collect income tax from anyone working or making money in any industry or 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 profit you make from your Schedule C will determine the amount of self-employment tax you need to pay. This calculation is done on Schedule SE and will be added to your income tax.
Example of Taxes for an Independent Contractor
1099-MISC
John is an independent contractor. He worked for several clients in the year 2018, and he earned a total amount of $18,000 for all year, as you can see 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.
Schedule C-EZ
He 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 made the raper jobs contract. The IRS mileage rate for this year was 0.455 cents per mile. 250 mile X 0.455 = $86.25. That makes the income to be $18,000-86.25= $17,913,75. That amount will go to 1040 on line 12 as Business income or loss.
self-employment tax of $17,913,75
Later John also has to pay a self-employment tax of $17,913,75. John can use the short form Schedule SE. The rate for self-employment tax is 15.5%, which makes a total of $2,687.05 that John has to pay. The Schedule SE calculation is different, showing that John owes $2,687.05 (15.3%) for self-employment tax.
Deduction
Asa an independent contractor, John gained credit for this amount of SS benefits. Half of this amount ($1,343.53) is a deduction, as shown on page 1 of John’s income tax return; it reduces his total adjusted gross income for 2018. Half of this amount ($1,343.53) is a deduction on Page 1 of her income tax return to reduce her total adjusted gross income for the year.
John’s wife withholding from her work
To account for the additional self-employment tax, Mary John’s wife could increase her withholding from her work. John could start advancing taxes by paying estimated taxes. Dividing the total amount of $2,687.05 into four payments each quarter a payment. Paying at the 15th of each month starting on April 15th, July 15th, and October 15th, ending on January 15th
Example
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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