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The IRS is not a fan of independent contractors. In fact, these workers are responsible for filing their own taxes and paying self-employment tax. This article will help you make sense of the rules and regulations around this difficult subject so that you can plan your strategy accordingly. It’s important to know how the laws work in order to best ensure compliance with federal tax law.,
The “independent contractor taxes calculator” is a tool that can be used to calculate the taxes due on an independent contractor’s income. The “independent contractor taxes calculator” is available for free online.
Federal income tax, self-employment tax, state taxes, and local taxes are all imposed on independent contractors. Form 1040, Schedule C, is used by single proprietors and independent contractors to submit their taxes. If you file an extension, your tax return is due on April 15 or October 15. To avoid an underpayment penalty, independent contractors must submit anticipated tax payments on a quarterly basis.
What Are Independent Contractors and How Do They Work?
Even though they perform all of their work for one company, an independent contractor is self-employed. An employer has the power to manage and guide how an employee completes a work, which is the key distinction between an independent contractor and an employee. Independent contractors, on the other hand, are given a job and are in charge of how it is completed.
Tip: With so many grey areas, determining the right categorization between employee and independent contractor may be tricky. The Internal Revenue Service (IRS) offers a wealth of information to assist you in making your selection.
Before you start working, the company or companies for which you work should determine whether you are an employee or an independent contractor. If they provide you a Form 1099-NEC for your yearly earnings, you are categorized as an independent contractor and must pay the taxes indicated in this article. You are an employee if your yearly earnings are reported to you on Form W-2, and this article does not apply to you.
Taxes for Self-Employed Individuals
Taxes are paid by independent contractors at the federal, state, and municipal levels. Independent contractors pay federal income tax and self-employment tax on their net earnings at the federal level. In addition to paying income tax in the state or states where they live and work, independent contractors must also pay income tax in the state or states where they reside and work. Business taxes, registration fees, and licenses are levied by certain cities and counties.
Independent contractors must pay the following taxes:
- Federal income tax is recorded on the federal tax return Form 1040. At the federal level, independent contractor taxes are calculated using total income for the year, less any tax deductions or credits. Depending on the amount of income, the tax rate ranges from 10% to 37%.
- Independent contractors pay into Social Security and Medicare via the self-employment tax, which is computed on Form 1040, Schedule SE. For the year 2021, the tax rate is 15.3% on net profits from self-employment up to $142,800 and 2.9 percent on net earnings over that level.
- Other federal taxes: Depending on their financial situation, independent contractors may be required to pay additional federal taxes. The alternative minimum tax, net investment income tax, and additional Medicare tax are all federal taxes.
- State and municipal taxes: In the cities, counties, and states where they reside and work, independent contractors may be required to pay income taxes, business taxes, registration fees, or licensing fees.
- Sales tax: If you sell things, you must collect sales tax from consumers and send it to your state along with your sales tax return.
- Excise tax: In addition to sales tax, excise tax may apply to some items and services you sell. Excise taxes, for example, apply to alcohol, cigarettes, guns, and telephone services.
Independent Contractor Tax Rates in the United States
The federal tax rates for independent contractors vary depending on their income. Based on a person’s filing status and taxable income after deductions, the federal income tax rate begins at 10% and ultimately rises to 37%.
Federal Income Tax Rates in 2021
Federal Income Tax Rates in 2022
Independent Contractors’ Self-Employment Tax
There are two parts to the self-employment tax rate. The first is a 12.4% Social Security tax on net profits up to a certain level, which is $142,800 in 2021 ($147,000 in 2022). The 2.9 percent Medicare tax, which applies to all net earnings as an independent contractor, is the second component. As a result, the self-employment tax rate is 15.3 percent on net earnings up to the Social Security limit, and 2.9 percent on earnings over that level.
Rates of Self-Employment Taxation in 2021 and 2022
* If self-employment net earnings exceed $200,000 for single filers or $250,000 for joint filers, an additional 0.9 percent Medicare tax may apply.
Rates of State Income Tax
The state-level tax rates for independent contractors differ depending on where they live. If the independent contractor’s office or company is in another state, he or she may be required to file and pay taxes in that state as well. The income tax rates are regulated by each state. New York, for example, has tax rates that range from 4% to 8.82 percent.
To show the state with the highest income tax rate, choose a state from the drop-down box:
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Additional state-level independent contractor taxes may apply to you. For example, if you sell things, you may be subject to sales tax, excise taxes on specific commodities such as alcohol and tobacco, and other state and local taxes, which may vary depending on your geographic location.
Top Independent Contractor Tax Deductions
Independent contractors may take advantage of a number of tax advantages. Home office expenditures, computer and equipment purchases, health insurance, retirement savings, and other expenses linked to their craft or company are just a few of the top independent contractor tax deductions.
1. Deduction for Home Office
Independent contractors who work from home may deduct a portion of their rent, mortgage, utilities, and other home-related expenditures such as repairs and insurance. The size of the office space as a proportion of the total square feet of the house determines the amount of the home office deduction. The office space must be utilized only for business on a regular basis.
2. Premiums for health insurance
Health insurance premiums paid by independent contractors for themselves, their spouse, and their dependents are tax deductible. Premiums for medical insurance, dental insurance, and long-term care insurance are all eligible for the deduction. Your income tax is reduced by the self-employed health insurance deduction, but not your self-employment tax.
3. Retirement Plans for Small Businesses
Contributions to retirement plans by independent contractors are tax deductible. Aside from standard IRAs and Roth IRAs, independent contractors may deduct up to $58,000 (for 2021) by putting money into a small company retirement plan such as a simplified employee pension-IRA (SEP-IRA) or a solo 401(k) (k). Retirement contributions, like health insurance, lower your income tax, but not your self-employment tax.
4. Computer, equipment, and furniture depreciation
Computers, software, machinery, equipment, desks, seats, and furnishings may all be deducted by independent contractors. Depreciation deductions are the term for these sorts of charges. Independent contractors have the option of deducting expenditures over time or all at once in the year that the equipment or other asset is first utilized for commercial purposes.
5. Automobile and Truck Expenses
Costs associated with driving a vehicle, truck, or SUV for work might be deducted by independent contractors. The tax-deductible amount is calculated by dividing the number of miles travelled for business by the total miles driven for the year. Car depreciation is subtracted from the purchase price. Gas, insurance, registration fees, and repairs may all be deducted by independent contractors. It’s considerably easier to utilize the standard mileage rate, which is 56 cents per mile in 2021, instead of subtracting real expenditures. We suggest QuickBooks Online as an easy and effective solution to monitor your miles.
6. Deduction for qualified business income
This deduction allows independent contractors to claim a deduction of up to 20% of their net profits. Unlike other deductions, the qualifying business income deduction does not require you to spend money. Instead, the deduction amount is determined by the independent contractor’s annual income and the type of their profession or company.
7. Contract Labor and Outside Services Expenses
Subcontractors are often hired by independent contractors to assist them in completing their tasks. Tax deductions are available for amounts paid for contract work. If the amount paid to other contractors exceeds $600 for the year, independent contractors may be required to file a Form 1099.
8. Miscellaneous Expenses Associated with Your Trade or Business
Independent contractors are allowed to deduct costs that are a normal and essential element of their company. Liability insurance, phone service, internet service, business cards, memberships in professional organizations, professional education courses, office supplies, reference books, and tools are all examples of such charges. Check out our post on IRS business cost categories for additional information on business expenses.
How to File Your Taxes As An Independent Contractor
There are seven stages to filing taxes as an independent contractor. While it’s essential to learn the fundamentals of submitting an independent contractor tax return, we strongly advise utilizing tax software or an online tax service. TurboTax is the finest tax software for freelancers and self-employed people, according to us. Bench is an excellent online accounting program that includes tax preparation if you need assistance submitting your taxes.
1. Organize Your Year’s Income and Expenses
You’ll need to know how much money you made as an independent contractor, as well as how much money you spent on tax-deductible costs. You can accomplish this using an accounting system like QuickBooks Online, which allows you to classify your income and expenses throughout the year. As a consequence, you’ll get a complete breakdown of your revenue and spending.
2. Fill out Schedule C of Form 1040 to report your income and deductions.
Schedule C is used by independent contractors to record their self-employment income and business-related deductions. The contractor’s Form 1040 includes this schedule. Other sources of income, like as interest, dividends, and rental income, are also reported on Form 1040.
3. Fill out Schedule SE to report your net self-employment income.
Your self-employment income is transferred from Schedule C to Schedule SE, which is used to compute your self-employment tax. Schedule SE’s tax will be carried over to the taxes portion of your Form 1040.
4. Fill out Form 1040 to report nonbusiness income and deductions.
Your Form 1040 must also include all other income, including as salary, interest, rental property, and similar things, in addition to your independent contractor revenue. Non-business deductions include, among others, itemized deductions, self-employed health insurance, charitable donations, and student loan interest.
5. Determine the total amount of federal taxes owed.
Your entire tax obligation is shown on Form 1040, which includes both your income tax and self-employment tax payable. After subtracting any anticipated tax payments you made during the year, you’ll either have a debt owed or a refund.
6. Estimate Your Taxes for the Next Fiscal Year
After you’ve completed your tax return, you’ll need to estimate how much tax you’ll have to pay in the future tax year. Bench offers tax services in addition to accounting if you need assistance predicting your taxes for the next year.
7. Finish your state’s income tax return
The majority of states demand a separate income tax return, although the forms and criteria differ significantly. To find out what your state’s requirements are, do some research or utilize a tool like TurboTax. Independent contractors are often required by states to make anticipated tax payments throughout the year.
When to File & Pay Independent Contractor Taxes
The most important deadlines for submitting tax returns as an independent contractor are April 15 (first deadline) and October 15 (extended deadline), unless those days occur on a weekend or holiday, in which case the deadline is the next working day. April 15, June 15, September 15, and January 15 are also the dates for paying quarterly independent contractor taxes.
How to Organize Your Independent Contractor Taxes
For tax purposes, independent contractors must keep their funds well-organized. Here are three methods for keeping track of your earnings and expenses: Purchase accounting software., organize receipts using a business cost tracker app, and monitor company miles with a mileage tracker app.
Purchase accounting software.
If you plan to do your own books, it’s a good idea to Purchase accounting software., which will allow you to track all of your income and expenses easily. Having all of this information in one place will make tax time a breeze. At the end of the year, you can give your tax professional access to your data, and they can run the reports they need to prepare and file your tax return. Check out our recommendations for the best small business accounting software to find the right fit for your business.
Use a Business Expense Tracker App to keep track of your expenses.
Paper receipts may be difficult to keep track of for company owners. You may do rid of paper receipts with today’s technology by installing an app on your mobile device and snapping a picture of them instead. Business cost tracker applications make it simple to arrange receipts in a digital file, and many of them integrate with accounting software so you don’t have to manually input data afterwards.
With a mileage tracker app, you can keep track of your business miles.
You must monitor the total miles travelled for business to determine your car tax deduction if you use your own vehicle for business. Mileage tracker applications are a wonderful method to keep track of how many miles you’ve traveled to visit customers or take care of other business obligations. Downloading a mileage tracker app to your mobile device takes just a few minutes, and you can begin monitoring your miles right away.
Inability to Pay Taxes, as well as the Penalties Involved
If you don’t have enough money to pay your taxes, fill out Form 9465 to request an installment arrangement. There are a few requirements that must be met in order to request installment payments using this form:
- You owe no more than $25,000
- You demonstrate that you lack the financial means to pay your taxes.
- You have three years to pay the tax.
If you pay your taxes after the April 15 deadline, you will be penalized by the IRS. The penalty for failing to file a tax return is 5% every month of the outstanding sum, up to a maximum of 25% of the total tax payable. If you submit your tax return on time but don’t pay the amount owing, the IRS will charge you a late payment penalty of 0.5 percent of the actual tax owed for each month the tax is overdue from the due date until it is paid in whole.
Conclusion
Independent contractors pay taxes on their net earnings, which are the profits from a trade or company less any relevant business deductions. Estimated taxes on this revenue are usually paid four times a year in advance. On Form 1040 and Schedule C, independent contractors disclose their earnings and deductions, and on Schedule SE, they compute their self-employment tax.
The “independent contractor tax form” is a document that all independent contractors fill out in order to be taxed as self-employed individuals. This form includes the information needed for the IRS and state governments to collect income taxes on behalf of the individual.
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