Find your Independent Contractor taxes
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Are you a freelancer?
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When diving into the world of independent contractor taxes, one can't help but think that W-2 employees seem to have it easy when it comes to taxes. Employers withhold taxes for their employees, saving them the hassle of doing it themselves. As an independent contractor, you wear the honorary titles of both employer and employee and the fate of your taxes lies in your hands.
Independent contractors are sometimes referred to as freelancers, gig workers or self-employed individuals. Businesses may choose to hire independent contractors to keep operational costs in check and meet increased workload demands.
When it comes to handling independent contractor taxes, there's a lot to take into account since you need to estimate how much you'll owe and pay taxes quarterly. But once you get the hang of it, you'll know which taxes you need to pay, so there are no surprises when your taxes are due.
Independent contractors are self-employed or owners of a small business like a sole proprietorship or single-owner LLC (Limited Liability Company) that provides services to another business. They aren't considered employees of the person or company they are providing services to and don't have taxes withheld from their paychecks.
For example, you might provide accounting services to a company and charge them hourly for your services. You aren't on the payroll and have your own payment terms.
Or, you might be a painter and have your own painting business. After marketing your services, you acquire new clients regularly and provide services on a project basis.
Quick tip: When someone becomes an independent contractor, they need to start paying self-employment taxes (Social Security and Medicare taxes) since they don't have an employer who is automatically withholding them from their paychecks.
Unless your business is classified as an LLC or corporation, you'll report your taxes as a sole proprietorship. The profits and losses from the business will be reported on your personal tax return using Schedule C.
Self-employment taxes are made up of Social Security taxes and Medicare taxes, with a rate of 15.3% of your net income. In an employer-employee relationship, the employer would pay half of this, and the employee the other half. As self-employed individuals, independent contractors are required to pay the full 15%, although half of this can be deducted from your income tax.
For the 2022 tax year, you'll pay a 15.3% self-employment tax on 92.35% of your total earnings. So why is it 92.35% and not 100%? The 7.65% deduction represents the FICA taxes your employer would pay if you were an employee.
Let's say you expect to make $150,000 from your content writing business this year. Multiply $138,525 (92.35% of 150,000) by 15.3%. So the amount of SECA taxes you'll owe is about $21,194.
The tax rates for independent contractors vary according to your income level. The tax rate for federal taxes starts at 10% and increases to 37% based on your income after deductions and filing status. It might be helpful to use a tax bracket calculator to find your tax rate and pay the correct percentage of taxes. The 2022 federal income tax rates:
Tax deductions can help ease the burden of taxes by lowering your taxable income and you can claim numerous 1099 tax deductions as an independent contractor. The deductions get reported on Schedule C. Some business-related deductions include:
Thanks to the Tax Cuts and Jobs Act (TCJA), you might be eligible for qualified business income interest deduction, which allows you to deduct up to 30% of your business income. It must be your business income before depreciation and interest. In the past, business interest was fully deductible.
As if paying taxes once a year wasn't enough work, independent contractors are required to make estimated tax payments four times a year. Schedule SE can help you calculate how much you'll owe, or you can use an independent contractor taxes calculator that can help estimate your quarterly tax payments.
Estimated state tax payments may also be required depending on where you live. Make sure you know whether your state is expecting you to make quarterly estimated tax payments, so you don't receive a late payment penalty.
Reporting independent contractor taxes is done a bit differently than a W-2 employee. The IRS requires you to report your business profits and losses on Schedule C. You'll attach this along with your personal income tax return, Form 1040. Any income you earn needs to be reported to the IRS along with taxes on that income. Factoring in deductions will help lower the taxable income and ultimately the taxes you'll need to pay.
You'll use Schedule SE to report your self-employment taxes and attach it with your tax return. As an independent contractor, if you expect to owe at least $1,000 in taxes in a year, you're required to make estimated quarterly tax payments.
FlyFin caters to the tax needs of freelancers, independent contractors and anyone self-employed.
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