In business, an individual offering products or services, while not formally appointed as an employee at a company, is considered an independent contractor. Typically people such as doctors, dentists, veterinarians, lawyers, and accountants are considered to be in independent trade. Generally, contractors or subcontractors control how and what it takes to complete requested services, which differs for employees. As an employee, the employer has control of the job performance and must withhold federal, state, medicare, and social security taxes from the employee’s paycheck. Whereas the employer is responsible for withholding taxes for each employee, the Internal Revenue Service requires the self-employed to pay an independent contractor tax.
Independent contractors might have to pay self-employment and estimated taxes, which can be done by completing 1099 forms and work-related expense deductibles. Accurate accounting for independent contractors can be complicated. Income and expense records are essential for individuals operating as businesses to report and pay quarterly estimated taxes. Omitting expense deductibles on estimated tax forms each quarter is common among independent contractors, which can easily result in overpayments. Although it is possible to recoup the payment in excess when filing your federal income tax return, you should reserve that cash for other use. For the self-employed filing taxes next year for the first time for earnings from 2022, you can consider your tax liabilities by estimating the income amount you are expecting. Here is everything you need to learn about self-employment taxes for the self-employed, including how independent contractors pay taxes, the tax rate, and tax-deductible benefits.
Tax Considerations for Independent Contractors
As an independent contractor, you’d have to pay estimated federal income and self-employment taxes every quarter, using the estimated tax form for individuals Form 1040SE. You can calculate your net profit or loss by subtracting the business expenses from your income, which contractors may omit when estimating taxes. If your income exceeds your business expenses, you can report the net profit on IRS 1040 or 1040SR form; or for a net loss, the amount can be deducted from your gross income. Remember, the Internal Revenue Service limits how much loss independent contractors can deduct from their gross income. In addition, an Internal Revenue Code rule requires you to file an income tax return on net earnings of $400 and up (you still have to file an income tax return if you meet any other filing requirements listed in the Form 1040 and 1040-SR instructions).
What Is the Independent Contractor Tax Rate?
For the 2022 and 2023 tax years, the independent contractor rate is 15.3 percent, comprising 12.4 percent for social security and 2.9 percent for medicare. In 2022 the combined wages, tips, and net earnings of $147,000 were subject to taxation, and for the 2023 tax year, the combined total is $160,200. Businesses that pay you $600 or more for services must send you an independent contractor tax form – Form 1099, by January 31, the deadline requirement by IRS. You may receive a 1099 Misc form for receiving prizes, awards, or when making $5,000 in direct sales for resale to a buyer.
Independent Contractor Tax Benefits
When an independent contractor files a federal income tax return, they will need to complete Schedule C with the 1040, 1040SR, 1040NR, or 1041 forms. You will include the following information on the schedule:
- Gross Receipts or Sales
- Returns and Allowances
- Cost of Goods Sold
To calculate your total gross profit, take your gross receipts or sales and subtract the returns & allowances, and costs of goods sold. Add all other income you earned and gross profit to determine your gross income on Schedule C of the 1040 federal income return. Your independent contractor tax deductions might be beneficial for you and your business, including the following expenses:
- Rent or Lease (Equipment, Machinery, and Vehicles)
- Mortgage Payments
- Taxes & Licenses
- Legal & Professional Fees
- Office Expense
- Travel & Meals
The best practice for the self-employed is to keep accurate financial records for tax-deductible expenses and taxable income. Software solutions such as QuickBooks can help manage independent contractor tax liabilities and is beneficial for recording and tracking your expenses and earnings.
At Fusion, our CPAs can set up your recordkeeping on QuickBooks and provide bookkeeping services to help you optimize tax-deductible expenses. We help to ensure you are making timely estimated self-employment and federal income taxes to avoid penalties and fees imposed by the IRS.
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.