Taxes
How to file and pay independent contractor taxes
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Published 8:00 a.m. UTC April 11, 2024
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Independent contractors have more tax leg work to do than salaried workers who receive pay from just one source. It is paramount you keep accurate records of your pay and expenses so you don’t run afoul of Uncle Sam.
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What is an independent contractor?
An independent contractor is a self-employed person who provides services or products to one or more organizations, per the IRS, but isn’t an employee. A contractor can freely decide what jobs to take on (or not) and earn income, but doesn’t receive employee benefits and must take care of their own taxes as there’s no employer to do automatic withholdings.
Almost anyone can be an independent contractor, including laborers and doctors.
You could also be an employee of one company and still do independent work on the side, meaning you’d receive a W-2 from your employer and a 1099 from each of the entities for which you do independent work.
Self-employed vs. independent contractor
Independent contractors are a type of self-employed worker. Entrepreneurs who have one or more businesses, including a sole proprietorship, a partnership or an LLC (limited liability company), are also considered self-employed.
Both could work together: A freelance graphic designer might make marketing materials for a small business.
How to file taxes as an independent contractor
Decide on your filing method
While you could file by hand, it can be far less time consuming to use one of the best tax preparation platforms.
Each software has its own pros, cons and pricing. Independent contractors typically need to get the highest level of software due to the required forms, but, the good news is that you can likely deduct at least part of the cost as a business expense.
Gather all the forms
As a self-employed person — whether or not you formally started a business — the IRS considers your self-employment income (and expenses) to be that of a business.
Remember: you are a business for the purposes of reporting taxes as an independent contractor, even if you don’t feel like one.
Here are forms that you’re likely to receive from the companies for which you did work:
- Form 1099-NEC. For each non-employer from which you earned at least $600 within a year, you should receive a 1099-NEC (before 2020, this was form 1099-MISC).
- Form 1009-K. This shows income you received in the form of gift cards and on payment apps or online marketplaces. Platforms are legally required to send this form only if you received more than $20,000.
Here are the forms you’ll likely need to file with the IRS:
- Schedule C (Form 1040). You’ll use the above forms to fill out Schedule C, which shows profit or loss from a business for the purpose of income tax. If you didn’t receive a 1099, you are still obligated to report earnings.
- Schedule SE. If your net profit for self-employment totaled at least $400 during the tax year, you need this form to calculate self-employment tax (Social Security and Medicare taxes), which you pay in addition to income tax.
Many independent contractors pay estimated taxes throughout the year — if you did that, you’d need to see how much you’ve already paid (Form 2210 is required if you ended up underpaying) — and, if you want (or need) to prepay going forward, you’ll need Form 1040-ES.
Take deductions
Independent contractors can take deductions that aren’t available to others.
“Lowering your tax bill as an independent contractor is largely about leveraging tax deductions and there are plenty available,” said Eric Croak, a certified financial planner and accredited wealth management advisor.
You can use Schedule C to list all of the deductions you’re taking, including expenses for:
- Home office use.
- Business internet and phone.
- Business supplies and travel.
- Health and business insurance.
Various rules and limitations apply, so read the forms carefully and consider checking with a tax consultant if you’re unsure whether you qualify.
Do some math and submit the forms
If you’re filing by hand, you’ll need to break out a calculator and follow the directions on the tax forms. Some of them cross-reference each other: The self-employment tax figure you calculate for Schedule SE is reported on Schedule 2 of Form 1040.
It can be much easier to use one of the best tax apps. Tax preparation software will do the calculations for you and many, if not most, have accuracy guarantees.
How to pay taxes as an independent contractor
Make estimated tax payments quarterly
According to the IRS, most self-employed Americans must pay estimated taxes every three months to account for Social Security, Medicare and income taxes.
The key advantage to setting aside money throughout the year is that you face a far lower risk of having an unaffordable tax bill when April rolls around.
“It’s human nature to spend what we have available. By making quarterly payments, you’re less likely to see that money as spendable,” said Nick Simpson, founder and CEO of WorkMade, which offers a financial app for self-employed people.
In most cases, you must prepay once a quarter if you expect to pay at least $1,000 in taxes and expect your deductions and credits to be less than 90% of your tax return next year or less than 100% of the tax shown on your current tax return.
You might consider making regular deposits in a savings or checking account that’s set up solely for quarterly tax payments.
Pay once a year
If you aren’t required to make quarterly tax payments, you could shell out to Uncle Sam once a year. The big advantage of doing so is that you’ve simply got more cash to work with during the year.
The potential danger is that you may find your annual tax bill unaffordable.
“As a rule of thumb, the amount you should reserve for taxes as a 1099 independent contractor depends on your self-employment income and the tax bracket you anticipate falling into at the time of filing your annual return,” said Croak.
If you can’t pay by the deadline, you can use a credit card, a loan, or your emergency savings.
Set up an IRS payment plan
The IRS allows for short-term (180 days or fewer) and long-term payment plans, but it’s not free. Application fees go up to $225 and interest and penalties can increase the amount you owe.
Frequently asked questions (FAQs)
Setting aside 25% to 30% of your total self-employment income for taxes is generally recommended.
Independent contractors generally receive 1099 tax forms from clients and report their income on Schedule C (Form 1040) to the IRS. They also must file Schedule SE (Form 1040), if their net earnings are at least $400.
The IRS generally requires self-employed people, including independent contractors, to make quarterly estimated tax payments. You can use this IRS website on Form 1040-ES to estimate your taxes and find more information.
The self-employment tax rate (not the income tax rate) for independent contractors is 15.3%. Of that, 12.4% goes to Social Security and 2.9% goes to Medicare. Income tax is separate and varies based, in part, on an independent contractor’s profits and losses for the year.
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