Finance

Independent Contractor Taxes: A Beginner’s Guide

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There was a time if you needed to clarify to these within the 9-to-5 world what it actually means to work from the sofa or hand around in loungewear all day lengthy, that’s not the case.

For the reason that pandemic pushed so many individuals into working from house briefly or completely, the lifetime of an unbiased contractor isn’t so troublesome to examine now.

To be clear although, being an unbiased contractor is nothing like working from house when a paycheck nonetheless comes repeatedly and the corporate is taking out the taxes for you.

The way you file taxes is completely different from what your W2 counterparts do, and that’s a very powerful administrative factor that units you aside.

Whether or not you’re contemplating making the massive leap into the world of freelancing otherwise you’re already within the deep finish, your tax state of affairs doesn’t should be that difficult.

Right here’s what you must learn about paying taxes as an unbiased contractor.

Paying Taxes as an Unbiased Contractor

Earlier than we get began, we have to stress we’re not tax professionals. That is merely basic info and usually applies to sole proprietors or single-member LLCs. For enterprise constructions comparable to an S-Company or partnerships, it’s a sensible concept to seek the advice of a tax skilled.

Now that we received that out of the way in which, let’s go over one of many main variations between being a full-time worker and an unbiased contractor: quarterly tax funds.

Doing the paperwork to start out an LLC might be your smartest first transfer as an unbiased contractor. We’ve received the main points about the way to arrange an LLC.

Paying Estimated Quarterly Taxes

Estimated quarterly taxes is what chances are you’ll give to the IRS estimating how a lot you’ll must pay annually. Full-time staff have their taxes taken out with every paycheck, whereas unbiased contractors don’t

Principally, if you earn cash as a freelancer, you title a value, you carry out the service and your consumer pays you — with out withholding any cash to cowl taxes or advantages.

Extra particularly, you’re getting paid an quantity that’s pre-tax — the federal government nonetheless needs its reduce even when you’re self-employed. As in, it’s your accountability to ensure you’re paying the right amount to the IRS.

The quantity you pay will depend upon how a lot you must pay in state taxes (if any) and the quantity you’ve earned every quarter. Estimated taxes embrace each federal revenue tax — which is organized by tax brackets that run from 10% to 37% — and self-employment tax.

There’s additionally the matter of taxes that fund Social Safety and Medicare. As an alternative of the everyday 7.65% which staff pay, you’ll must pay each the worker and employer’s share, or 15.3%.

A great rule of thumb: Put aside round 30% to 35% to cowl your taxes.

When Are Quarterly Taxes Due?

Quarterly taxes are due across the identical time every calendar yr and is predicated on the quantity you’ve earned for every quarter:

  • Jan. 15: For Sept. 1-Dec. 31 of the earlier yr
  • April 15: For revenue earned from Jan. 1-March 31
  • June 15: For revenue earned from April 1-Might 31
  • Sept. 15: For June 1-Aug. 31

To pay these taxes, you’ll file Type 1040-ES with the IRS on or earlier than the due date. You’ll be able to file and pay your quarterly taxes on-line (usually the simplest choice), by cellphone or mailing in your cost.  If you must pay state taxes, it’s greatest to verify how a lot you’ll must owe and the place precisely to ship it off (if it’s not by means of the IRS, that’s).

Submitting Your Annual April Tax Return

Though you file and pay quarterly taxes, you’ll nonetheless must file a tax return — the identical as somebody working at a full-time job. On the whole, you’ll file a private tax return, the place you’ll point out your annual revenue and estimated taxes paid. As you’ve stored up along with your quarterly taxes, it shouldn’t be too painful — when you’ve missed funds or uncared for the self-employment tax, chances are you’ll end up owing the IRS.

Because you’re the one answerable for maintaining observe of your revenue, you’ll wish to be diligent about recording each single BGTIME Reader you earn.

Verify Your Earnings Fastidiously

Each consumer who pays you greater than $600 in a yr is required to file a type 1099-NEC in your title, which you’ll obtain throughout tax season. Consider this manner as a W-2 besides you’re an unbiased contractor. These types will record your earned wages however not any withheld taxes — as a result of that’s your accountability.

You wish to ensure that the revenue you report is the right amount. For those who underreport revenue, you can owe a penalty and face different severe penalties. That’s why you’ll wish to verify every 1099-NEC that you just get to ensure that the quantity said on the shape matches what you’ve got in your information.

Some purchasers received’t file a 1099-NEC — it’s nonetheless your accountability to report the revenue earned from these sources.

If You Nonetheless Work a Full-Time Job

For those who’re presently nonetheless at a full-time job and your freelancing is a facet hustle, then you definitely’ll nonetheless obtain a W-2 type. Your employer will ship it to you by the tip of January for the quantity you earned the earlier calendar yr. Quite a lot of freelancers work half time for another person along with their facet hustle for extra dependable revenue and, in some circumstances, medical health insurance.

This manner shows gadgets comparable to your earned wages, Social Safety contribution, withheld federal revenue and Medicare taxes. You’ll must file this manner along with the quantity you’ve earned as an unbiased contractor.

What Can You Deduct as a Small Enterprise Proprietor?

As an unbiased contractor, you’re eligible to make sure business-related deductions so long as they’re thought of needed within the eyes of the IRS. As in, you want these to run your operations. These deductions can decrease your total tax burden — aka the quantity you’ll in the end pay in taxes.

Among the commonest deductions for freelancers embrace:

  • Dwelling workplace (it must be a delegated house in your house you utilize completely for enterprise functions)
  • Workplace provides
  • Journey bills associated to work (like conferences)
  • Meals and leisure, inside cause, associated to consumer conferences or enterprise journey
  • Skilled providers, like an accountant
  • Half of your self-employment taxes

Ought to You Rent an Accountant?

Sure, you may technically file your individual taxes utilizing software program from corporations like TurboTax or H&R Block.

Nevertheless, there are a number of occasions hiring skilled assistance is nicely well worth the cash:

1. You may have a W-2 job (or three) alongside your freelance enterprise.

Working a conventional job means you’ve already contributed a few of what you owe for Social Safety and Medicare. On this case, calculating quarterly taxes can get a bit furry, very true when you’re holding down a number of gigs to make ends meet.

An accountant may help you’re employed out precisely how a lot you owe, which might find yourself saving you cash even after you think about what you pay for his or her providers.

2. You’ve elected a extra convoluted enterprise construction.

Whereas most freelancers function as sole proprietorships, there might be advantages to incorporating a rising freelance enterprise. As an illustration, in an effort to save lots of on taxes, some unbiased contractors type an LLC and take the S-corporation choice. This enterprise entity is one during which you rent your self by means of the enterprise as an worker and pay common revenue taxes.

There are different varieties of enterprise constructions like these which can be often known as a “pass-through” taxation construction. It turns into extra difficult since you’ll must file extra paperwork —  submitting a W-2 as each worker and employer is one among them.

For those who go this route, it’s greatest to rent an accountant to make sure you’re following IRS guidelines.

3. You don’t wish to take care of it (and may afford it).

For those who’re incomes substantial revenue and end up brief on time, it could be nicely well worth the cash hiring an accountant to assist with submitting your quarterly and annual taxes.

Sure, it might be laborious to half with the cash, however the time you may spend on different duties might be nicely value it. Moreover, an accountant might be able to make it easier to save on taxes (comparable to discovering deductions you qualify for you didn’t learn about), making their providers much more priceless.

Often Requested Questions (FAQs) About Unbiased Contractor Taxes

We reply the most typical questions on the way to pay taxes as an unbiased contractor.

How Do I Pay My Taxes as an Unbiased Contractor?

You’ll must pay estimated taxes every quarter along with submitting an annual tax return. To pay quarterly taxes, you’ll must calculate the quantity you owe (it’s primarily based in your revenue for the quarter). The IRS permits you to pay on-line, by cellphone, or by way of snail mail.

How A lot Cash Ought to I Set Apart for Taxes as an Unbiased Contractor?

A great rule of thumb is to put aside round 30% to 35% of the quantity you earn for taxes. This may increasingly appear excessive — particularly if you’re normally in a decrease tax bracket — nevertheless it provides you with a cushion. Understanding that you must withhold this share for taxes would possibly push you to set larger charges, too.

How Do Unbiased Contractors Keep away from Paying Taxes?

You’ll be able to work to reduce the quantity you pay in taxes by claiming enterprise bills in your tax return. These bills have to be thought of important to working your corporation.

Contributor Sarah Li-Cain is a private finance author primarily based in Jacksonville, Florida, specializing in actual property, insurance coverage, banking, loans and credit score. She is the host of the Buzzsprout and Past the Greenback podcasts. BaghdadTime contributor Jamie Cattanach’s work has been featured at Fodor’s, Yahoo, SELF, The Huffington Put up, The Motley Idiot, Roads & Kingdoms and different retailers.




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