What Is an Independent Contractor?

An independent contractor is a self-employed person or small business owner who performs services for another person or entity.

Independent contractors aren’t employees of the people or businesses they provide services for. They may or may not have written contracts spelling out the services they’re supposed to perform and their compensation for those services.

How to File Taxes as an Independent Contractor

Independent contractors generally file Schedule C, “Profit or Loss from Business” with their individual tax returns to report income and expenses to the IRS. An independent contractor who structures their business as a corporation, a partnership or an LLC with more than one member may file a separate business tax return.

How to Pay Taxes as an Independent Contractor

In the U.S., federal income taxes operate on a pay-as-you-go system, meaning you generally can’t wait until the end of the year to calculate your taxes and pay what you owe. Instead, the IRS requires you to estimate your tax liability and pay it throughout the year as you earn income.

Employees satisfy this requirement by having their employers withhold taxes from their paychecks. But independent contractors must make estimated quarterly payments on their own—if they expect to owe taxes of $1,000 or more when they file their tax returns.

Estimated tax payments are due on April 15, June 15, September 15 and January 15 (for the last quarter of the prior year). If any of those dates falls on a weekend or holiday, the due date shifts to the next business day.

Estimating an Independent Contractor’s Federal Tax Liability

Figuring out exactly how much you owe in taxes can be challenging—especially if you’re new to working as an independent contractor. It’s not as simple as setting aside a specific percentage of your income—say 25% or 30%—because the amount you’ll ultimately owe depends on your tax bracket and the deductions and tax credits you may be eligible for.

Plus, your estimated taxes need to cover both federal income taxes and self-employment taxes: the independent contractor’s version of Social Security and Medicare taxes.

Calculating Self-Employment Taxes as an Independent Contractor

For 2022, you’ll pay a 15.3% self-employment tax on 92.35% of your net self-employment earnings, which are your earnings as an independent contractor minus ordinary and necessary business expenses.

Why 92.35% instead of 100%? Because the other 7.65% is essentially a deduction representing the FICA tax your boss would pay if you were an employee and not self-employed. An employer can deduct that tax as a business expense.

Here’s an example of how to calculate your self-employment tax. Let’s say you expect to make $100,000 from your business in 2022.

You multiply $92,350 (92.35% of $100,000) by 15.3%. The result is a tax of around $14,130.

Knowing you have to pay that much on top of your income taxes may be disheartening. The good news is you get to write off half your self-employment taxes as an above-the-line deduction.

Calculating Your Income Taxes as an Independent Contractor

We’ll continue with the same scenario to estimate your federal income taxes. And let’s assume you’re single, have no other income and claim the standard deduction.

Start by calculating your taxable income after deductions. Take your $100,000 in earnings and subtract $7,065 (half your $14,130 self-employment tax). Then, subtract $12,950 (the standard deduction for single taxpayers in 2022). That leaves you with $79,985 of taxable income.

What kind of income tax hit will you take? IRS tax tables for 2022 have not yet been released, but the 2021 tables indicate that if your taxable income had been $79,985 last year, you would have owed income taxes of $13,343. We’ll use that as a rough benchmark for what you’ll owe for 2022.

Add your estimated self-employment taxes ($14,130) and your estimated federal income taxes ($13,343), and you get an estimated federal tax liability of $27,473. Divide that number by four to determine the amount ($6,868.25) of your estimated quarterly payments.

If you make those payments on time, then you shouldn’t have to worry about a hefty tax bill when you file your federal return.

For More:  https://www.forbes.com/advisor/taxes/independent-contractor-taxes/

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