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If you’re a freelancer, self-employed worker, or independent contractor, your taxes might be more work than you realized. In addition, taxes are ever-changing, so the rules and guidelines for self-employed folks might be a bit complex — here’s what you need to know.
Who Is an Independent Contractor?
So how do you know who is considered an independent contractor? While employees typically get a W2 and have withholdings on paychecks, independent contractors don’t. Instead, they complete a W9 and receive payment for the total amount of the project. Then, the contractor pays out the taxes they owe at tax time.
Here are some general guidelines of how an independent contractor is defined by the IRS.
How much you pay in taxes depends on how you’re classified. If you’re an independent contractor, you’ll know by the type of tax form you completed — a W9. This is for all self-employed folks and those classified as a sole proprietor, LLC, or S-Corporation.
How To Pay Taxes as an Independent Contractor
Most independent contractors generally pay annual federal estimated quarterly taxes four times a year. You should make estimated quarterly taxes if you expect to owe more than $1,000 in income tax (even with credits and other withholdings).
The final estimated quarterly taxes are always due at the beginning of the next year. It’s also important to remember that you’re paying an estimation, not necessarily the exact amount you owe.
Important Tax Deadlines
The 2023 quarterly estimated tax deadlines for independent contractors are:
- 1st Quarter: April 18, 2023
- 2nd Quarter: June 15, 2023
- 3rd Quarter: September 15, 2023
- 4th Quarter: January 16, 2024
Estimating Your Taxes
The estimated taxes you’ll pay is based on reporting your self-employment income. You’ll file a Schedule C form with your personal tax return detailing your business profits and losses. To calculate the self-employment taxes, you’ll use the Schedule SE form.
Don’t forget that in addition to federal taxes, you may need to pay state taxes. Check with the tax authorities in your local area for more information.
If you’re an LLC or an S-Corp, you’ll file business tax returns rather than additional paperwork to your personal returns.
What Can You Write Off as an Independent Contractor?
Calculating your taxes is based on your income, filing status (married vs. single, for example), and deductions (standard vs. itemizing). The calculation also considers if you qualify for tax credits and deductions, which can lower how much you owe in taxes. For salaried W-2 employees, these deductions and credits might mean they get more money back. For self-employed workers who haven’t made tax payments throughout the year, you’ll still owe money on your taxes, but these credits and deductions can reduce how much you owe.
Self-employed workers have the advantage of claiming business deductions. You may qualify for some of them, including:
- Home office deductions: This is the cost of your workspace inside your home that you use exclusively for work as an independent contractor. You can deduct your home office space whether you rent or own and while you’re going off the honor system here, it’s a good idea to have precise measurements and calculations in case you get audited by the IRS. If you own your home, you can also deduct a portion of your mortgage interest, homeowners insurance, and more.
- Utility deductions: Aside from claiming a portion of your home utilities (if you own your home), you can also deduct phone and internet usage on your taxes. You could deduct the whole expense if you can prove the line is both ordinary and necessary. It’s not easy to do this if you use the line for business and personal use, so if you have a second phone line devoted entirely to business use, you can deduct all of that.
- Insurance premiums deductions: If you have insurance through the ACA Marketplace or otherwise pay for your health insurance premiums, you can deduct health, dental, vision, and other health-related insurance premium costs. You can do this for yourself and your dependents, if they don’t have their own insurance.
- Other deductions: Depending on your work, you might also qualify for deductions on meals, travel, costs associated with your business (like start-up costs, advertising, business insurance), and retirement plan contributions.
Check with a qualified tax professional if you have questions about a specific deduction on your taxes.
The Bottom Line
Handling your taxes as a self-employed worker or independent contractor can feel like a lot of work and sometimes it is. If you need help, consider hiring a tax professional to help you throughout the year — not just in April — so they can set you up for the most success with the least amount of extra cash coming out of your pocket.
If you don’t have the money to pay a tax professional, consider bartering or exchanging services. Remember that tax laws frequently change, so doing it right the first time is vital to ensure you’re in line with the IRS.
3 Things to Know Before Paying for a Tax Preparation Service
Self-employed workers are on the hook for the self-employment tax (15.3%) and income taxes. Remember that you pay an estimation, not an exact amount, so to be safe, you may want to set aside anywhere from 25% to 30% — or more — of your income just for taxes, depending on how your taxes are calculated. This might seem like a high amount but it’s better to have enough to cover your taxes rather than scrambling to pay your taxes if the IRS found out you owe more than you originally said you did.
When you’re working for someone else, both you and your employer pay taxes on your earnings. You don’t see as much money taken out since your employer handles a portion of it for you. When you work for yourself, you’re paying both employer and employee taxes.
Businesses cannot withhold taxes from an independent contractor. They can only withhold taxes from salaried employees.
The best way to reduce how much you owe on your taxes is to take advantage of all the deductions you’re eligible for. If you think you’ll save more by itemizing deductions instead of taking the standard deduction, you could owe less and pocket more once you file your tax return.
In most cases, as an independent contractor or sole proprietor, you probably won’t get a tax refund. But if you’re a small business owner, that could be the difference in getting a refund versus owing money to the IRS. Consider examining which business classification is best for you to get the most back in your tax refund or not owe as much if you have to pay.