Self-employed individuals enjoy the benefits of setting their schedule, choosing which projects to work on, and earning as much as they choose. But working as an independent contractor poses unique tax challenges. By consulting an experienced tax professional, you can understand your tax liabilities and filing deadlines and avoid tax penalties. Let’s take a look at how to file taxes for contract work.
Income Tax Requirements for Independent Contractors
Whether you regularly work on a contract basis or have taken on a side hustle, you must follow income tax guidelines. Generally, independent contractors will need to pay quarterly estimated taxes in addition to filing annual tax returns.
Under IRS rules, independent contractors must file taxes if their net earnings (net income) exceed $400. You can calculate net earnings by subtracting the total cost of goods from your total revenue, but an experienced tax accountant can advise you about other requirements that may apply.
What Taxes Do I Pay as an Independent Contractor?
Independent contractors are responsible for the following taxes:
- Self-employment (SE) tax – This includes Social Security and Medicare taxes. The total tax rate is 15.3 percent; 12.4 percent goes to Social Security and 2.9 percent to Medicare costs.
- Income tax – Employees and independent contractors must pay annual income taxes (contract workers should use Schedule C to report profit and loss if they operate as a sole proprietorship).
Important Tax Deadlines For Independent Contractors
As previously mentioned, independent contractors must pay quarterly estimated taxes throughout the year. Use Form 1040-ES to calculate estimated taxes. The quarterly estimated tax due dates for 2023 are as follows:
- Q1 – April 18, 2023
- Q2 – June 15, 2023
- Q3 – September 15, 2023
- Q4 – January 16, 2024
An experienced accountant can help ensure your estimated taxes are accurate and filed by the applicable deadlines and advise you on minimizing your tax liabilities.
Permissible Tax Write-offs for Independent Contractors
Since you pay for all your business expenses as an independent contractor, you may be eligible for the following tax deductions:
- Home office – You may be able to write off expenses for a home office, such as supplies and utilities like phone and internet. However, taking deductions for a home office can be tricky, so consult a knowledgeable tax professional who can advise you on the details.
- Health insurance/retirement contributions – Since you do not receive employer-sponsored benefits as an independent contractor, you can deduct healthcare insurance premiums and retirement contributions.
- Marketing – Keep track of marketing or advertising expenses because these may qualify as a tax write-off.
- Professional Services – If you hire an attorney to review a contract or an accountant to handle your taxes, these expenses are tax-deductible.
- Subscriptions/Memberships – If you subscribe to industry-specific publications or pay membership fees to a professional organization, you can deduct these expenses if they’re related to your business.
- Travel – You can deduct business travel expenses such as meeting with a client or attending a trade show; however, commuting (driving between home and a principal place of business) is not deductible.
Filing taxes as an independent contractor is challenging. Working with a professional CPA will ensure you’re following IRS rules, help to avoid tax penalties, and allow you to enjoy the benefits of being self-employed.