The Ultimate Guide to Navigating Taxes as an Independent Contractor

Business owners, whether operating as an independent contractor, limited liability company, or S corporation, must understand how taxes impact their business income. You must be familiar with the strategies and protocols available that aid in maximizing your tax refund. If you're running your business as an independent contractor, use this ultimate guide to navigating taxes to keep more of your hard-earned money in your pocket. 

What Is an Independent Contractor?

Independent contractors, including self-employed individuals or sole proprietors who run a sole proprietorship, enjoy advantages that traditional employees do not. Employees are usually expected to work a set schedule under the direct supervision of someone else. But it's not all upside for contractors. Traditional employees don't usually have to pay taxes throughout the year!

As an independent contractor, you have the freedom of a flexible schedule. You can also pick and choose which projects to take on. However, this freedom comes with the additional responsibility of preparing and filing a tax return throughout the year and keeping up on the latest changes to tax law that impact your state and industry, among other tasks. 

Income Requirements for Independent Contractor Taxes

Whether you’re in the early stages of establishing your business or freelancing on the side, you need to be aware of the income tax filing guidelines. 

So, how much do you have to make as an independent contractor to file a tax return? According to the IRS, independent contractors must file taxes if their net earnings exceed $600 annually. Net earnings, also known as net income, can be calculated by subtracting the total cost of goods from your total revenue.

This amount is the standard income requirement for independent contractor taxes, but keep in mind there are still other requirements that can be found in Form 1040 and 1040-SR. These can depend on certain factors such as marital status, income as a dependent, or if you owe special taxes.

Filing Tax as an Independent Contractor

Filing taxes as an independent contractor may seem intimidating at first, but it is easy to grasp with guidance and a little experience.

Two Taxes to Pay as an Independent Contractor

Independent contractors are responsible for everything, from business expenses to taxes. A business usually deducts taxes from a W-2 employee’s paycheck, but taxes for 1099 independent contractors will differ.

The IRS identifies the following taxes for independent contractors:

Self-employment tax: Also known as an SE tax, includes Social Security and Medicare taxes. This tax rate equals 15.3%, which includes 12.4% attributed to Social Security and 2.9% to Medicare costs. You’ll use Form 1040 or 1040-SR to calculate your self-employment tax.

Income tax: This is a basic requirement for employees and independent contractors. Use a Schedule C form to report your profits or losses.

Important Tax Deadlines for Independent Contractors

While traditional employees file income taxes in April, independent contractors must pay quarterly estimated taxes throughout the year. Quarterly estimated taxes are calculated using Form 1040-ES.

Estimated taxes are due each quarter, with the deadline usually falling on the 15th of the month. There are exceptions for holidays or if the date falls on a weekend. 

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

7 Common Tax Write-offs for Independent Contractors

A majority of independent contractors aren’t expert bookkeepers, which means they may overlook these common tax deductions that can help minimize their tax burdens.

1. Home Office

Consider all the expenses that go into a home office, such as supplies and utilities like phone and internet. Deductions for a home office can be tricky but provide valuable tax savings.

2. Health insurance

Since independent contractors don’t have the option of employer-provided healthcare, they can deduct healthcare insurance premiums.

3. Retirement contributions

The same scenario for health insurance could also apply to retirement contributions, which are not being withheld.

4. Marketing

Any expenses that go into your marketing or advertising duties should be tracked, as these may also qualify as a tax write-off.

5. Professional services

There may come a time when you need to outsource certain services, such as hiring a lawyer to review legal documents or an accountant to handle your small business taxes. These expenses are tax-deductible, so don’t forget to track them!

6. Subscriptions

If you pay dues to a professional organization or subscribe to an industry-specific publication, you can likely write off these expenses as long as they relate to your business.

7. Travel

Independent contractors may need to travel for business, whether meeting with a client or attending a trade show. Record these travel expenses, as they can also be deducted. However, remember that commuting (driving between home and a principal place of business) is not deductible. Still, you are able to deduct travel between a principal place of business and another work site.

Filing Quarterly Taxes as an Independent Contractor

Not only do you have to pay quarterly estimated taxes, but you also must file an annual return. Here are some simple steps to keep you on the right track:

1. Calculate your net profit or loss, and remember to include the deductions you want to claim. This is known as your Adjusted Gross Income (AGI). This should be the first step, as it will determine whether you must pay self-employment and income taxes. 
2. Determine your income tax with the following calculation: AGI x tax rate = income tax owed. Your tax rate can be found with this income tax bracket.
3. If you calculate a net income of over $600 for the year, complete tax Form 1040-ES to determine your quarterly estimated tax. 
4. Calculate your taxable income for the SE tax using this formula: estimated total income x 92.35% = taxable income. You can then multiply your taxable income by 15.3%, which tells you how much you need to pay for the SE tax.
5. Add your income taxes and SE taxes to calculate your total estimated taxes. Divide this number by four to get your estimated quarterly tax payment.
6. Pay with a voucher and a check, or pay online through the IRS website.

Work with a Tax Professional to Navigate Independent Contractor Taxes

Calculating and filing taxes as an independent contractor can be exhaustive, whether during tax season or at the conclusion of a tax year. But, paying taxes on self-employment income is non-negotiable. The IRS not only expects regular payments throughout the year but must also be calculated accurately to avoid penalties and increased IRS scrutiny. 

Juggling tax responsibilities while running a business can sometimes feel impossible, which is why so many independent contractors trust 1-800Accountant, America's leading virtual accounting firm for small businesses, for their professional needs. 

Whether it's small business taxes, quarterly estimated tax payments, or any of our professional accounting services, we have the solution you need at a price that works for you. Schedule a quick consultation – typically 30 minutes or less – to learn how we can help.