Tax season is upon us, so you should be gathering your documents and preparing to meet with your tax advisor. Independent contractor taxes are different from standard W2 taxes in a few key ways. For starters, no tax is withheld from your pay so it is your job to calculate and remit the correct amount. This adds a level of complication that most W2 wage earners don’t encounter when preparing their taxes. Do you work as an independent contractor? Here is what you need to know to file your taxes.
Am I an Independent Contractor?
As an independent contractor, the IRS classifies you as self-employed. Some examples of independent contractors include freelance writers, freelance graphic designers, and even Lyft drivers. You work on your own time and set your own rates. Some may use third-party payment processing apps like Lyft or Upwork at work, however, you’re still an independent. Taxes aren’t withheld from independent contractor paychecks, so it’s their responsibility to calculate and remit taxes on their own.
How Does an Independent Contractor Pay Taxes?
If no taxes are withheld from my pay how do I pay independent contractor taxes? Most independent contractors and self-employed individuals have to pay what is called estimated taxes. Estimated tax payments are based on your forecasted income and are due 4 times a year; April 15, June 15, September 15, and January 15. Estimated taxes, also known as quarterly taxes represent the income tax and employer would have withheld. The IRS has you pay estimated taxes because they do not want to wait until tax day to collect taxes.
How can you remit taxes on the income you haven’t earned yet? It may sound complicated, but determining an appropriate estimated tax payment is pretty simple. First, take last year’s total tax expense and divide it by four. This gives you a rough estimate of how much you should pay this year. As long as you pay at least 90% of what you owed the previous year, you will avoid IRS late fees and penalties. You can always increase or decrease your payments as needed and, if you overpay, you’ll receive a tax refund for the extra payments.
In addition to estimated taxes, you might have to pay self-employment taxes too. These make up your portion and employer portion of social security and medicare taxes in the amount of 15.3%. Half of it is tax-deductible. Both estimated taxes and self-employed taxes can be paid online.
Common Contractor Tax Forms
It is important to become familiar with the tax forms associated with being an independent contractor. Some common tax forms you might see include 1099 MISC and 1040 ES. You may also receive a 1099K if you work with a third party payment processing site like Upwork, in which case they will issue a 1099K if you have over 200 transactions and reach 20K in revenue.
Form 1099 MISC
Independent contractors should expect to receive a 1099 MISC if they generate $600 or more in income from a client. For example, if you are working as a freelance writer, and you have a client who paid you $1,000 for your services, they own you a 1099 MISC. Likewise, if you collaborated with another professional, say a photographer, who you paid $650 over the course of the year, you would owe them a 1099 MISC. Learn more about form 1099 MISC here.
Form 1040 ES
Form 1040 ES is what you use to calculate estimated taxes, self-employment taxes, and other taxes you may be liable for. If you anticipate owing more than $1,000 in taxes after adjustments and deductions, you need to file form 1040 ES. Taxes aren’t withheld from independent contractor income, so they usually need to file this form. Click here to learn more about Form 1040 ES.
Tax Strategies for 1099 Workers
Taxes are the inevitable part of earning an income. If you are self-employed or work as an independent contractor it is important to learn how to strategize your taxes. Here are some tips when it comes to independent contractor taxes.
Depreciation is a useful tool to help lower your tax burden. In your business, you probably have assets. The cost of obtaining these assets can be spread out over the useful life of the asset. This allows you to reap the deduction benefits over a course of time, instead of all at once. For example, if you purchased a new work vehicle, you have the ability to either take the deduction upfront or spread it out over the next couple of years. You may want to talk to your tax advisor about the best strategy for your situation. Taxes aren’t one size fits all, so weighing your options under the guidance of a tax advisor can help you make an informed decision.
It costs money to make money. Fortunately, you can deduct your business expenses to help lower your tax burden. Necessary and ordinary business expenses like office supplies, operating costs, and marketing are all examples of deductible expenses. Tracking these expenses is important because deductions can save you tons of money at tax time. Most accounting software programs, like Quickbooks Pro, offer built-in expense tracking apps. This allows you to snap pictures of receipts while you are out and about. So the coffee that you purchased while meeting with a new client can be categorized right then and there. This streamlines the process and allows you to save money on your taxes. Business expenses can really add up, so having a system in place to take full advantage of them is important.
Home Office Discount
The home office deduction is a deduction that often gets overlooked. However, it can help you save a lot of money on your taxes. If you operate your business out of your home, you may be eligible for the home office deduction. The home office deduction is only available for exclusive workspace, meaning you must have a dedicated space for work, a section of your kitchen countertop does not count. The home office deduction allows you to deduct $5 per square foot, up to 200 square feet.
Standard Mileage Deduction
The standard mileage deduction is also a really useful deduction, especially if you spend a lot of time in the car. You have the option to take each and every expense and deduct it, which involves a lot more math, or you can take the standard mileage deduction of 58 cents per mile. The standard mileage deduction accounts for the average costs of insurance, fuel, maintenance, and more. If you choose to take the standard mileage deduction, you can’t claim individual expenses. You can choose one or the other but not both. The best method depends on your tax situation and costs. Speak with a tax advisor to find out your best option.
Tax Help for Independent Contractors
When it comes to independent contractor taxes, it is best not to go at it alone. The more complicated your tax situation is, the better off you are enlisting the help of a tax advisor. In the long run, you can save time and money on your taxes. Get started now with a free one-on-one strategy session with a Shared Economy Tax experts. For more tax tips subscribe to our newsletter using the form below.