For independent contractors, taxes aren’t that clear-cut and obvious. The process and frequency of filing your taxes can be so arduous that they can overwhelm any newcomer.
This contractor’s guide to taxes will give you a crash course on how to file your taxes like a pro and in time, as an independent contractor.
Major Tax Differences Between An Employee And A Contractor
The way you file your taxes is going to differ from how an employee would go about it in at least 4 major ways.
1. Reporting Incomes and Deductions
To make up for the addition to the amount of taxes you have to pay, being a contractor comes with some perks on the deductions you’re able to make.
As a contractor, you can reduce the amount of money you’ll pay in taxes by deducting the amount from your total profit that’s going towards your health insurance, your office (yes, the one you have at home, or should), mileage, and phone bill.
In addition to this, the Tax Cuts and Jobs Act may allow certain eligible contractors to deduct a maximum of 20% of their business income.
Self Employment Taxes
Then there’s Schedule SE. Unlike the Social Security and Medicare taxes that you pay only half of while the rest is covered by your employer, as a contractor, you’re required to pay an equivalent of those without help. To get an estimate of how much you should pay based on your gross income, you can make use of calculators, including whether you have W2 (employee) income.
At the moment, the self-employment tax is 12.4% while that for Medicare is pegged at 2.9. This amounts to 15.3% in self-employment taxes! The bright side is that you’ll be able to take back half of what you’d have paid as deductions.
Estimated Quarterly Tax Payments
As soon as you become a contractor, you no longer have an employer above you making deductions from your salary to have you pay taxes. It becomes solely your responsibility to know how many times to pay your taxes and the exact dates.
In order not to miss any of your tax payments or to underpay them, you’ll need to make quarterly estimated tax payments for both your federal and state taxes.
If you have a rough estimate of what your yearly income will be then you may be able to further estimate in advance how much you’ll owe the government in taxes then start paying your taxes quarterly.
Where you used to get a W-2 as an employee, as a contractor you’ll instead be given a 1099-MISC. This will show you how much you made throughout that given year. This information will help you verify whether you’re reporting your income correctly.
If a client paid anything below $600, then you won’t get a 1099-MISC yet the information will still need to reflect on your Schedule C form. Good record-keeping and accounting will help you do this well.
Deadlines For Your Quarterly Estimated Tax Filing
As any of your quarterly estimated taxes deadlines draw close, you should use your Schedule SE to help calculate the total taxes you need to pay.
The deadlines for these taxes are as follows:
- 15 April
- 15 June
- 15 September
- 15 January
Your state might have a different set of deadlines. State-specific deadlines and other requirements can be accessed through your state’s business resources.
Deadline For Your Personal Income Tax
This tax is the same for both contractor and employee. Your Personal Income Tax that you’ll file with Form 1040 is due every year on the 15th of April. If the 15th of April happens to be a weekend, then you’ll need to file your personal income tax during the next business day.
Form 4868 is for when you’re unable to file this tax in time. This form will grant you a 6-month extension to your deadline. Be aware though, that this extension doesn’t cover the actual amount of your taxes. If you’re owing in taxes, failure to pay by the given deadline will still invite a penalty. Form 4868 just goes by giving you an additional 6 months to file your taxes.
To stay in compliance with all your tax requirements, you most definitely, as a starting point, need to understand which taxes you need to pay and when.
Hopefully, this article has provided you with a great place to start if you’ve been looking for a guide into how things work in the taxes world for a contractor.
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