Filing Taxes as an Independent Contractor

Filing your taxes as an independent contractor is very different from filing taxes as an employee. As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly

Getting Started

When you work for yourself, there are no deductions from your paycheck for income taxes, social security or Medicare, as would be the case if you were working as an employee. As an independent contractor or small business owner, you are held responsible for paying federal and state income tax, social security and Medicare; this combined tax is called self-employment tax for independent contractors.

Organize and Prepare

As an independent contractor, the most important aspect is to organize and prepare. A few things you should consider and prepare for are:

  • Seeking tax preparation assistance or finding a reliable tax preparer or accountant, especially if it’s your first time filing. To find support in finding a tax preparer visit the Taxpayer Advocate Service.
  • Be prepared to pay both federal and state, and in some cases local or city, taxes
  • Keep track of your income (both as an employee and IC)
    • You will receive a W-2 form as an employee and a 1099 form for work done as an independent contractor.
    • You will only receive a 1099 if you made $600 or more for a particular client.
    • You will need to report income from small jobs separately
  • Keep track of your business expenses
    • It is recommended that you keep receipts of all of your expenses for at least 6 years.
    • Consider using an App to keep track of receipts such as Quickbooks or Foreceipt.
  • Pay quarterly estimated taxes if you expect to pay more than $1,000 in taxes annually.

 

Keep up with changes

The IRS makes updates, corrections, clarifications, and changes to tax filing requirements, forms, and procedures throughout the year so it is important to stay up to date and aware of any changes that might affect you before filing. For updated information about changes you can visit the irs.gov website.

Tax Preparation Assistance

You may file your independent contractor or business taxes on your own, but we recommend working with a reliable tax preparer or accountant (especially if it’s your first time filing as an IC), who can help you complete the correct tax forms and help you determine your deductions and expenses.

At the end of the day there is no one right or best way to prepare your taxes, you are the only one who can find the best tax preparation path for your needs. The key is to be informed, do your own research and ask questions.

Assistance with filing your own tax returns

The IRS can help many taxpayers prepare their own returns without the assistance of a paid preparer. Some options you can consider include:

Finding a professional tax preparer

Similar to immigration services, you should be very careful when choosing a tax preparer. You do not want to become a victim to any scheme that offers unrealistic wealth or exemption from your obligation to file tax returns and/or pay taxes.

What to look for

While most preparers provide excellent and honest service to their clients it is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return, which is why it is very important to choose your tax preparer wisely.

When when searching for a tax preparer you should:

  • Check the person’s qualifications
  • Check the preparer’s history
  • Find out about their service fees
  • Ask if they offer electronic filing
  • Make sure the tax preparer is accessible and can answer your questions when needed
  • Provide all records and receipts needed to prepare your return
  • Never sign a blank return
  • Review the entire return before signing it
  • Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN).

Forms to Know

There are a few forms you need in order to file your taxes.

  • W9 Form – you will be asked to submit this form to each client so they can keep track of how much they pay you.
  • 1099 Form – this form is a summary of how much a client (or clients) paid you (if more than $600) mailed to you at the end of the year by each client.
  • Form 1040 – form used to report self-employment income.
  • Schedule C EZ Form – (no longer used for tax years 2019 and later) form used to calculate net profit from business (used for
  • smaller businesses) if:
    • Your business expenses are less than $5000
    • You have no employees
    • You have no physical inventory
    • You are not using depreciation or deducting the cost of your home
  • Schedule C Form – used to calculate profit or loss from business (used for more complex businesses).

Schedule SE Form – used to determine how much you pay in social security and Medicare taxes (in addition to income tax).

Expenses and Deductions

As an independent contractor or business owner, the IRS allows business expenses to be deducted from your earnings; expenses must be business expenses and not personal. What this means is that you only pay taxes on the money left over after you deduct business related expenses from money earned.

Keep a record of expenses

For any business expense, you must keep record of each expense (date, purpose, amount, and copy of receipt) to prove that it was a business expense in case of an audit. You want to take as many legitimate deductions as you can, but you must be able to prove that the money was spent and that it was used for business purposes.

We recommend keeping a ledger of all expenses and deductions with detailed notes to help you file taxes and be prepared in case of an audit.

Common business expenses

Below is a list of common business expenses:

  • Advertising expenses
  • Business insurance
  • Interest paid on business credit card or business loans
  • Professional services (i.e. lawyers, accountants, tax preparers)
  • Repairs for equipment
  • Office supplies
  • Travel costs
  • Business meals and other entertainment
  • Student loan interest deduction
  • Tax benefits for education

For more detailed information about business expenses, see IRS Publication 535, Business Expenses.

Managing Cash-Flow and Saving for Taxes

As an independent contractor or business owner, it is important to learn to manage your cash flow by making sure you are charging enough to cover business expenses and taxes, and maintaining a consistent flow of projects/clients.

Research comparables

Research hourly rates of people who do similar work to you, negotiate your billable hours, and determine how many clients and projects you need to have at any given time to keep you financially stable.

Keeping track & making a budget

It is important to keep track of the hours you work and submit invoices to clients on time. You should also keep track of when and how long it takes for clients to pay invoices. There are two great ways to keep track of your cash-flow and ensure you are preparing to cover your taxes.

  1. Create a budget to keep track of your expenses and revenues, and forecast a couple of months ahead to keep your finances in check.
  2. Open a separate savings account to put aside at least 25% of your income to pay for taxes.