As an independent contractor, there are three types of taxes you will owe:
- Self-Employment Tax
- Federal Income Tax
- State Income Tax
Self-Employment Tax: As an independent contractor, you will be taxed 15.3% of your net income (income after business expenses).
Federal Income Tax: Is the tax taken by the Internal Revenue Service (IRS) from taxpayers’ annual earnings. Everyone who earns income above the standard deduction in the United-States is required to pay federal income tax.
The amount you owe depends on your total income during the year, which is calculated after business expenses for independent contractors.
*The more you earn, the higher percentage of federal income tax is taken from your earnings*
State Income Tax: Is the amount of tax taken from your earnings by the state government where you live and/or work. This is separate from the IRS. and the amount you owe will depend entirely upon the tax policies in the state where you live/work.
If your state has income tax, you will be required to file a state tax return every year in addition to your federal tax return. If you use an online service to file your taxes, you can almost always file your state tax return at the same time.
If you owe state income tax, it is important to note that this needs to be paid directly to your state’s government, separately from what you pay to the IRS.
What Are Write-Offs?
Write-offs are qualified business expenses that you subtract from your gross (total) income to get your net (actual earned) income. These business expenses are things that are necessary to keep your business running.
Employees are not eligible for these write-offs because they are not the business owners, and they are not responsible for keeping the business up and running.
*It is important to keep your receipts for all business purchases because if you are audited, the IRS will ask to see proof of purchases.*
Who Is Expected to Pay Taxes Quarterly?
Anyone who is expected to owe $1,000 or more in taxes, and whose tax withholdings cover less than 90% of their tax liability, needs to pay quarterly taxes. Most independent contractors fall into this category because no taxes are withheld from self-employment income. If you have another job where you are paid as an employee, you may not be required to pay quarterly. It depends on how much you earn in self-employment income, and how much is withheld from your paychecks.
How Much Do I Need to Pay Quarterly?
Each quarter, you will need to pay 1/4 of your total taxes owed for the year. However, since you won’t know exactly how much you’ve made until the end of the year, these quarterly payments will be estimates of what you owe. There are two ways to estimate the taxes you will owe for the upcoming year in order to make quarterly payments. The first way is to use what you owed in the previous year. I don’t recommend this method, because as an independent contractor/business owner, your income can fluctuate greatly. However, this can be a good starting place if your income is fairly steady from year to year.
The second way, and the way that I recommend, is to make payments based on what you have earned so far for that year. The quarters for quarterly estimated payments are broken down like this:
Quarter One: January 1st-March 31st
Quarter Two: April 1st-May 31st
Quarter Three: June 1st-August 31st
Quarter Four: September 1st-December 31st
You may have income other than self-employment income to report on your tax return. Here are some common examples of other income you may have, and what tax form you’ll need to report them!
Unemployment: 1099-G. (If they didn’t mail this to you, you can usually access it from your online portal, where you filed weekly claims.)
Wages from a job: W-2. This should have been mailed to you, and shows all of the income you earned in the tax year that you are filing. If you changed addresses and didn’t receive a W-2 from your employer or former employer, you can request that they send this to you again.
Interest income (usually from a savings account): 1099-INT. Your bank will have this on file, and sometimes you can log into your bank account online and authorise the tax software to access this form directly.