According to a 2018 Gallup poll, an estimated 57 million Americans participate in the U.S.’s growing gig economy. And what do these workers have in common? All of their gig work classifies them as independent contractors for tax purposes.
Federal tax laws for full-time employees versus independent contractors have significant differences. Many of us are used to our employers taking care of all tax filings, and footing part of the bill for Social Security and Medicare. Independent contractor status means taking on the responsibility for the tax filing process and more of the financial burden.
As a newly-minted independent contractor, what do you need to need to know in order to comply with tax laws and avoid penalties? Make sure you have the answers to these three questions—and follow their guidance when preparing your taxes.
What Are the Tax Obligations for Independent Contractors?
According to the IRS, independent contractors are classified as self-employed individuals – along with sole proprietors, partnerships, or anyone in business for him or herself. Any tax requirements that apply to the self-employed automatically apply to independent contractors.
One big difference here is tax payment frequency. While, full-time employees are used to filing once a year, their employer is responsible for withholding money from each paycheck for taxes. Self-employed individuals, on the other hand, are generally required to file make quarterly tax payments four times a year, in addition to filing their taxes annually. That means more planning (and setting aside funds) for taxes.
What are Self-Employment Taxes?
The IRS requires that self-employed individuals pay self-employment taxes and income taxes. Income tax is a variable tax based on a series of income brackets found on the IRS’s website. Self-employment tax is currently a 15.3% tax that pays into Social Security and Medicare for self-employed individuals. Note: these tax payments are only required if an individual’s net earnings from self-employment are $400 or more during the tax year.
How to Calculate Your Income for Tax Purposes
How do you figure out your net earnings for tax purposes? Take your total business income for the year and subtract your expenses. The result will show you if you’re over the $400 threshold. Subtracting the standard deduction from that result will then give you your taxable income for the year. Next, divide your taxable income by 4 to calculate your quarterly estimated tax payments. And don’t worry: you don’t have to calculate these inputs on your own. The worksheets in the IRS’s Forms 1040 and 1040-ES will walk you through the process (either on paper or online).
State and Local Taxes
Aside from federal taxes, independent contractors may also be subject to state and local tax obligations. These taxes will depend on each state, city, or county’s tax laws. Find information about state taxes at your state’s tax authority (listed here) and all U.S. municipalities that collect taxes here.
What Are the Tax Deadlines for Independent Contractors?
- 1st deadline: April 15 (tax payment for January 1-March 31)
- 2nd deadline: June 15 (tax payment for April 1-May 31)
- 3rd deadline: September 15 (tax payment for June 1-August 31)
- 4th deadline: January 15th of the following year (tax payment for September 1-December 31)
If the federal tax deadline falls on a weekend or holiday, the due date automatically reverts to the next business day. State, city, and county deadlines vary, so it’s important to check with your local authorities to ensure timely payments (and reduce the risk of penalties).
Which Forms Do Independent Contractors Need to File Taxes?
Form 1040 (US Individual Income Tax Return)
Form 1040 (US Individual Income Tax Return) is the starting point to calculate taxable income and file taxes for all self-employed individuals that are not partnerships, LLCs, or corporations. This form includes all sources of income, all business expenses, and the tools to calculate an individual’s taxable income (after removing expenses and the standard deduction).
Form 1040-ES, Estimated Tax for Individuals
Form 1040-ES, Estimated Tax for Individuals takes it to the next step by providing the necessary format for calculating quarterly tax payments.
Form 1099-MISC for Subcontractors
Helpful but not absolutely necessary are the Form 1099-MISC sent to the contractor by a client. A business using an independent contractor is required to file a 1099-MISC if the contractor does more than $600 worth of work for them. However, self-employed individuals are still responsible for reporting all income sources, regardless of whether or not the business sends a 1099-MISC.
If you use subcontractors as part of your own business operations, you’ll need to file Form 1099-MISC on their behalf. That means sending a copy to both the IRS and the subcontractor by January 31st of the following year.
If you need to request an extension on your taxes, file Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return). Keep in mind that the extension doesn’t remove your obligation to make a payment—it just extends your tax filing deadline until October 15 of that year.
Give Yourself a Break: Tax Changes Are an Adjustment
Compared to the ease of filling out one or two forms per year, independent contractor taxes can seem like a big change. Independent contractors have to be more meticulous about record-keeping, as there are just more things to keep track of. However, paying quarterly taxes makes the hit smaller when it’s spread out, and it allows businesses the opportunity to project future income – an exercise that can provide much-needed visibility.
If you’re still feeling overwhelmed, consider consulting an accounting expert. He or she can guide you in the right direction, map out your first tax payments, or take over your taxes completely—depending on your needs.