With an evergreen tax code that measures thousands of pages long, it’s understandable if you’re unsure of what’s expected of you regarding independent contractor taxes. Being an independent contractor offers several tax advantages, but it requires excellent record keeping.
For instance, if you're a physician, you might be able to deduct professional membership dues. All self-employed individuals’ circumstances are different, which is why it’s crucial to work with a business advisor to understand what you can and cannot deduct.
Things get a little more complicated when you’re filing and paying independent contractor taxes. You'll have additional forms to file, and you'll need to pay quarterly estimated taxes. To calculate and make estimated tax payments, you must fill out Form 1040-ES.
Are you thinking of being your own boss? Here's what that means for your taxes.
As an independent contractor, you have some unique responsibilities where taxes are concerned. Working with a CPA can help you optimize your tax strategy so you can reduce your tax bill and avoid issues with the IRS.
Here's a breakdown of what you stand to benefit from:
An independent contractor is any person running a one-person business. As such, you’re required to provide details of your profit and loss like other business owners. To do this, you’ll have to file a Schedule C along with your personal tax return, filed with Form 1040.
In addition to paying income taxes, you’re also required to cover the full portion of Social Security and Medicare taxes yourself. The current self-employment tax rate is 15.3% - 12.4% for Social Security and 2.9% for Medicare – which you’ll report by filing Schedule SE.
A self-employment tax of 15.3% is high, but there’s an upside – you qualify for certain business deductions as an independent contractor. These deductions can include health insurance, home office deductions, and business expenses like credit cards, phone, internet, and mileage expenses.
The IRS allows you to deduct direct and indirect taxes on your business. If travel is part of your business, keeping track of mileage and hotel receipts can help reduce your tax bills. Other possible deductions that can reduce your taxable income include retirement savings and costs for professional service fees like lawyers and accountants.
The U.S. tax system is a pay-as-you-go system that requires you to pay taxes as you earn income during the year. As an independent contractor, you must pay taxes on a quarterly basis – April, June, September, and January. Estimated tax is used to pay both income tax and self-employment tax. Even if you don't know how much tax you owe until you file your taxes, you may be charged a penalty if you don't pay enough estimated taxes or if you pay them late.
To calculate and make estimated tax payments, you must fill out Form 1040-ES. You can estimate how much you need to pay by saving a portion of each payment you make.
Additionally, you can also check what you paid in previous tax years to estimate your tax payment. It can be difficult to estimate how much to pay as you must consider both federal and state taxes. Your best bet is to work with a CPA with an extensive understanding of the tax code to ensure you’re not subject to penalties.
Once you’re earning a level of income, you may want to consider setting up a legal entity for your business, like a Sole Proprietorship or a Limited Liability Company. Doing so can help you reduce your tax liability. For instance, as a sole proprietor, you might qualify for the Qualified Business Income deduction. QBI deductions allow you to minus up to 20% of your business income on your individual tax return.
BAAP CPA can help you determine whether you qualify for the deduction as the threshold of qualification differs depending on the type of business.
Taxes are complicated and often intimidating, especially when you’re your own boss. BAAP CPA is a CPA firm in Clearwater offering business advisory services to help individuals understand the basics of independent contractor taxes.
If you think you might be paying too much to the IRS, talk to us about strategic tax planning. We provide information for people who want to establish, sustain, and grow their businesses as independent contractors. Here’s the best part: a portion of our fees may even be deductible as a business expense. Contact us today to schedule a consultation and ease any fears you may have regarding independent contractor taxes.