As a self-employed worker, you can claim the status of an independent contractor. However, when it comes to paying taxes, your status has its peculiarities.
If you're an independent worker or a freelancer, according to the IRS, you are an independent contractor because you are paid by delivering service to someone else. An employer does not engage an independent contractor. An employee is someone whose work can be directly controlled by the person paying them.
While a contractor is only paid per work, an employee is paid at regular intervals. That means the two types of workers are taxed differently. Employees often have their income taxes deducted before they are paid. However, a contractor is paid in full and has to deduct their taxes themselves. So the IRS has different tax rules for independent contractors.
While an independent contractor has bigger obligations to the IRS, there are also benefits. That's why some workers would prefer to be classified as independent contractors rather than employees. This distinction needs to be made because some workers see themselves more as employees while their payer(s) may regard them as contractors. This often leads to confusion when the workers receive Form 1099-NEC from the payer.
Some also assume that they must have a business of their own to qualify as an independent contractor. The moment someone pays you for a job and that person hasn't offered you permanent employment, you are entitled to receive a Form 1099, and you can claim an independent contractor status while filing your returns.
Because the income of independent contractors is inconsistent, sometimes, they are at a disadvantage when they need certain financial services because they don't enjoy the stable, regular income that employees have. But with some verifications, they should be able to prove their status as independent contractors.
But, how do independent contractors pay taxes?
Since independent contractors are not on a fixed recurring income, their tax schedule is not as straightforward as employees'. While all taxes are demanding, independent contractors have a more rigorous tax filing procedure. Here's how it goes.
Employers of independent contractors use Form 1099-NEC to report how much they pay to all non-employees (freelancers and contractors) at the end of each year.
An independent contractor must report all earnings as soon as the income is above $400. The net profit is then calculated with Schedule C. The Independent contractor would do this with Form 1040.
Using Schedule SE on Form 1040, the contractor can then pay the self-employment tax, which is the amount that covers social security and medicare. Independent contractors have to make quarterly tax payments if they are estimated to owe up to $1,000 or more in taxes. The quarterly payments prevent them from paying in bulk, which could be more difficult. Penalties accrue if independent contractors miss quarterly payments.
Tax Deductions for Independent Contractors
Independent contractors pay more in self-employment taxes. However, there are several avenues to reduce the burden. Since most self-employed people do not necessarily use a rented office, they can file some of their home office expenses tax-deductible. Several other benefits can be accrued from the taxes giving the independent contractor a lot of advantages.
Independent Contractors can deduct certain expenses from their taxes, reducing the amount payable. An independent contractor may deduct a business expense from taxes whenever a business expense is incurred. Some of the tax-deductible expenses include;
Mortgage interest
Retirement plan
Students loan interest
Health insurance premium
Business expenses
Legal expenses
Home Office deduction
Business meals
Advertising
Although most of these deductions are frequently amended and can be audited by the IRS, a self-employed individual can take advantage of them to reduce the tax payable when filing returns.
Independent contractors must indicate the deductions and the income on Schedule C when filing tax returns.
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