Independent Contractor Taxes in 2023: The Ultimate Guide
Independent contractors pay federal, state, and local taxes. At the federal level, independent contractors pay income tax and self-employment tax on their net earnings. Most independent contractors also pay income tax in the state where they live and work, and some cities or counties charge business taxes, registration fees, or licenses.
Independent contractors who are sole proprietors report taxes on Form 1040, Schedule C. Tax returns are due on April 15 or October 15, if an extension is filed. Independent contractors must pay their estimated taxes every three months or face a penalty.
The taxes in this article don’t apply to employees whose income is reported on Form W-2. See our comparison of W2 vs 1099 workers if you’re unsure of your employment status.
List of Taxes for Independent Contractors
- Federal income tax: This tax is reported on the Form 1040 federal tax return. Independent contractor taxes at the federal level are based on total income for the year, minus any tax deductions or tax credits. The tax rate varies from 10% to 37%, based on the level of income.
- Self-employment tax: This federal tax is how independent contractors pay into Social Security and Medicare and is calculated on Form 1040, Schedule SE. The tax rate is 15.3% on net earnings from self-employment up to $160,200 for 2023 ($147,000 for 2022) and 2.9% on net earnings above that threshold.
- Other federal tax: Independent contractors may need to pay other federal taxes depending on their particular financial situation. Other federal taxes include the alternative minimum tax, net investment income tax, and additional Medicare tax.
- State and municipal tax: Independent contractors may need to pay income taxes, business taxes, registration fees, or license fees in the cities, counties, or states where they live and work.
- Sales tax: If you sell products, you’ll need to collect sales tax from customers and remit the sales tax along with the sales tax return to your state.
- Use tax: Depending on your state, you may have to pay use tax on items you purchase out-of-state if no sales tax was collected by the seller.
- Excise tax: In addition to sales tax, certain products and services that you sell may also be subject to excise tax. For example, alcohol, tobacco, firearms, and telephone services are all subject to excise taxes.
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Independent contractor tax rates at the federal level vary by income. The federal income tax rate starts at 10% and gradually increases to 37% based on a person’s filing status and taxable income after deductions.
2023 Federal Income Tax Rates | ||||||||
|---|---|---|---|---|---|---|---|---|
Filing Status | Single | Head of Household | Married Filing Jointly | Married Filing Separately | ||||
Tax Rate | From | To | From | To | From | To | From | To |
10% | $0 | $11,000 | $0 | $15,700 | $0 | $22,000 | $0 | $11,000 |
12% | $11,001 | $44,725 | $15,701 | $59,850 | $22,001 | $89,450 | $11,001 | $44,725 |
22% | $44,726 | $95,375 | $59,851 | $95,350 | $89,451 | $190,750 | $44,726 | $95,375 |
24% | $95,376 | $182,100 | $95,351 | $182,100 | $190,751 | $364,200 | $93,376 | $182,100 |
32% | $182,101 | $231,250 | $182,101 | $231,250 | $364,201 | $462,500 | $182,101 | $231,250 |
35% | $231,251 | $578,125 | $231,251 | $578,100 | $462,501 | $693,750 | $231,251 | $346,875 |
37% | $578,126 | ― | $523,601 | ― | $693,751 | ― | $346,875 | ― |
The self-employment tax rate has two components. The first component is the 12.4% Social Security tax on net earnings up to a maximum limit, which is $160,200 for 2023 ($147,000 for 2022). The second component is the 2.9% Medicare tax, which applies to all net earnings as an independent contractor. Thus, the self-employment tax rates are 15.3% on net earnings up to the Social Security limit, and 2.9% on net earnings above this limit.
Self-Employment Tax Rates for 2022 and 2023 | |||
|---|---|---|---|
 | On Net Self-employment Earnings Up To: | ||
Tax for | Tax Rate | Year 2022 | Year 2023 |
Social Security | 12.4% | $147,000 | $160,200 |
Medicare | 2.9% | All SE Earnings | All SE Earnings |
Note: An additional 0.9% Medicare tax may also apply if net earnings from self-employment exceed $200,000 for single filers or $250,000 for joint filers.
Independent contractor tax rates at the state level vary based on the state in which they reside. If the independent contractor’s office or business has a location in another state, the contractor might need to file and pay taxes in that other state as well. Each state sets its own income tax rates. New York, for example, has tax rates ranging from a low of 4% to a high of 8.82%.
Select a state from the drop-down box to see that state’s highest income tax rate:
You may be subject to additional state-level independent contractor taxes. For example, sales tax if you sell products, excise taxes for the sale of certain items like alcohol and tobacco, and other state and municipality taxes, which will be determined by your geographical location.
Top Tax Deductions for Independent Contractors
There are a variety of tax deductions available to independent contractors. A few of the top independent contractor tax deductions are home office expenses, computer and equipment purchases, health insurance, retirement savings, and other expenses related to their trade or business.
Independent contractors who work from home can deduct part of their rent or mortgage, utilities, and other home-related expenses like repairs or property insurance. The amount of the home office deduction is based on the size of the office space as a percentage of the total square feet of the house. The office space must be regularly and exclusively used for business.
Independent contractors can deduct the health insurance premiums they pay for themselves, their spouses, and their dependents. The deduction includes premiums paid for medical insurance, dental insurance, and long-term care insurance. The self-employed health insurance deduction reduces your income tax, but not your self-employment tax.
Independent contractors can make tax-deductible contributions to retirement plans. Besides traditional independent retirement accounts (IRAs) and Roth IRAs, independent contractors also can deduct up to $66,000 (for 2023) by setting money aside through a small business retirement plan, like a simplified employee pension-IRA (SEP-IRA) or a solo 401(k). As with health insurance, retirement contributions reduce your income tax but not your self-employment tax.
Independent contractors can write off the cost of computers, software, machinery, equipment, desks, chairs, and furniture. These types of expenses are referred to as depreciation deductions. Independent contractors can choose between deducting costs over several years or all at once in the year the equipment or other asset starts being used for business purposes using Section 179 or Bonus Depreciation.
Independent contractors can deduct costs related to driving their car, truck, or SUV for business. The tax-deductible portion is based on the number of miles the vehicle is driven for business compared to the total miles for the year. The purchase price is deducted as car depreciation.
Independent contractors can also deduct gas, insurance, registration fees, and repairs. Instead of deducting actual expenses, it’s much simpler to use IRS’s standard mileage rate, which is 65.5 cents per mile for 2023.
Independent contractors can take a deduction of up to 20% of their net earnings with this deduction. The IRS’s qualified business income deduction doesn’t require spending money, unlike other deductions. Instead, the amount of the deduction varies based on the independent contractor’s income for the year and the nature of their trade or business.
Independent contractors often hire subcontractors to help them complete their projects. Amounts paid for contract labor are tax-deductible. Be aware that independent contractors may need to report on Form 1099 the amounts paid to other contractors if they exceed $600 for the year.
See the series of 1099 forms in our guide to IRS Form 1099 reporting for small businesses.
Independent contractors can write off business expenses that are ordinary and necessary. This can include costs for liability insurance, phone service, internet service, business cards, memberships in professional organizations, professional education courses, office supplies, reference books, and tools.
For more information about business expenses, check out our article on IRS business expense categories. It includes a free worksheet of business expenses and their treatment.
How To File Your Independent Contractor Taxes
Filing taxes as an independent contractor can be summarized in eight steps. While it’s important to understand the basics of filing your independent contractor tax return, we highly recommend using tax software or an online tax provider.
We recommend TaxAct as the best tax software for freelancers and the self-employed. And if you want help filing your taxes, Bench is a great online bookkeeping service that includes tax preparation. To learn more about these solutions, our TaxAct review and Bench review discuss their features, services, and prices in depth.
You’ll need to know how much money you received as an independent contractor and how much you spent on various tax-deductible expenses. You can do this using an accounting system such as QuickBooks Online, which will allow you to categorize the money you earn and spend throughout the year. The result is a detailed summary of your income and expenses.
Independent contractors report their self-employment income and business-related deductions on Schedule C. This schedule is included with the contractor’s Form 1040. Other income is also reported on Form 1040, such as interest, dividends, and rental income.
Your self-employment income flows from Schedule C to Schedule SE, where your self-employment tax is calculated. The tax calculated on Schedule SE will carry over to the taxes section of your Form 1040.
On your Form 1040, you must also list all of your other income, such as wages, interest, rental property income, and other similar sources. You also have to report non-business deductions—like itemized deductions, health insurance for self-employed people, charitable donations, and student loan interest.
Your Form 1040 combines both your income tax due and self-employment tax due to show your total tax liability. Any estimated tax payments you made during the year are subtracted, leaving you with either a balance due or a refund.
After finishing your tax return, you must estimate how much tax to pay for the upcoming tax year. If you want help estimating your taxes for the next year, Bench provides tax services in addition to bookkeeping.
Most states require a separate income tax return, but the specific forms and requirements vary greatly. You’ll need to do some research or use a program like TaxAct to determine your state’s requirements. States often also require independent contractors to make estimated tax payments during the year.
When to file and pay independent contractor taxes: The key deadlines for filing tax returns as an independent contractor are April 15 (the first deadline) and October 15 (the extended deadline)—unless those dates fall on a weekend or holiday, in which case the deadline would be the following business day.
As an independent contractor, you usually don’t have tax withholding like employees do, but you will still owe taxes throughout the year like all taxpayers. Estimated tax is a way to pay tax on income that is not subject to withholding.
Generally, you’ll have to make estimated tax payments if you expect to owe $1,000 or more in taxes when your return is filed. You’ll make these payments every three months according to the following schedule:
Period Income Earned | Due Date |
|---|---|
January 1–March 31 | April 15 |
April 1–May 31 | June 15 |
June 1–August 31 | September 15 |
September 1–December 31 | January 15 of the following year |
You can pay your estimated taxes by:
- Mailing IRS Form 1040-ES
- Using IRS’s online platform
- Calling by phone
- Using the IRS2Go mobile app
Whichever method you decide, be sure to get your payments in on time to avoid potential penalty and interest exposure.
Inability To Pay Taxes and Penalties Involved
If you don’t have the money to pay your taxes, you can apply for an installment agreement by completing IRS Form 9465. To request installment payments using this form, there are a few conditions that must apply:
- You owe $25,000 or less
- You prove that you don’t have the money to pay the taxes
- You can pay the tax off within three years
The IRS charges penalties for paying taxes after the April 15 deadline. The penalty for not filing a tax return is 5% per month of the balance you owe, not to exceed 25% of the total tax due. If you file your tax return on time but don’t pay the outstanding balance, the IRS will charge you a late payment penalty of 0.5% of the actual tax owed for each month that the tax remains unpaid from the due date, until the tax is paid in full.
How To Keep Your Independent Contractor Taxes Organized
1. Invest in Accounting Software
If you plan to do your own books, it’s a good idea to invest in accounting software, which will allow you to track all of your income and expenses easily. Having all of this information in one place will make tax time a breeze.
At the end of the year, you can give your tax professional access to your data, and they can run the reports they need to prepare and file your tax return. Check out our recommendations for the best small business accounting software to find the right fit for your business.
2. Use a Business Expense Tracker App
Keeping track of paper receipts can often be a challenge for business owners. With today’s technology, you can get rid of paper receipts by downloading an app to your mobile device and taking a snapshot of your receipts instead.
Business expense trackers allow you to organize receipts in a digital file easily, and most of them will connect with your accounting software so that you don’t have to enter the information later on. You might find one that fits the bill in our roundup of the leading business expense tracker apps.
3. Use a Mileage Tracker App for Business Miles
If you use your personal vehicle for business, you need to track the total miles driven for business to calculate your auto tax deduction. Mileage trackers are a great way to track miles driven to see clients and handle other business matters. It takes just a few minutes to download an app to your mobile device, and you can start tracking those miles immediately. See our top-recommended mileage tracker apps to kick off your search.
Frequently Asked Questions (FAQs)
The filing due date for Form 1099-NEC is January 31, for both paper and electronically filed returns. If you are expecting this form, you should receive it by early February.
For tax purposes, self-employed and independent contractors are treated the same. People generally refer to someone as an independent contractor if they do most of their work for just a couple of customers but maintain control over how they complete the work. Self-employed people generally run a business that serves many different customers.
Bottom Line
Independent contractors pay federal and state tax on their net earnings, which is the income from a trade or business minus any related business deductions. Estimated taxes on this income typically are paid in advance four times a year. Independent contractors fill out Form 1040 and Schedule C to report their income and deductions. They use Schedule SE to figure out their self-employment tax.
