Independent Contractor Taxes: The Ultimate Guide
Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content.
Danielle is a writer for the Finance division of Fit Small Business. She has owned a bookkeeping and payroll service that specializes in small business, for over twenty years.
Independent contractor taxes include federal income tax, self-employment tax, state taxes, and municipal taxes. 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 are required to make estimated tax payments on a quarterly basis to avoid an underpayment penalty.
What Are Independent Contractors?
An independent contractor is self-employed, even if they do all of their work for a single business. The primary difference between an independent contractor and an employee is that an employer has the right to control and direct how an employee accomplishes a task. On the other hand, independent contractors are given a task, and they determine how the task will be accomplished.
Tip: Determining the proper classification between employee and independent contractor is difficult with lots of grey areas. The IRS provides a lot of information to help you make the decision.
The business or businesses for which you work should classify you as an employee or independent contractor before you begin work. If they report your annual earnings to you on Form 1099-NEC, then you have been classified as an independent contractor and must pay taxes as outlined in this article. If your annual earnings are reported to you on Form W-2, then you are an employee, and this article doesn’t apply to you.
List of Taxes for Independent Contractors
Independent contractors pay federal, state, and local taxes. At the federal level, independent contractors pay federal income tax and self-employment tax on their net earnings. Independent contractors also pay income tax in the state or states where they live and work. Some cities or counties charge business taxes, registration fees, or licenses.
Taxes that independent contractors need to pay include:
- 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 $142,800 for the year 2021 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.
- 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.
Federal Income Tax Rates For Independent Contractors
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.
2021 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 | $9,950 | $0 | $14,200 | $0 | $19,900 | $0 | $9,950 |
12% | $9,951 | $40,525 | $14,201 | $54,200 | $19,901 | $81,050 | $9,951 | $40,525 |
22% | $40,526 | $86,375 | $54,201 | $86,350 | $81,0501 | $172,750 | $40,526 | $86,375 |
24% | $86,376 | $164,925 | $86,351 | $164,900 | $172,751 | $329,850 | $86,376 | $164,925 |
32% | $164,926 | $209,425 | $164,901 | $209,400 | $329,851 | $418,850 | $164,926 | $209,425 |
35% | $209,426 | $523,600 | $209,401 | $523,600 | $418,851 | $628,300 | $209,426 | $314,150 |
37% | $523,601 | ― | $523,601 | ― | $628,301 | ― | $314,151 | ― |
2022 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 | $10,275 | $0 | $14,650 | $0 | $20,550 | $0 | $10,275 |
12% | $10,276 | $41,775 | $14,651 | 55,900 | $20,551 | $83,550 | $10,276 | $41,775 |
22% | $41,776 | $89,075 | 55,901 | $89,050 | $83,551 | $178,150 | $41,776 | $89,075 |
24% | $89,076 | $170,050 | $89,051 | $170,050 | $178,151 | $340,100 | $89,076 | $170,050 |
32% | $170,051 | $215,950 | $170,051 | $215,950 | $340,101 | $431,900 | $170,051 | $215,950 |
35% | $215,951 | $539,900 | $215,951 | $539,900 | $431,901 | $647,850 | $215,951 | $323,925 |
37% | $539,901 | ― | $539,901 | ― | $647,851 | ― | $323,926 | ― |
Self-Employment Tax for Independent Contractors
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 $142,800 for 2021 ($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 2021 and 2022
On Net Self-employment Earnings Up To: | |||
|---|---|---|---|
Tax for | Tax Rate | Year 2021 | Year 2022 |
Social Security | 12.4% | $142,800 | $147,000 |
Medicare | 2.9% | All SE Earnings | All SE Earnings |
* 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.
State Income Tax Rates
Independent contractor tax rates at a 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.
1. Home Office Deduction
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.
2. Health Insurance Premiums
Independent contractors can deduct health insurance premiums they pay for themselves, their spouse, 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.
3. Small Business Retirement Plans
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 $58,000 (for 2021) 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.
4. Depreciation on Computers, Equipment, and Furniture
Independent contractors can deduct 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.
5. Car and Truck Expenses
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 the standard mileage rate, which is 56 cents per mile for 2021. For a simple and efficient way to track your mileage, we recommend QuickBooks Online.
6. Qualified Business Income Deduction
Independent contractors can take a deduction of up to 20% of their net earnings with this deduction. The 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.
7. Expenses for Contract Labor and Outside Services
Independent contractors often hire other 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.
8. Other Expenses Related to Your Trade or Business
Independent contractors can deduct expenses that are an ordinary and necessary part of conducting business. This can include expenses for liability insurance, telephone 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.
How To File Your Independent Contractor Taxes
Filing taxes as an independent contractor can be summarized in seven 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 TurboTax as the best tax software for freelancers and self-employed. If you want help filing your taxes, Bench is a great online bookkeeping service that includes tax preparation.
1. Organize Your Income and Expenses for the Year
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.
2. Report Income and Deductions on Your Form 1040, Schedule C
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.
3. Report Your Net Self-Employment Income on Schedule SE
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.
4. Report Nonbusiness Income and Deduction on Form 1040
In addition to your independent contractor income, your Form 1040 must report all other income received from wages, interest, rental property, and similar items. You also report non-business deductions such as itemized deductions, self-employed health insurance, charitable contributions, and student loan interest, just to name a few.
5. Calculate Total Federal Taxes Due
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.
6. Calculate Your Estimated Taxes for the Upcoming Year
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.
7. Complete Your State Income Tax Return
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 TurboTax, to determine your state requirements. States often also require independent contractors to make estimated tax payments during the year.
When to File & Pay Independent Contractor Taxes
The key deadlines for filing tax returns as an independent contractor are April 15 (first deadline) and October 15 (extended deadline), unless those dates fall on a weekend or holiday, in which case the deadline would be the following business day. Additionally, the deadlines for paying quarterly independent contractor taxes are April 15, June 15, September 15, and January 15.
How to Keep Your Independent Contractor Taxes Organized
Independent contractors need to keep their finances well-organized for tax time. Here are three ways to stay on top of your income and expenses: invest in accounting software, use a business expense tracker app to organize receipts, and use a mileage tracker app to track miles driven for business.
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.
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 tracker apps 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.
Track Business Miles With a Mileage Tracker App
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 tracker apps are a great way to track miles driven to see clients and handle other business matters. It takes just a few minutes to download a mileage tracker app to your mobile device, and you can start tracking those miles immediately.
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 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.
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 are typically paid in advance four times a year. Independent contractors report their income and deductions on Form 1040 and Schedule C and calculate their self-employment tax on Schedule SE.
