If you’re working as an independent contractor, you know that you need to take care of all aspects of your business, from making sure you have the proper small business liability insurance to taking care of your tax return. Your tax situation is going to be a bit different than the standard employee tax returns. As an independent contractor you work for yourself, which means that you don’t have an employer who withholds your taxes. You need to pay those yourself as part of your tax return. 1099 contractor taxes refer to your:
- State taxes
- Federal income taxes
- Social Security contribution
- Medicare contribution
If you’re an independent contractor you’ll be receiving the 1099 contractor form instead of a W-2 form. The 1099 form instructions explain all you need to know.
The biggest difference between filing as an employee and doing your taxes as an independent contractor is that as an independent contractor, you can deduct business expenses from the Schedule C form tax form. This is because an independent contractor is treated like a business owner, even if the only person who works for you is you. It’s useful because it brings down your overall tax liability.
You’ll need to submit your 1099-MISC by January 31, and also fill out any W-2s by then. This is an important date, because it used to be later, and was recently changed. The due date for 2017 Schedule C returns is April 17, 2018. A great calendar of all deadlines for small business taxes in 2018 can be found here.
How Can I Prepare for Filing Taxes as an Independent Contractor?
Before filing your independent contractor tax return, you’ll need to prepare a few things.:
- Gather your tax documentation. This means finding every 1099 form that you’ve received from clients.
- Collect all your business receipts. You can deduct all of your ordinary and necessary business expenses from your income before you calculate tax, so make sure that you keep a record of what you spend during the year. You’ll be asked to prove your expenses.
- Calculate your deductions. You can deduct any expense that is considered to be ‘ordinary and necessary,’ meaning that you need it to do your job and it is an expected part of your job. Business costs which don’t count as deductible expenses could include hiring a limo to pick up your clients or buying fancy work clothes. Some common expenses include:Gas to drive to clients
- A new work computer or business software
- A portion of your rent and electricity if you work from home
- Print the correct tax forms from the IRS website:
- Form 1040 is your main tax return form
- Schedule C or C-EZ for deducting business expenses
- Schedule SE for estimating quarterly taxes
How Do I Complete These Forms?
- Calculate your gross income for the last tax year. This should be a simple matter of adding up the amount on every 1099 form you’ve received.
- You can then use Schedule C to list and add up your deductible business expenses. If your business expenses come to less than $5,000, you have no employees, and you’re not deducting for a home office, you can use Schedule C-EZ, which is much faster to complete.
- Then, write your total expenses on form 1040 to discover your net income.
- Use the table in form 1040 instructions and your net income to work out how much you owe in income and state taxes.
- You also need to calculate your Social Security and Medicare contributions. The rate for 2017 is 12.4% of your income for Social Security and 2.9% for Medicare. Note these amounts on form 1040 and add them together to get your estimated self-employment tax total.
- Now, file your forms online by the tax return deadline in April.
Common Questions and Mistakes
What is a 1099 form?
The 1099 form is the form you get from your clients instead of a W-2 form.
Can I do my business tax return myself as an independent contractor?
As long as you keep careful track of all of your expenses and your income throughout the year, filing taxes as an independent contractor should be a relatively quick and painless process. There are clear form 1099 instructions as well as step-by-step guidance for form 1040 on the IRS website.
If I made less than $400, do I really need to declare my income as an independent contractor?
Yes, this is very important. Although you only owe self-employment taxes on a profit of over $400, if income that’s declared on a 1099 form isn’t included in your tax return, the IRS could get in touch to ask for clarification. And nobody wants that.
Can I make estimated payments for my taxes?
If you owe more than $1,000, the IRS requires you to make estimated advanced payments for both your income taxes and your Social Security and Medicare contributions next year. Divide that amount into four equal quarterly payments (or more, if you’d like). You can use the IRS form 1040-ES to declare the payments and send the money either electronically or by mailing in a check.
Does it really matter if I miss a quarterly estimated tax payment? I can just make it up when I do my tax return.
Many people think this is correct, but actually the IRS will charge you a penalty if you miss a quarterly payment. The quarterly payment dates for each tax year are:
Payment 1: April 15th
Payment 2: June 15th
Payment 3: September 15th
Payment 4: January 15th
If the payment date falls on a Sunday or legal holiday, then it’s deferred until the next working day.
Filing taxes as an independent contractor is easier than it sounds, but to do it right, you need to make sure you have considered all potential angles and double-checked important filing deadlines.