The Independent Contractor’s Guide to Taxes (with Calculator) | Bench Accounting

First, make sure you understand your business structure

Most independent contractors are technically small business owners that operate either as a sole proprietorship, circumscribed liability party ( LLC ), partnership, or S corporation. With any of these business structures, your earnings are reported as part of your personal income for tax purposes .
In the USA, approximately 73 % of businesses are registered as sole proprietorships —clearly the most popular commercial enterprise structure for entrepreneurs going it on their own. Setting one up is quick and slowly : if you don ’ deoxythymidine monophosphate formally cash register as a sealed character of occupation entity, the IRS will treat you as a sole owner by nonpayment .
If you run your business separate time, and you ’ re besides person ’ sulfur employee, you ’ ll need to file your own business taxes with Form 1040 ( US Individual Income Tax Return ). Your employer besides files a Form W-2 ( Wage and Tax Statement ) for you.

note : taxes work the claim same room for freelancer contractors and freelancers. a long as you ’ rhenium freelance, the IRS only looks at you through the lens of your business entity. so if you understand how your entity type works, you ’ ll know how your taxes oeuvre .

The taxes you need to pay

freelance individuals need to pay self-employment tax ( which is 15.3 % of your final business income ) american samoa well as country and federal income tax .

Self-employment tax

FICA consists of your union Social Security tax ( 12.4 % ) and Medicare tax ( 2.9 % ), for a full self-employment tax rate of 15.3 % of your net occupation income .
When you pay self-employment tax on your freelance income, you ’ ra paying both the assign of FICA you would normally pay as an employee, and the part your employer would match .
note : tied if your business is a side hustle, and your employer is withholding FICA from your income, you ’ ll even need to pay self-employment tax on all the income you earn from your side speculation .
Your self-employment tax is filed with Schedule SE, Form 1040 .

Income tax

You ’ ll need to pay income tax precisely like all taxpayers, in addition to self employment tax. Your taxable income is your entire income for the year minus any deductions. From there, you consult the tax mesa for the class to see what your income tax rate will be .

Calculating and paying your taxes

You ’ ll pay all these union taxes together, four times a year when you pay estimated quarterly taxes .
To calculate how much tax you need to pay, use the Estimated Tax Worksheet, which is partially of Form 1040-ES .
You ’ ll besides use Form 1040-ES to file your quarterly estimated taxes .
For a more detail walk-through of estimated taxes, check out our article How to Calculate and Pay Estimated quarterly Taxes .
Or if you want to get straight to calculating, use our freelance Tax Calculator .

Federal taxes vs. state and municipal taxes

For the most separate, this guide covers federal taxes .
But your submit and municipality may besides expect you to pay taxes. Since every country and municipality is different in this respect, it ’ sulfur beyond the scope of this guide to cover them all .
To find out what you need to pay in addition to union taxes, visit the tax authorities for your state and municipality. here ’ s a directory to every US country ’ sulfur tax authority, and here ’ s a number of every tax-collecting municipality in the USA .

If you’re a freelancer, read this

As a freelance, you depend on your clients to file Form 1099-NEC for you. When you total that 1099 income up, you ’ ll get most of the income that you need to report on your tax hark back ( but not all—if a customer paid you less than $ 600 in the tax year, they won ’ t have to file a 1099-NEC. )
When you hire subcontractors to take care of mercenary work, the script is flipped. It ’ s up to you to fill out and file Form 1099-NEC for every subcontractor you pay more than $ 600 during the course of the year .
The deadline for getting a Form 1099-NEC to a subcontractor is January 31st, 2022. And, as of this stream tax charge, all Form 1099-NECs must besides be filed with the IRS by January 31st .
Further reading: Independent Contractors ( Everything You Need to Know )

Subcontractor agreements

When you work with a subcontractor, it ’ randomness better to have a subcontractor ’ second agreement in place. In addition to early information, this agreement between you and the subcontractor lists the services they ’ ll be providing—as well as whether they will be using your facilities and equipment or their own .
It ’ sulfur important a subcontractor doesn ’ deoxythymidine monophosphate do any exploit besides that trace in the agreement. In case of an audit, the IRS will try to determine who works for you as a contractor and who works for you as an employee .
If they decide that one of your subcontractors is fulfilling the duties of an employee, you could be penalized for not filing the discipline taxes ( i.e., your share of FICA ) .
If you ’ re lease contractors for the first time, and you ’ re not sure how you should classify them, ask an accountant .

How to take advantage of tax deductions

sadly, it ’ mho illegal to skip paying taxes outright. however, there are ways you can minimize how much of your self-employment income goes to the IRS .
That ’ s where deductions come in handy. When you spend money on certain business expenses ( like home office expenses, marketing costs ) the IRS will reduces your tax indebtedness .
Your tax deductions are reported on Schedule C of Form 1040, which you use to report your personal income. form 1040 is filed at the goal of the year, with your concluding quarterly estimated tax payment .
Further reading:

Here’s what you can deduct

From home agency repairs to health indemnity, there ’ s a wide crop of deductions available to independent contractors. To learn about which deductions you may qualify for and how to report each one, read our article Small Business Tax Deductions and How to Claim Them .

How to file your taxes

Doing it yourself

If you don ’ metric ton owe any outstanding taxes from the by, and your business hasn ’ t changed importantly in the past year or two, you can opt to roll up your sleeves and file taxes yourself.

There are two methods for filing your taxes : by mail or on-line .
To file by mail, you ’ ll have to obtain tax forms by ordering them online, then fill them out and submit them to the IRS. You can pay your taxes by crack or money holy order .
To file on-line, you create an account on the IRS web site and transfer funds directly from your credit card or debit accounts .
We recommend on-line filing because of its ease and travel rapidly. It besides saves trees and reduces the likelihood of paper cuts. When you file on-line, your requital history and other important information is stored in your procure IRS history, so you don ’ t need to worry about paper records being lost or damaged .

Hiring a tax professional

If you have any questions about filing your taxes or if your clientele has undergo recent growth, it ’ s a good idea to consult with a Certified Public Accountant ( CPA ). When you ’ re a potential new customer, many CPAs are will to sit down with you for a free consultation .
even if you don ’ thyroxine lease an accountant to do your tax homework, they can help advise you—for exemplify, on the best way to estimate your quarterly taxes. Learn more about how to find, hire, and work with an accountant .
You can besides find tax professionals who can file for you and provide some tax advice for less than what a CPA would cost. With Bench, you can add tax advice and filing to your subscription and get outright, on-demand access to our in-house tax professionals .
Further reading: Choosing a Tax Advisor : Everything You Need to Know

Preparing your books for tax filing

even if your business is only a half-time guess, you should hush have a bookkeeping solution in invest. Most providers are DIY solutions meaning you need to import transactions, ensure they ’ re categorized correctly, and review them constantly to get your fiscal information. But some providers ( like Bench ) are wholly automated .
After you “ close ” your books after the end of the year—bring all accounts up to date, and ending record-keeping for the fiscal year—you can promptly determine your income .
You need to know your income in ordering to file your taxes. If you haven ’ thyroxine closed your books, you may find yourself scrambling to get all your information together so you can file a form 1040 before the tax deadlines .
If your books are well-organized and you have separate ledgers tracking different categories of clientele expenses, you ’ ll besides find it easier to track your deductions for the year .

How Bench can help

If you need bookkeeping support, Bench can help. Your bench bookkeeper keeps your fiscal reports up-to-date, giving you entree to necessity and accurate data on your business ’ s fiscal health. then, when tax season rolls around, a CPA or tax professional can use your Bench-generated fiscal reports to get your taxes filed .
Looking for an even more hands-off tax solution ? Choose a subscription package that includes tax support, and in addition to outright tax advisory services, we ’ ll file those taxes for you. Learn more .

Quarterly taxes for the self-employed

Earn more than $ 1,000 ? You need to pay taxes quarterly, in April, June, September, and January .
If you besides work for person as an employee, they ’ ll withhold taxes from your give. But the money you make on the side is besides taxed. And those taxes, in the form of a fortune of your income, need to be withheld by you .
You can calculate your estimate tax payments based on last year ’ south income, or on your calculate income for the deliver class .

Contractor tax deadlines

Keep in take care that deadlines for state and local taxes will be different from those set by the IRS .

Quarterly estimated tax payment deadlines for the 2022 tax filing year

once you start making quarterly tax payments for the 2022 tax filing year, hera are the deadlines you ’ ll have to meet through 2022/23 :

  • April 18, 2022
  • June 15, 2022
  • September 15, 2022
  • January 16, 2023

Personal income tax (Form 1040)

tax file for the 2021 tax year opens on January 1st .
Your income tax for 2021 ( Form 1040 ) must still be filed by April 18, 2022 .
This income tax filing will besides include whatever deductions you ’ ra claim .
If you ’ re not ready to file your taxes, you can request an extension with Form 4868 ( Automatic Extension of Time to File US Individual Income Tax Return ). If you request an extension to file your 2021 taxes, your final deadline becomes October 17, 2022. You ’ ll however need to make a requital on clock, though. Learn more about how to get a tax extension, and what happens when you do .

Partnerships (Form 1065)

If you operate a partnership, you ’ ll file your taxes as an person. however, the partnership still needs to report its fiscal activeness for the class to the IRS. This is done with form 1065 ( US Return of Partnership Income ), which is due March 15th, 2022 .

S corporations

If you ’ re a stockholder in an S Corporation, you need to file a form 1120S ( US Income Tax Return for an S pot ), which reports the fiscal activities of the administration, a well as how many shares you control. Every stockholder in the S Corporation must file Form 1120S. form 1120S is due on March 15th, 2022 .

Subcontractors (Form 1099-NEC)

If your business hired a contractile organ in 2021 and paid them more than $ 600 in a year, it ’ s your duty to file a Form 1099-NEC with the IRS and send a copy to the contractile organ. You must mail them their form 1099-NEC and submit a copy to the IRS by January 31st .
Further reading: 1099-NEC and 1099-MISC : Differences, Deadlines, and How-To ’ mho

tax meter can sting a fiddling. cipher likes sinking hours into figuring out how much money they owe the IRS .
If you ’ five hundred preferably simplify the process, try Bench. We ’ ll get your bookkeeping done to IRS standards and get your taxes filed for you so your taxes are taken care of from sidereal day one .

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Category : Finance

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