How to file taxes as an independent contractor?
Learn what it means to be an independent contractor and how to file your taxes in a simple yet efficient way.
Summary
Independent contractors have a different tax filing process than regular employees.
Some of the most important tax forms that independent contractors need are Form 1040 and Form 1099-SEC.
Learning how to file taxes as an independent contractor is crucial for managing your career success.
Get matched with a financial advisor to simplify your tax filing process and meet all of your tax obligations.
Who qualifies as an independent contractor?
An independent contractor is a self-employed person who provides goods or services to clients under independently written contracts or verbal agreements.
Most freelancers can be classified as independent contractors. Examples include graphic designers, electricians, attorneys, and copywriters.
A common question with independent contractors is, “Do independent contractors pay taxes?” The answer is yes.
Independent contractors may not be working for any particular agency or organization, but they are still working citizens who need to pay income taxes for their wages. However, if you’re one of the 76.4 million freelancers in the US, your tax filing process will differ from that of the average employee.
How is your income recorded and paid as an independent contractor?
Knowing how to file your taxes as an independent contractor is crucial for meeting IRS requirements and tax obligations throughout your career.
As an independent contractor, you are responsible for recording and managing all income.
Every payment received should be recorded, and these records should always be up-to-date and accurate.
Independent contractors may choose to keep these records themselves manually, use accounting software, or rely on an accountant, bookkeeper, or assistant to do so.
The IRS recognizes independent contractors as self-employed individuals. As such, they are required to submit tax filings that differ from those of standard employees.
What are your tax obligations as an independent contractor?
When it comes to tax filing, independent contractors can report their income using Form 1040 (Schedule C) Profit or Loss from Business (Sole Proprietorship).
If your net earnings are above $400, you will also need to file Schedule SE on Form 1040.
In addition to this, you’ll need to pay self-employment tax, which covers your Social Security and Medicare annual taxes. Understanding how to file taxes as an independent operator and your tax obligations as one will help you pay your taxes accurately and on time.
What tax deductions are there for independent contractors?
Tax deductions lower your annual taxable income.
Independent contractors may ask for tax deductions for business expenses, such as:
Vehicle-related expenses
Home office expenses
Business insurance
Legal costs
Advertising costs
General equipment purchases
Health insurance premiums
Long-term care insurance
What documents do independent contractors need to file taxes?
Independent contractors should keep several important records and documentation to file taxes and fulfill their duties efficiently.
Some of the most important include invoices, receipts, and proof of expenses.
Accurate and thorough record-keeping will also help to simplify the tax filing process and support deductions. The IRS may ask for proof of certain payments or expenses, and having this on hand is crucial for ensuring you can optimize your returns.
A financial advisor can answer other questions, such as, “What do I file for taxes as an independent contractor?”
What are the key tax forms for independent contractors?
All independent contractors need a few primary IRS forms.
The most important ones are Form 1040, Form 1099-NEC for reporting income and Schedule C for profits and losses.
If you have less than $5,000 in business expenses, you may also need a Schedule C-EZ form. The deadline for filling out tax forms for independent contractors is January 31, and if this is missed, penalties will apply.
How to deal with common issues and IRS audits
Knowing how to file taxes as an independent contractor can be challenging, especially without the help of a professional financial advisor.
Some of the most common challenges independent contractors face when filing taxes include:
Dealing with irregular income: Independent contractors will be subject to sporadic monthly income. This can make filing inconsistent and hard to keep track of.
Incomplete documentation: If you are in the early phases of being an independent contractor or you lack experience with the corresponding tax filings, it may be difficult to know when your tax filings and reports are complete.
Adapting freelancer laws: There has been an explosion of independent contractors in the past few years, and IRS audit requirements are still evolving. This can lead to new requirements that are hard to keep up with.
If you want to handle your tax filings and the IRS audit process, expand your knowledge of the rights and responsibilities of freelancer taxpayers and hold onto your records.
Separating your money and avoiding mixing personal and professional finances are also good tips.
Get expert financial advice
Knowing what to file for taxes as an independent contractor is crucial for avoiding penalties and potential issues with the IRS. However, navigating the world of tax filings and the IRS audit process for those who work independently from corporations and standardized employment can be a challenge. There are different forms to fill out and different requirements for how to fill out essential forms.
To learn more about the independent contractor tax filing process and simplify the way to manage your money, get matched with a financial advisor through Unbiased.
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