Tax Obligations and Estimation
Independent contractors pay income tax at local, state, and federal levels. They also pay a 15.3% self-employment tax. The total amount will vary depending on where you live and how much you make. To cover the quarterly payments without inadvertently underpaying, we recommend setting aside at least 20% of your income for tax purposes.
To calculate their quarterly taxes, contractors must estimate their income, taxable income, taxes, deductions, and credits. Using the previous year’s tax return as a guide is helpful. Independent contractor’s federal tax liability includes income taxes and self-employment taxes, which are calculated differently. Federal and state income tax rates vary based on taxable income and tax bracket. Some states and cities also assess income taxes.
After figuring the net profit, the next step is to use Schedule SE to calculate self-employment taxes. The self-employment tax is 15.3%, allowing for a deduction for the portion an employer would have paid.
Most sharing economy workers are 1099 contractors, also known as independent contractors or freelancers. As self-employed, if they made over $400, they must pay 15.3% self-employment tax on net profit. This tax includes Medicare and Social Security and is calculated on Schedule C (Form 1040).
How to Prepare for Tax Payments
Save about 25–30% of your self-employed income to pay for taxes. This guide covers everything about independent contractor taxes: what a 1099 form is, deductions, and more. After reading it, you won’t worry about your 1099 taxes anymore.
The Complete Guide to Independent Contractor Taxes explains tax responsibilities, deadlines, deductions, and how to pay. Although tax filing as an independent contractor can seem intimidating at first, all you need to do is take it one step at a time.
Reporting and Paying Taxes
Independent contractors report their income and expenses on Schedule E or Schedule C of Form 1040. Income is usually reported on a 1099-NEC or a 1099-K. Contractors need to make estimated tax payments throughout the year to cover their federal income tax, as well as any applicable state and local taxes.
Independent contractors have to pay estimated taxes if tax liability is over $1,000 with Form 1040-ES. An estimated tax calculator is the best way to find your owed tax. Unlike employees who have taxes withheld from their paychecks, contractors are required to make estimated quarterly tax payments throughout the year.