If
you are not aware of it already, you are
considered an independent contractor.
The general rule used to determine if an
individual is an independent contractor
is if the payer has the right to control
or direct only the result of the work
done by an independent contractor, and
not what will be done and how it will be
done.
Filing your yearly income taxes as an independent contractor means you will
have to fill out additional forms and be subject to a special type of tax called
"self-employment tax" (more on this below), and if it is your first time, the
experience can be confusing. The good news is that being an independent
contractor means that you are considered self-employed, and as such, you are
entitled to deductions on your home office and business equipment that may save
you money – if you know what to do. This short and by no means comprehensive
tutorial is intended to help guide you through the additional forms that you
will need to complete and provide you with a basic understanding of the terms
that you may run across. At the end of this tutorial, you will find examples of
completed forms, and .pdf files of the forms mentioned in the tutorial, as well
as useful publications from the IRS website.
What Is Self-Employment (SE) Tax?
Self-employment (SE) tax is a social security and Medicare tax that applies
primarily to individuals who work for themselves. As an independent contractor,
you will be required to pay SE tax. Social security and Medicare taxes for most
wage earners are calculated by their employers and automatically deducted from
their paychecks, but because you are considered an independent contractor, these
taxes are not automatically deducted, and it is your responsibility to calculate
this amount yourself. You are required to pay SE tax if your net earnings from
self-employment amount to $400 or more. You can figure out your SE tax yourself
using Schedule SE (Form 1040).
You may not be required to pay self-employment tax if you are employed
elsewhere as an employee while operating as an independent contractor. In such a
case, part or all of any tax refund from a personal-income filing related to
your wage income will be redirected to cover any SE taxes you may owe.
To pay SE tax, you must have a social security number (SSN), or if you are a
nonresident or resident alien and you are not eligible to receive a SSN, you
will need an individual taxpayer identification number (ITIN). To apply for
either a SSN or an ITIN, contact the following to receive the proper form:
SSN: 1-800-772-1213 (Form SS-5)
ITIN: 1-800-829-3676 (Form W-7)
You can also download the forms from the IRS website at
www.irs.gov.
Paying Estimated Tax
Estimated tax is the method used to pay tax on income that is not subject to
withholding (this includes SE tax). If you expect to owe less than $1,000 in
total taxes, you can pay them at the same time you file your income taxes. If
you expect to owe $1,000 or more in total taxes, you will need to make estimated
tax payments. Use
Form 1040-ES, Estimated Tax for Individuals, to calculate and
pay this tax. These payments are made quarterly, and you will need to calculate
these taxes at the beginning of the year.
You can avoid paying estimated taxes if you are employed elsewhere as an
employee while operating as an independent contractor by having your employer
increase the income tax taken out of your pay. To increase your withholdings,
use Form W-4, Employee’s Withholding Allowance Certificate.
Next...