Pay Tax As an Independent Contractor or Freelancer

While being self-employed gives you the freedom to choose your own work schedule, one major drawback is the responsibility of calculating and paying your own taxes. Independent contractors are responsible for self employment income taxes in lieu of social security and medicare taxes. Because they lack employers to cover half of these payroll taxes, independent contractors typically pay higher tax rates than other workers, making it extra-important to know how to calculate these taxes accurately.

Steps

Getting Ready

1. Make sure you qualify as self-employed. According to the IRS, the general rule for which types of people qualify as independent contractors is that: "An individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." In other words, if you set your own hours and control your relationship with your clients, you are probably an independent contractor. Specific criteria for being self-employed include:
   • Being the sole proprietor of a business or an independent contractor.
   • Being a member of a partnership that carries on a trade or business.
   • Being otherwise in business for yourself (including a part-time business).
   • On the other hand, if you work as a salaried employee on the staff for a company or organization, you are probably not an independent contractor.
   • If you are unsure what kind of worker you are, you can file IRS Form SS-8 to have the IRS examine your situation and make a decision for you.
2. Gather any and all 1099 forms. These forms document how much income you received from each company you did freelance work for, and will be important for filing your taxes.
   • Contact the institutions you have worked for as a freelancer if you have not received your 1099s by February 1st of the year taxes are due. Your clients are supposed to send you this information no later than January 31st.
3. Gather all your business receipts or invoices. Collect any receipts for money you spent on business expenses, as well as all invoices from the tax year.
   • These receipts will be important if you want to claim any of these expenses on your taxes and thus decrease the amount of income you are responsible for paying taxes on.
   • This includes invoices, receipts for supplies, business expenses, health insurance premium costs, and home office rent.
4. Separate W-2 forms and 1099s from employers. If you are employed as a regular employee of some company in addition to your freelance work, you will also have W-2 forms, which should be kept separate from you 1099s.
   • A W-2 indicates that you are an employee of a business and taxes have already been deducted. A 1099 shows money earned from freelancing.
   • Report income from W-2s on your 1040 form as normal. Do not report this income along with your 1099s.
5. Do a rough estimate of expenses versus income. Subtract your expenses from your income. If you made a profit of more than $400 on freelance work, you will owe self-employment taxes in the United States. You may be tempted not to report income that did not generate a profit of $400 or more, but it is best practice to include any income that has been reported on a 1099. Not including this income could generate a letter from the IRS asking for clarification.
6. Print applicable freelance income tax forms from the IRS website. These will include the Schedule C, Schedule C-EZ, and Schedule SE forms, in addition to the standard 1040 tax form.
   • These forms are easy to find by simply entering their titles in the search bar at the top of the page.
   • Review the documents and read instructions before beginning. These forms can be quite complicated, so it is important to review these forms carefully.
7. Research your deductions. Part II of Schedule C in the IRS Publication 535 allows you to deduct certain amounts from your taxable freelance income. Check to see if any of these deductions apply to you.
   • Many of the deductions you can make are actually percentages of the costs incurred. For example, any office supplies you may have purchased, as well as the cost of a dedicated work computer may be written off.
   • It is also likely you can deduct a portion of your rent and other housing related expenses if you have a home office, but that home office may need to have a door that can be closed to separate the office from the rest of the house.
   • These deductions can greatly reduce your tax liability and as such should be examined carefully.

Calculating Your Taxes

1. Calculate your gross yearly earnings. As with taxes for ordinary employees, the more money you make as an independent contractor, the more you owe in taxes. To find your earnings, first total up all of the money you made selling your goods and/or services as an independent contractor the previous year. If you received a 1099 from every employer, this will just be the total of your earnings from each 1099. In the next few steps, you'll use this information to find your taxable income and determine how much you owe.
2. Calculate your deductible business expenses. Business expenses are directly tied to the operation of the business — supplies you bought, wages you paid for work you delegated, travel you made for your work, and so on. Things like groceries and entertainment expenses are not to be included.
   • Note that, in addition to the business expenses above, self-employed people can also receive deductions for things like health insurance, retirement accounts and lawyers and accountant fees.
   • See Form 1040 lines 48-54 for relevant tax credits.
3. Fill out a Schedule C. This is also called a Form 1040 Profit or Loss from Business (Sole Proprietorship) form. This form (available here) is used to report your freelance income and expenses. You can use the Schedule C-EZ form instead of the regular Schedule C form if your freelance business expenses total less than $5,000 and if you have no employees and no home office deduction. This form (available here) is simpler and quicker to fill out. Use the steps below to fill out your Schedule C:
   • Enter your total (gross) income from freelance work in Part I.
   • Enter your expenses in Part II.
   • Enter the cost of goods sold in Part III. If your freelance work involves selling any physical goods, you will need to enter the costs of those items, taking an inventory at the beginning and end of each tax year.
   • Enter the cost of goods sold in Part III. If your freelance work involves selling any physical goods, you will need to enter the costs of those items, taking an inventory at the beginning and end of each tax year.
   • Enter information on your vehicle in Part IV, if you are claiming it as a business expense.
   • Enter any other expenses in Part V. This section includes miscellaneous expenses like bad debts, business start-up costs, or an money you invested making your place of business more energy efficient.
   • Compute your total income or loss, and enter it on line 12 of your 1040 form.
4. Fill out the IRS Worksheet Form 1040-ES. This form is available here. Fill out the worksheet on page 8. This worksheet form is to determine your estimated taxes for the year. In other words, since you don't have an employer withholding part of each paycheck for tax purposes, you need to determine if, how much, and when you are required to pay tax on your own.
   • Use the tables on page 7 to determine your income tax liability. For example, if you are filing as a single person and you made $80,000 last year, you would use the instructions for income between $37,450 and $90,750:

     5,156.25 + 0.25 (80,000 - 37,450)

     5,156.25 + 0.25 (42,550)

     5,156.25 + 10,637.50 = $15,793.75

   • If you have a previous year's tax return for similar work, use it as a guideline. First-time independent contractors must estimate yearly earnings to determine the applicable tax payment schedule — if you estimate too high or too low, you can re-file your 1040-ES later.
5. Don't forget to account for Self-Employment tax. Income tax isn't the only tax you need to pay as a self-employed person — like ordinary workers, you also owe money for payroll taxes which cover Social Security and Medicare, known as Self-Employment (SE) tax. For work done in 2014, this tax rate amounts to 15.3% of your taxable income. This rate comes from the 12.4% tax for Social Security and the 2.9% tax for Medicare. Enter these taxes on line 12 of Form 1040-ES.
   • For example, if your taxable income is $80,000, your SE tax would amount to:

     80,000 × 0.153 = $12,240

   • Starting from 2013, you must also pay an additional 0.9% Medicare tax if your taxable income is over a certain threshold: $200,000 for singles, $250,000 for married filing jointly.
6. Add your taxes together to get your total. Once you know both your income tax and your additional estimated self-employment tax, enter them on lines 11 and 12 of Form 1040-ES and complete the worksheet. Your total estimated tax will be given on line 13c — it's just all of your taxes added together.
   • If you owe more than $1,000 in taxes, you are usually allowed to make quarterly tax payments. These freelancer tax payments help break up large amounts owed to alleviate you of the stress of having to pay it all at once.

Paying

1. Complete the applicable IRS income tax form for the current tax year. This is usually a 1040 (available here) for most self-employed freelance workers. You can use the shorter 1040 EZ (available here) if you have no dependents and you meet the other qualifications on the form. Use your schedule C and 1040-SE to guide you as you fill out these forms. Complete no later than the April tax day deadline.
   • The deadline to file taxes on income earned in 2014 is April 15th, 2015.
2. Record your total owed. Write down the total quarterly or annual amount of self-employment tax you owe on the tax payment vouchers included with Form 1040-ES. Self-employed people usually have the option of paying quarterly (rather than all at once) if they owe more than $1,000 in self employment tax.
3. Pick a payment method. The IRS lets you pay your taxes two ways: electronically or by mail. See below:
   • Electronically: Payments can be made using the Electronic Federal Tax Payment System (EFTPS) available here. Additional service fees may be charged for the convenience of paying online.
   • Mail: The IRS considers the postmark date as your payment date. Write checks to "United States Treasury" and include the estimated tax payment vouchers in your envelope. Mail your 1040-ES voucher, schedule C, 1040, and payment to the appropriate IRS office for your region of the United States.
4. Set a calendar note to remind you when self employment tax payments are due. As noted above, if you owe more than $1,000 in self employment taxes, you usually can pay your taxes quarterly. Payments for income earned in 2014 are due on the 15th of April 2015, June 2015, September 2015, and January 2016.

Tips

• Note that you are required to file a tax return even if your earnings don't cross the minimum $400 threshold if you meet any of the special requirements on page 9 of the 1040 instructions (available here.)
• It's often a good idea to consult with a certified tax preparer if you are a new independent contractor. The tax preparer can set up your booking systems to help you understand why you owe money and how much estimate tax payments you should expect to pay to avoid future penalties.

Warnings

• Falsifying information or failing to make estimated tax payments will result in penalties and fines even if the IRS owes you a tax refund.

Sources and Citations

See also

• Determine Your Federal Tax Bracket
• Turn Someone in to the IRS
• Fill Out a US 1040EZ Tax Return
• Annualize
• Find a Federal Tax ID Number
• Fill Out a W‐4
• Account for Fixed Assets
• Calculate Tax on Bonus Payments
• Pay Less in Taxes
• Complete a W‐9 Tax Form

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