what do i need to know as an independent contractor
New to being an contained contractor? Here's what you need to know nigh taxes.
Existence an independent contractor or gig worker comes with more flexibility. It besides comes with new tax responsibilities.
At a high level, the IRS considers you an contained contractor, and therefore self-employed. You are paid for the result of your work, not for how or when y'all do information technology. The "cocky-employed" status more often than not translates into college tax rates and more cumbersome taxation filing. But it also generates some potential new revenue enhancement deductions.
Allow's walk through some things yous need to know about taxes as an contained contractor.
You'll be paying a new tax: self-employment taxation
If y'all're self-employed, yous pay self-employment revenue enhancement (approximately xv% of your net business income) and federal income tax directly to the IRS. The cocky-employment tax includes Social Security and Medicare taxes. This generally means that you lot'll pay a higher tax charge per unit.
Quarterly estimated tax payments
You probably need to make quarterly revenue enhancement payments to the IRS. This is especially important if yous believe you'll owe more than than $i,000 in income taxation when you file. These payments represent an estimate of what yous will owe in taxes for a given year based on your projected income and deductions. They are typically due to the IRS on April xv, June 15, September xv, and January 15. These payments can be a big burden for new contractors, as you are now responsible for withholding your own taxes on income and paying them at the appropriate times. It's important to pay throughout the twelvemonth so you don't end up short on cash or with a tax punishment at taxation fourth dimension. The IRS has more than information on determining and paying your quarterly estimated tax payments.
New tax forms
You'll generally receive and apply new tax forms. As an contained contractor, you need to file your own business taxes on Form 1040 (the standard tax render). Y'all'll use a Schedule C to study income and expenses and a Schedule SE to decide your self-employment tax. You may demand to fill out new country and local tax forms equally well.
Whenever you receive $400 or more of income, you should receive a Class 1099 (instead of a Westward-2 for employees) at tax time that y'all must written report when filing your income taxes. Nonetheless, you may not e'er receive official tax forms to track your income. Yous are still liable to report all of your income, and then y'all'll demand to keep your own records. See the IRS'southward Tax Guide for Small Business for more data on federal taxation laws and the self-employed.
Tracking your income and documenting your expenses
Being self-employed requires a lot of system and documentation. You need to prepare up financial systems for tracking your income, documenting your expenses, regularly setting aside coin for taxes, and paying your estimated tax bills on time.
You may commencement with a simple Excel spreadsheet for tracking your business finances. If it's getting too complicated, consider budgeting software like QuickBooks or Quicken or expense trackers like Expensify or Stride. Carefully track your expenses to maximize your eligible tax deduction and minimize your tax liability.
From the start, plant a separate savings account for your taxes. Set aside at least 20% of your income in that account to be able to pay your taxes on fourth dimension and in full.
Business organisation-related deductions
Yous may exist able to go some new tax breaks from business-related deductions to reduce your federal income revenue enhancement obligation. Forth with the new tax responsibilities of being an independent contractor come a few tax benefits. Namely, expenses that might otherwise be considered "personal" tin be deducted every bit concern expenses. These include services, items, or amenities you use for concern purposes. Some mutual examples are phone and internet, role supplies, utilize of your personal vehicle, a portion of rent, sure meals, and health insurance.
Business organization deductions effectively reduce your business's taxable income and could lower how much yous owe in federal income tax. Merely deductions have their limits. To understand the rules of deducting business expenses, run into this guide from the IRS.
Is an accountant right for you?
You may want to hire an accountant to protect yourself. A certified public accountant volition understand how federal taxes work. They can assistance you manage your new responsibilities, avoid costly mistakes and tax problems, take reward of available deductions, brand filing your taxes easier, decrease your overall revenue enhancement liability, and safeguard the health and longevity of your business. While an accountant is an extra price, it can also provide peace of listen and might be a worthwhile expense.
Saving for retirement
When you are feeling established equally an independent contractor, consider starting a retirement account. Self-employed people accept some unique options when it comes to retirement savings that aren't bachelor to employees. A SEP-IRA is ane option. Information technology allows self-employed people to set aside significantly more in other accounts, providing yous with deductions on your tax render while building your retirement savings. It's wise to consult a financial planning professional before making investment decisions. I would recommend a fee-only counselor (who is compensated straight by you lot for advice).
More than resources for independent contractors
For more than information, the IRS has online revenue enhancement centers on its website for pocket-sized businesses and the self-employed and those working in the gig economy.
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Christi Baker is a nationally recognized financial educator and coach who has 25 years of feel building financial health with individuals and through community-based organizations. She believes in allowing personal values and vision to lead the journey to financial health alongside the right tools, support, and resources.
Source: https://www.saverlife.org/community/guide-to-filing-taxes-as-an-independent-contractor
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