There are definite benefits to being an independent contractor. For one, you work for yourself, which gives you tremendous flexibility. You are also able to choose where you work and have the opportunity to work as little or as much as you want.
It’s important to remember however, that as an independent contractor, you do not have income taxes withheld from your earnings and the way you will file taxes is different than how full or part time employees file. But, this has advantages in that you may be able to deduct some expenses from the income you earn and only pay taxes on the income amount after these deductions. Below, we’ve provided some very general tax tips, but it is a good practice to see a tax professional to ensure you file correctly.
Certain business expenses that you’ve incurred during the year may be deductible from your total income as represented on your 1099. Your tax professional can help determine which of these you may deduct either in full or in part:
- Vehicle costs (depreciation, lease payments, gas, tune-ups, registration, car washes, new tires, etc.)
- Mileage for work travel
- Car insurance
- Liability insurance
- Professional certification costs
- Computer/laptop costs
- Tolls or parking fees
- Phone and phone plan costs
- Accounting and bank costs
Your 1099 Form
As an independent contractor executing work on behalf of one or more of KFS’s clients, you will receive your 1099 form by January 31st. This form will show payments made to you for the work you performed in the past year.
A 1099 form is different from a W-2 form. It will show that no income taxes have been withheld during the year. If your total earnings for the year were over $600, you will owe taxes to the federal government and possibly state and local taxes as well. Typically, you will pay these when you file your tax return.
Types of Taxes Owed
Independent contractors are “self-employed,” and as such, are required to pay self-employment tax (which is 15.3% of your net business income). When you pay self-employment tax on your independent contractor income, you’re paying both the portion of federal taxes that consist of your contributions to Social Security (12.4%) and your contributions to Medicare (2.9%). Together, these percentages tally to 15.3% of your net income.
Independent contractors owe income taxes just like anyone else and these are in addition to self-employment taxes. Your taxable income is your total income for the year minus any deductions. The actual percentage of income tax you will pay will vary based upon your total net income and which bracket you will fall into.
State and Municipal Taxes
Your state also expects you to pay taxes and in some cases, your municipality may also tax your earnings. Since every state and municipality is different, it’s best to check the regulations for each. Here are a couple of quick links to help you:
If you have never tried keeping expense records, consider opting for a low cost version of Quickbooks for the Self-Employed. A subscription will give you an on-line way to track your earnings and expenses throughout the year so tax preparation going forward is simple. Here is a link to the Quickbooks site to review subscription options: Learn More
It is easy to get overwhelmed, but with a tax professional’s help, filing is a snap. Gather your 1099 and other documents, including receipts for expenditures that relate to your performing work and find a tax professional in your area. Or, if you choose to file yourself using an online tool, be sure to do so by April 15th. Always keep a copy of your submitted tax forms and all receipts and records for deductions.
There are great benefits to being an independent contractor! To take advantage of these benefits, it pays to be organized and thorough. Always keep track of your expenses and keep your receipts. By planning ahead, you will derive the greatest tax savings.
Additional tax resources