As an employee, you will receive a W-2 each year indicating how much you earned and how much you withheld from your paycheck for taxes. Once you know how much you`ve earned, you need to determine how much you`ll have to pay in taxes for the self-employed. With Schedule SE, you calculate that you owe $5,914 in taxes for the self-employed. Half of the tax you pay ($2,957) is considered a deduction on page 1 of your Form 1040. It`s important to understand how much you pay in taxes as an independent contractor, but it can be confusing. We`ve broken down what independent contractors can expect in terms of taxes this year and provided some helpful tips to help you get the most out of your deductions and credits. As an independent contractor, you will have to pay 2 or 3 taxes, depending on where you live: federal income tax, self-employment tax, and possibly state income tax. The self-employed tax rate for 2020 is 15.3% of your total taxable income, no matter how much money you`ve earned. You won`t know exactly how much tax you owe until you file your personal tax return at the end of the year. But you should spend time estimating this, because if you underpay your taxes estimated too low, you could be subject to penalties. Maintaining segregation of duties between contractors and employees helps avoid misunderstandings or complaints about the IRS misclassification of employees. Subcontractors should only work on projects and tasks assigned in the subcontracting agreement, should work remotely or in a temporary workplace and provide the computer and other electronic equipment necessary for the performance of the tasks, unless otherwise specified in the agreement.
Contractors provide valuable services, information and support to companies that need temporary workers or specific skills that regular employees do not have. Subcontractors usually work for general contractors hired by a company. Understanding the tax responsibilities in relation to the relationship between the client and the subcontractor helps prevent a company from misclassifying subcontractors, employees and others in the corporate tax return. Subcontractors are responsible for tracking and paying taxes on income earned throughout the year. Federal and state income taxes use a graduated scale to determine how much you`ll pay. This means that once you`ve made more money, you`ll have to pay a higher percentage of your income, but only at a certain point. For example, if you earned $40,000 last year and looked at a federal income table, you can expect to owe 22% of your taxable income because your income puts you in the $38,701 to $82,500 tax bracket. Unfortunately, it is illegal to pay taxes directly. However, there are ways to minimize the portion of your self-employment income that goes to the IRS.
And here`s why. It`s important to set aside money, as you may need it to pay estimated quarterly taxes. If you`re a 1099 worker and expect to owe more than $1,000 in taxes by the end of the year, the Internal Revenue Service requires you to make quarterly payments on the debt. Quarterly tax payments are an estimate of how much you will have to pay in taxes in April. You must make quarterly payments equal to the amount of taxes due in the previous year. If you miss your estimated tax payment, you may receive a penalty from the IRS. To calculate your quarterly tax payments, take last year`s total income or what you expect that year, calculate 30% of that number, and divide it by four. If you want to know how much you need to pay easily, use our quarterly tax calculator to estimate your payments. So how does an independent contractor pay taxes? If you are an independent contractor, it is your responsibility to pay the government regularly throughout the year.
To do this, you make quarterly estimated income tax payments. You can estimate how much you will have to pay to the government each quarter by guessing what your total income will be for the year or by using the amount you paid in estimated taxes the previous year. Tax time can be a bit stingy. No one likes to waste hours figuring out how much money they owe the IRS. If you are working with a subcontractor, it is best to have the agreement of a subcontractor. In addition to other information, this Agreement between you and the subcontractor lists the services they provide and whether they will use your facilities and equipment or their own. Subcontracting agreements should clearly describe the role and responsibilities of the subcontractor, as well as timelines for services, contract duration, and tax liability information. The agreement should stipulate that neither the General Contractor nor the Customer is responsible for paying taxes on income from the work performed by the Subcontractor and that the Subcontractor is solely responsible for asserting, filing, and paying all state, local, and federal taxes. If you don`t pay your estimated quarterly taxes or if you pay them too little, it can result in a tax penalty. The amount of the penalty depends on the amount you paid too little. A subcontractor may be self-employed and provide general contractors with consulting, graphic design, writing and editing, or data collection and analysis services, or work for a temporary employment agency or personnel service provider.
In some cases, general contractors hire other general contractors to act as subcontractors for a project. Subcontractors, unlike independent contractors, do not work directly for a client, but for the client`s contractor. All subcontractors must self-report and pay taxes, including income taxes and state, local and federal freelancers. The general contractor must file IrS Form 1099-MISC if the subcontractor earns more than $600. In exchange for a higher tax burden, independent contractors have much more flexibility when it comes to deducting work-related expenses. “Deductions” are business-related expenses that reduce your total taxable income and decrease the amount of earned income on which you have to pay tax. For example, if you earned $50,000 last year and you apply eligible deductions worth $20,000 to your account, you actually only have to pay federal and state income tax on your $30,000 income. To calculate the amount of tax you will have to pay, use the *Estimated Tax* spreadsheet, which is part of Form 1040-ES. Let`s say you earn $40,000 over the course of the year as an independent contractor working with two companies. These are your only jobs and you are not an employee anywhere else. You should receive a 1099-MISC from each company, which confirms how much they paid you during the year.
You will include this income in Part 1 of your Schedule C. Many independent contractors are not ready to take on the task and feel overwhelmed by the task. It`s natural to worry a little about how much money you should set aside for taxes if you`re self-employed. If they decide that one of your subcontractors performs the duties of an employee, you could be penalized if you do not produce the right taxes (i.e., your share of FCIA). It is important that a subcontractor does not perform any work other than that described in the agreement. In the event of an audit, the IRS will try to determine who works for you as a contractor and who works for you as an employee. If you earned more than $400 as an independent contractor, you will have to pay income tax and self-employment tax. When you save 30% of your income, you cover your small business and income tax every quarter. The tax rate for the self-employed is 15.3%. The rate is composed of 2.9% for Medicare or hospital insurance and 12.4% for social security or survivors` insurance, old-age insurance and disability insurance.
For this reason, we recommend investing 30% of the money every time you are deposited into a short-term savings account. For a more accurate calculation, use our tax rate calculator above to estimate how much you should set aside for taxes. Companies that hire general contractors should turn to limited liability companies and corporations, as opposed to sole proprietorships or partnerships. The business structures of companies and LLCs increase credibility and provide an instant distinction between your business and the general contractor and subcontractors. Businesses and LLCs are required to file corporate tax returns, unlike sole proprietorships and partnerships that pay corporate taxes through personal income tax returns. This distinction avoids an IRS audit. Your estimated tax payments are due four times a year. You can use Schedule SE to calculate the amount you owe at each deadline.
If you live in a state that charges progressive income tax, calculate your total taxable income on the tax return and determine your state`s tax bracket. The state`s tax brackets all vary, so remember to take plenty of time to research how much you`ll owe before tax day. Instead of a W-2, you will receive a 1099-MISC as an independent contractor. This form will show how much you have been paid throughout the year. You can use this information to check if you are reporting all of your income earned during the year. From pen to printer, the cost of your office supplies is usually fully deductible as long as you only use them for business purposes. .
