Income Taxes for Independent Contractors and the Self-Employed

If you are self-employed you will pay taxes a little differently than employees do. If you are an employee your employer is required to withhold federal income taxes, as well as Social Security and Medicare taxes from your pay. But If you are self-employed, then you are required to pay these taxes on your own, either through quarterly estimated tax payments or when you file your tax return at the end of the year. The topics below will help you understand what you need to do to pay your taxes and file your return if you self-employed or an independent contractor:

What Is Independent Contractor Income?

Am I Self-Employed?

Am I an Independent Contractor?

Am I Carrying on a Trade or Business?

Am I Engaged In a Hobby?

Why Am I Considered Self-Employed and Not an Employee?

I Am Self-Employed, So What Taxes Do I Have to Pay?

What Are Self-Employment Taxes?

How Do I File Self-Employment Taxes?

Do I Have to Pay Estimated Taxes?

How Do I Pay Estimated Taxes?

When Do I Pay Estimated Taxes?

What Is Independent Contractor Income?

Independent contractor income is compensation you receive for doing work or providing services as a self-employed individual, not as an employee.

Non-employee compensation is reported on Form 1099-MISC (along with rents, royalties, and other types of income). If you received a 1099-MISC instead of a W-2, it means that you are probably not an employee. A 1099-MISC means that you are classified as an independent contractor, and independent contractors are self-employed.

Am I Self-Employed?

You are considered self-employed if you carry on a trade or business (not just a hobby), and any of the following statements are true:

  • You are an independent contractor (your income is reported on a Form 1099-MISC)
  • You are the sole proprietor of a business
  • You are a member of a business partnership
  • You are otherwise in business for yourself (whether full-time or part-time)

Am I an Independent Contractor?

Every situation is unique, but in general, you are considered an independent contractor if the person or organization that pays you has the right to direct and control only the result of the work and not what work will be done nor how it will be done. An independent contractor is self-employed.

Typical examples of independent contractors include: doctors, dentists, veterinarians, lawyers, accountants, public notaries, carpenters, electricians, plumbers, mechanics, stonemasons, home remodelers, housecleaners, lawn care providers, babysitters, newscarriers, software developers, web designers, graphic artists, entertainers, guest speakers, truckers, cab drivers, farm workers, interpreters, project managers, hairstylists, salespeople, freelance writers, etc.

Am I Carrying on a Trade or Business?

A trade or business, in general terms, is an activity carried out to make a profit. Even if you don't actually actually make a profit, you are still carrying out a trade or business as long as your motive is to make a profit and you make regular, ongoing efforts to further the interests of your business. A trade or business may be full-time or part-time, and it may be carried out in addition to regular employment.

Am I Engaged In a Hobby?

A hobby is not a trade or business. If you carry on an activity that occasionally produces income, but your main purpose for pursuing the activity is not for profit, then you may be engaged in a hobby. Hobby income should be reported as "other income" on your tax return. If you itemize deductions, you can deduct hobby expenses up to the amount of your hobby income. See the tax return filing requirements to find out if your hobby income requires you to file a tax return.

Why Am I Considered Self-Employed and Not an Employee?

Whether you are considered employed (an employee) or self-employed (an independent contractor) depends on 3 main factors:

  • Behavioral Control
    • Does the company or organization for which you work have the right to direct and control what work you do and how your work is done, using instructions, training, or other methods? If you direct and control your own work, you are probably self-employed.
      • Do you receive training or extensive supervision? If the company can control not only what work is done, but how the work is performed, then you may be an employee.
      • Do you receive specific instructions on how, when, and where to perform your job? If so, you may be an employee.
      • Are you told what tools or equipment to use, what assistants to hire, or where to purchase supplies or services? If so, you may be an employee.
  • Financial Control
    • You are probably self-employed if you have the right to direct and control the business and financial aspects of your job. When determining who has Financial Control, you should consider the following:
      • Do you have unreimbursed business expenses? If you are not reimbursed, you may be self-employed.
      • What is the extent of your own investment in the facilities, equipment, or tools used in performing your job? A significant investment means you may be self-employed.
      • Do you make your services available on the open market? If so, you are probably self-employed.
      • Do you set your own rates and prices for your services? If so, you are probably self-employed.
      • How does the company pay you? Are taxes withheld? If not, you are probably self-employed.
      • Can you both realize a profit and incur a loss? If it is possible for you to incur a loss, then you are probably self-employed.
  • Type of Relationship
    • To determine the type of relationship that exists between you and the business (whether you are an employee or an independent contractor), it is important to consider the following:
      • Are there contracts that describe the working relationship between you and the company? How do these documents characterize your role in the business?
      • Are you given employee benefits, such as insurance, pension, paid vacation, and sick pay? If so, you are probably an employee.
      • Is the business relationship expected to be permanent, or at least relatively long-term? If so, you may be an employee.
      • Are the services you provide a key aspect of the regular business of the company? If not, you may be self-employed.

If you would like the IRS itself to determine whether you or someone you pay are considered an employee or an independent contractor, you can file Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

I Am Self-Employed, So What Taxes Do I Have to Pay?

As a self-employed individual, you are responsible for paying income taxes and self-employment taxes.

Because you do not have taxes withheld from your pay by an employer, you may have to pay estimated income tax 4 times throughout the year (quarterly).

What Are Self-Employment Taxes?

Self-employment taxes are paid in addition to regular income taxes. Self-employment tax is made up of Social Security and Medicare taxes.

How Do I File Self-Employment Taxes?

When you prepare your return on efile.com, you will be asked if you own a business or have received a Form 1099-MISC efile it, or a Schedule K-1 efile it. Based on the answers you provide, the efile.com program will help you report your business income and expenses by providing the forms that you will need and asking for the information that needs to be reported on each form.

A Schedule SE efile it is used to calculate your self-employment tax. The efile.com software will generate the Schedule SE for you. You can also adjust any of the amounts on your Schedule SE that are automatically calculated if this is necessary.

Do I Have to Pay Estimated Taxes?

If you are self-employed, and you expect to owe $1,000 or more in tax when you file your return, then the IRS requires you to make quarterly estimated tax payments.

Estimated tax payments are used to pay income tax and self-employment tax. If you do not pay enough tax through withholding and/or estimated tax payments to cover your tax liability, then you will be charged a small penalty by the IRS. The tax penalty is calculated on your tax return, and added to the amount you owe (or subtracted from your refund).

How Do I Pay Estimated Taxes?

You calculate and make estimated tax payments using Form 1040-ES efile it, which is really a booklet than a form. Use the included worksheet to figure the amount of your estimated tax payments. You don't have to send this worksheet to the IRS, but they recommend that you keep it for your records.

The booklet also contains four payment vouchers, which you can use to make your quarterly payments, if you are paying by check or money order. Just fill out the appropriate voucher and enclose it in the envelope with your check or money order made out to "United States Treasury". You can find the correct mailing address to use on the "Where to File..." chart included in the 1040-ES booklet.

Alternatively, you can make your estimated tax payments electronically online. You can pay online using a credit card, debit card, or electronic funds withdrawal. If you make your payments online, you do not have to mail vouchers to the IRS. To pay online, go to www.irs.gov/epay.

When Do I Pay Estimated Taxes?

There are four estimated tax payment periods, each with its own due date:

Payment PeriodDue Date
January 11 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
September 1 – December 31 January 15 (of the following year)

If you are making an estimated tax payment by mail, your payment will be considered on time if it is postmarked on the due date. If the due date falls on a Saturday, Sunday, or legal holiday, you will be on time if your payment is made on the next business day.

Note that you can make more than four estimated tax payments per year if you want to or need to. Just make a copy of a payment voucher or pay online. But make sure that you pay enough by each due date to cover the preceding payment period.

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