Independent Contractor Income and Taxes
Whether you are an independent contractor or a statutory employee, the eFile.com tax app makes it easy for you to prepare and e-file your federal and state tax returns. eFile.com offers premium tax support through one of our Taxperts® via your own personal support page where you can easily access your support history. Plus, you will save on your tax preparation fees. Dare to compare eFile.com with TurboTax® or H&R Block® and you not only find considerable cost savings, but also superior tax support. We work so you get to keep more of your hard-earned money.
How much you have to make to file taxes depends on your income type. Regardless of your W-2 income or your filing status, if you earned a net income of $400 or more from self-employment during the year, then you are required to file a tax return. Use our free FILEucator tax tool if you are not sure if you need or want to file a tax return - there are situations where you might want to file even if you are not required to.
Net self-employment income is your income after deducting allowable expenses. As a self employed taxpayer, your return will be e-filed on Form 1040 and you will generally need include Schedule C and Schedule SE to your return - eFileIT these forms. Schedule C is used to report how much income you made or lost in your business as well as any deductible expenses from your business. Schedule SE is used to calculate the self-employment tax you owe. The Social Security Administration will use your Schedule SE to figure your Social Security benefits. Schedule C and SE are automatically generated for you on eFile.com. In general, you must eFile Schedule SE and pay self-employment tax if your net self employment income is $400 or more.
In order to avoid a hefty tax bill and potential tax penalties at the end of the year, you will likely have to make quarterly estimated tax payments. To pay self employed tax, you can make these online to the IRS or via mail - these payments are made by you and are similar to the way an employer withholds tax via Form W-2, except the responsibility is entirely yours. We at eFile.com highly recommend creating an IRS account and making these payments directly to the IRS online rather than mailing Form 1040-ES - FileIT.
See also: How to create a small business or self-employed retirement fund or 401K.
What Is an Independent Contractor?
The "independent contractor vs employee" conversation is simple when looked at through a tax perspective. In short, contractors are paid via 1099-NEC with no taxes withholds while employees are paid via W-2 with taxes withheld.
You are an independent contractor if you offer your services to people or organizations that pay you while they have the right to direct and control the result of the work, not how or what work will be done. You will generally sign an independent contractor agreement or contract when you finalize a deal with the company or employer. This agreement includes a fixed pay rate, terms of expected services, agreements for both the company and the contractor, and other items.
This position is often referred to as a nonemployee of the company, meaning you are on contract for the company rather than being employee by said company. As such, your income is likely reported on Form 1099-NEC, Nonemployee Compensation and taxes are not withheld.
You might also be part of the new gig economy. Consider these resources below for your business:
In comparison, you are not an independent contractor if you perform services that are coordinated and controlled (e.g. what and how it will be done, even if you have some freedom of action) by another person as an employer. The employer has the legal right to control the details of how the services are performed.
The main difference between an independent contractor and an employee is the way in which work is performed. Additionally, for tax purposes, it is the way payment is made and how taxes are withheld; employees are given a W-2 which reports payments and taxes withheld. See examples of self employed jobs below.
Tip: In order to deduct as much of your self-employment income subject to self employment taxes, maximize your business expenses reasonably. Let eFile.com help you claim your home office expenses, report the new computer you purchased for work, and let's reduce your tax liability! Generally, you should expect to withhold or save around 30% of your self-employment income in order to pay your income tax based on your filing status and self employment tax since it is not withheld for you.
Finding an independent contractor job or jobs is increasingly easy as the gig economy grows. These can be one-off gigs where you work for multiple contracted positions at a time or you sign for a single contract which takes you on for several months.
Examples of independent contractors:
- Babysitters and in-home childcare providers: They are generally self-employed and subject to self-employment tax. If you are a babysitter and perform work in your home or in the homes of your clients while substantially controlling the manner in which you do your job, then you are most likely self employed. A nanny, au pair, or other childcare provider that lives in their client's home and does not control the manner in which they perform their work may be a household employee. See the IRS guide for households employers.
- Newspaper deliverers or news carriers: You are considered self-employed if you deliver or distribute newspapers or perform related tasks (such as soliciting customers), your pay is based on sales or other output and not on the number of hours you work, and you work under a contract which states that you are not an employee for federal tax purposes. If you meet all these requirements, then you are generally considered self-employed. Even if you are under age 18, you will have to pay into Social Security and Medicare by paying self-employment tax. However, if you are under age 18 and you do not meet all of the above requirements, then you generally do not have to pay self-employment tax.
- Delivery, rideshare, etc.: Many delivery and transportation services allow their drivers to sign on as independent contractors. This is how companies like Uber and Lyft allows users to sign up through their phone without conducting extensive interviews.
- Other examples of independent contractors: Doctors, dentists, veterinarians, lawyers, accountants, public notaries, carpenters, electricians, plumbers, mechanics, stonemasons, home remodeler, house cleaners, lawn care providers, software developers, web designers, graphic artists, entertainers, guest speakers, truckers, cab drivers, farm workers, interpreters, project managers, hairstylists, salespeople, and freelance writers.
See the IRS Tax Guide for Small Business.
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. If you are self employed and an independent contractor, your compensation is reported on one of the many 1099 Forms, often 1099-MISC or 1099-NEC (along with rents, royalties, and other types of income). You are responsible for paying your own independent contractor taxes - commonly known as self-employment taxes.
State Taxes and Independent Contractors
Perhaps as a result of the COVID-19 Pandemic, many taxpayers are working remotely. As an employee, state taxes are generally due for income earned in a certain state. For example, if you live in Nevada but work remotely for a company in California, you would likely pay CA state tax as reported on your Form W-2. Most states require a resident return which taxes you on all your income, even if earned in another state.
However, as an independent contractor receiving a 1099 form, if you live in a state with lower or even no state income tax and you perform remote work for a company in a state with this tax, you may not owe it. If you live in Nevada and work from home with no state income tax, but work as a contractor for a company in California, you would likely not owe CA state tax. Instead, you are responsible for federal income tax and self employment tax.
Independent Contractor Versus Statutory Employee
What is a statutory employee?
There are a few special cases where, even though you fit the definition of an independent contractor, you are considered a statutory employee (an employee by statute) for tax purposes. You will then receive a W-2 instead of 1099-NEC as a statutory employee. This is shown in Box 13 of a W-2; if you are a statutory employee, your employer is not responsible for withholding income taxes from your pay, but Social Security and Medicare taxes will be withheld. To be considered a statutory employee, all 3 of the following statements must be true:
There is a service contract that states or implies that all the services covered by the contract are to be performed personally by you.
You do not have a substantial investment in the tools, equipment, or other property used to perform the services (other than vehicles or transportation facilities).
Your services are performed for the same payer on a continuing basis.
In addition, at least one of the following statements must be true:
You are a driver who distributes beverages (not including milk), meat, vegetable, fruit, or bakery products.
You are a driver who picks up and delivers laundry or dry cleaning.
You are a full-time life insurance sales agent, working primarily for one company.
You work at home with materials or goods which are supplied by your employer and that must be returned to your employer, who also provides specifications for the work that you do.
You are a full-time traveling (or city) salesperson who turns in orders to your employer from businesses like wholesalers, retailers, contractors, hotels, or restaurants. Additionally, the goods you sell are merchandise for resale or supplies for use in the buyer’s business.
You are a volunteer officer of an exempt organization who is paid by reimbursement or an allowance (unless you have to make an accounting of your expenses and pay the organization back the excess amounts).
You might be both an independent contractor and employee at the same time if you have multiple jobs, roles, or positions.
As an employee, you will receive periodic paychecks and, for each tax year, a W-2 from your employer(s) by January 31 of the following year. If you also have independent contract income, that might be reported via one or more 1099 forms. By April 15 of the subsequent tax year, you would prepare, file, or e-file your income tax returns to the IRS and states. The eFile.com tax app makes it easy for you to prepare and eFile your income taxes for federal and state income tax together.
Church Employees' Self Employment Tax
If you had $108.28 or more in church employee income, then you must pay self-employment tax. Church employee income is income received from a church or church-controlled organization, not including income paid to ministers or members of religious orders. If you are a minister (or priest, rabbi, etc.), a member of a religious order NOT under a vow of poverty, or a Christian Science practitioner, and you have a conscientious objection to Social Security insurance, you may exempt your net earnings from self employment tax by filing Form 4361. Under certain circumstances, if you have a conscientious objection to Social Security because of your membership in a religious sect, you may be able to exempt your net income from self-employment tax by filing Form 4029.
If you receive salaries, fees, allowances, or other compensation (housing, food) for doing work as a minister or member of a religious order, you generally have to pay self employment tax on your income. You may exempt your ministerial income from self-employment tax if you file Form 4361 and you receive an approval from the IRS. Income derived from other sources may still be subject to self-employment tax.
Spouses with a Joint Business Venture
In general, a husband and wife—husband/husband or wife/wife—who jointly own an unincorporated business must file taxes for the business as a partnership. However, partnership tax returns and recordkeeping can get very complicated, so the IRS has made an exception. If a husband and wife are the only members of a joint venture (a fancy name for a business owned by two or more people), then they may agree together to elect for their business NOT to be treated as a partnership for federal tax purposes. Instead, it will be a Qualified Joint Venture. Then, the couple files a joint tax return and prepares a separate Schedule C for each spouse, taking into account each spouse's share of income and loss derived from the business as if they were each a sole proprietor. Only couples that are married filing jointly can elect for their business to be a Qualified Joint Venture. Corporations and LLC's do not qualify for this election.
Independent Contractor and Self-Employed Tax Resources
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