With the rise of the “gig economy,” an increasing number of people are working as independent contractors, and thus having to pay their independent contractor taxes.
Whether you perform freelance work on the side or are running a long-time independent business as your primary source of income, you will need to report your income as an independent contractor when you file your income taxes with the IRS.
In most cases, you will need to pay self-employment taxes as well as income taxes on this income. Here is some information to help you report your 1099 income properly.
[Also read: A Guide to Rental Income Taxes]
What Is An Independent Contractor?
An independent contractor is different than an employee. Employees receive W-2 forms to report their income to the IRS, and taxes are usually withheld on both the employer and employee’s end at the time of payment. Independent contractors, on the other hand, pay their taxes separately.
They may make one payment at tax time or split their tax submissions into quarterly payments.
Proper classification of employees and independent contractors is a matter of labor law. Independent contractors have the right to determine the method of work, set their own hours and accept or decline work. They can determine their own schedules.
On the other hand, businesses can exercise a higher level of control over employees, including determining the time and place of work, dress code, specific required hours, mandatory software and other rules. There have been a number of legal disputes about whether workers are properly classified as independent contractors or as employees.
After all, businesses hiring independent contractors do not need to pay Social Security and Medicare taxes, nor do they need to provide other benefits granted to employees like employer-sponsored health care or retirement plans. Workers operating as independent contractors need to provide their own benefits and cover their expenses.
For tax purposes, the key thing to understand is the form that you receive. If you are paid as an independent contractor, you will receive a Form 1099-MISC, while if you are paid as an employee, you will receive a W-2 form. Some contractors work for agencies, and they will receive a standard W-2 form and will file income taxes like an employee.
Classically, independent contractors include people who work for themselves, like doctors, dentists, lawyers or accountants in private practice, or people who serve as consultants to agencies and companies on an independent basis. With the rise in online work and the gig economy, freelancers of all types, including actors, translators, software developers, musicians, writers and even drivers, have been classified as independent contractors.
Rules and Forms
The primary tax form received by an independent contractor is Form 1099-MISC. If you performed work for a person or business as an independent contractor, you will receive this form at the same time that employees receive W-2 forms. They usually arrive around the end of January following the tax year.
You will need to receive a 1099 form only if you are paid over $600 from a particular payer. If you were paid less, you still need to report the income on your tax return, but you will not need to receive the form. Each employer that you worked for will send a separate 1099 form. In most cases, you will report your income on Schedule C to Form 1040. Schedule C reports on profit or loss from business, and as an independent contractor, you are considered to be in business for yourself. This also applies if you do business as a single-member limited liability corporation (LLC); the income is treated the same way by the IRS.
On Schedule C, you will need to report your income from your business as well as your expenses, such as purchases of supplies or equipment, office expenses, professional fees, licensing costs and some taxes as part of your independent contractor tax returns. The total from Schedule C is transferred to Line 12 of Form 1040 along with your other income sources, such as W-2 income and income from your investments.
1099 Tax Rules
Employers generally do not withhold income taxes, Social Security taxes or Medicare taxes from income paid to independent contractors. Therefore, you will need to pay your taxes due when you submit your tax returns for the year. In some cases, you may be required to pay estimated taxes quarterly on your income as a 1099 contractor. Make sure that you check the 1099 tax rules for your specific circumstances to avoid penalties for underpayment.
Your income from your independent work will be calculated with your other income to determine your total income tax due. The amount that you pay is based on your income. In general, people with higher incomes pay a higher percentage of taxes on the portions of their income above a certain amount.
However, you also need to pay self-employment taxes, which are calculated separately from income taxes. All U.S. taxpayers must pay Medicare and Social Security taxes based on their net income. For people receiving a W-2, this is taken care of through the employer, and the employer also pays a portion of these taxes. People working as independent contractors must shoulder this burden themselves as part of their 1099 tax filing.
1099 Tax Deductions
Tax deductions can be particularly important for people working as independent contractors. Since you need to pay for all of your business expenses as well as your taxes, you need to make sure that you are filing correctly and claiming all of the 1099 write-offs that you deserve. This is one reason why many independent contractors opt to work with a professional accountant to file their taxes to ensure their returns are accurate while maximizing potential benefits.
Some of the 1099 write-offs that independent contractors can claim include the following. In all cases, you should make sure that your expenses are appropriate for claiming these deductions, and an online accountant at Picnic Tax can help to verify your deductions.
- Auto expenses for cars and trucks, including operating costs and depreciation or mileage
- Insurance for your business
- Fees, payments and commissions to other contractors or companies
- Home office expenses
- Depreciation of business property
- Attorney, accountant and tax advice fees
- Renting and leasing business assets
- Repairs to business property
- Office supplies
- License and tax fees
- Travel and and meal expenses for business trips
- Expenses for maintaining an office
- Utility bills
Filing Returns for Your 1099: Choosing the Right Accountant
When filing tax returns as a 1099 contractor, it is important that your returns are accurate and that you claim every deduction that is rightfully yours. Because you are fully responsible for your tax payments, the costs can add up quickly. If you have multiple streams of income, your return can quickly become complex, and it can be all too easy to make an error.
Working with a professional accountant can help to ensure you have an accurate 1099 tax filing and that you are fully credited for your eligible deductions. At Picnic Tax, our online accountants have been screened for their qualifications and training. You won’t have to spend valuable business time traveling to in-person appointments. Instead, you can just submit your tax documents, including your 1099 forms, online.
Picnic Tax uses your information to match you with an accountant with experience and knowledge in completing 1099 tax filings. You’ll have a clear price received in advance to complete your independent contractor tax returns, and you can rest assured that you are using a skilled professional rather than relying on a software algorithm.
When you work as an independent contractor, accurate filings that maximize your deductions legitimately are essential to keep your business going. Sign up with Picnic Tax today to get the professional assistance that can make your taxes a breeze, even when you have many clients and complicated concerns.