Introduction
If you aren’t a salaried employee and work as an independent contractor, you will have the following questions crossing your mind:
- How should I calculate taxes?
- How much tax do I pay on my 1099 income?
- How can I use the 1099 tax calculator?
- What are the various taxes for an independent contractor?
- How does an independent contractor like me pay taxes?
- How can I file tax returns before the deadline?
All these queries will be answered and explained in this article.
Know Your Business In And Out
Most independent contractors work in the US market either as a sole proprietorship, partnership, LLC (Limited Liability Company), or S corporation (S subchapter).
As per the US norms, if you don’t register as a particular business entity, you will be treated as a sole proprietorship. A sole proprietorship is the most common form of venture in the US.
If you perform a dual role such that you run a business and are employed with someone, it will have a different tax implication.
The IRS will judge you on the type of business entity. So, to understand your taxes, you need to know your business type very well and use the independent contractor tax calculator.
What Are The Taxes That You Need to Pay?
The following are the taxes that you need to pay as an independent contractor:
Self-Employment Tax
The Federal Insurance Contributions Tax Act (or FICA) consists of two components: Federal Social Security tax (12.4%) and Medicare tax (2.9%).
You need to pay this combined 15.3% tax on your income as self-employment tax, regardless of your income ticket size.
Suppose you're working for an organization and running a small business at the same time, and your employer is withholding FICA components on your salary. You still need to pay self-employment tax on your side business venture.
Self-employment tax is filed with the help of Schedule SE and Form 1040.
Income Tax
Along with your self-employment tax, you need to pay an income tax. For this, you need to consider your income, deduct the applicable values, and consult the tax table to figure out your income tax.
Know The Process of Tax Calculation And Payment of Taxes
You will have to pay federal taxes every quarter. Form 1040-ES will guide you on your tax calculations and will also help you in filing your tax returns.
The Estimated Tax Worksheet is your guide which is a part of Form 1040-ES.
You can use the 1099 tax calculator developed by bookkeeping agencies to get an accurate figure.
Understand The Multi-Layered Tax System: Federal Versus State or Municipality
The US follows a multi-layered tax system where along with the federal taxes, you need to pay certain taxes to the state or the municipality in which you run your business.
Remember the following key points when it comes to federal and state taxes:
- Both the taxes apply similarly; that is, on your income. However, the rates and regulations may vary.
- Federal taxes are generally progressive and impose a higher rate with high-income bandwidth.
- Some states may apply progressive taxations, while others impose a flat tax rate.
What Do You Need to Know As a Freelancer?
If you are working as a freelancer, you need not worry about the filing of Form 1099-MISC, as your client will take care of it at their end. It is subjected to the fact that your income is more than $600 in a taxable year. For anything less than $600, your client won’t have to file a return.
However, if you hire a sub-contractor, you need to fill and file Form 1099-MISC for the subcontractor if you pay them more than $600.
The Concept of Subcontractor Agreement and Its Importance
It is wise to have a subcontractor agreement in place. Along with all the terms and conditions, the agreement will contain details of the services and equipment they will use. If you're an employer, you must be clear about whether the equipment used will be yours or theirs.
An IRS audit will evaluate whether the on-board members in your entity work as sub-contractors or as employees. Sub-contractors and employees will have different tax applications, and hence any ambiguity can result in a penalty.
You must hire a tax consultant to categorize between employee and contractor before paying taxes.
As a freelancer, take note of the following points:
- Know your taxes and how much you need to pay.
- Pay your taxes quarterly.
- Know the tax benefits.
- Maintain your tax records.
- Consult a tax expert for a better understanding.
How to Avail of The Tax Advantage Benefits?
Although it is never a good thing to omit your tax payments, there are some ways to minimize the amount of taxes you pay to the IRS.
Your tax deductions are stated on Schedule C of Form 1040. These deductions come as a good respite while you pay your taxes. An independent contractor tax calculator makes you understand this better.
There are few areas where you can avail tax advantage benefits:
- Marketing and advertising expenses.
- Business meal expenses.
- Business-related travel expenses.
- Medical expenses
- Interest paid on a business loan.
- Charity expenses
- Any theft and casualty losses.
Standard Deduction: This is a flat amount you can choose as a deduction, depending on your income.
Itemized Deduction: Adding up your various business expenses and defining your tax deduction is an itemized deduction.
Learn How to File Your Taxes
There are two ways to go about this:
1) Filing On Your Own
If you feel you have maintained a good track record in tax filing and don’t have any dues over the past few years, you can do it independently.
There are two ways to do it.
- Offline method: In this, you can order the return filing documents online, fill the form, and mail them to the IRS. You can pay your taxes by money order or check.
- Online method: In this, you can open an account on the IRS website, fill up the details, and transfer funds from your bank account.
The online and paperless method is fast and keeps a digital record of your tax payments. As a result, it also ensures more transparency.
2) Hire a Tax Accountant
If your business has seen sudden growth, or if you have queries about tax rules and their implications, you can hire an accountant to do your taxes. They will update you on new regulations, make you understand your tax implications, do the math and file your taxes.
Bookkeeping For Your Tax Filing
Bookkeeping is essential to know your income and the subsequent taxes you need to pay. Well-maintained ledgers, categorized income, expenditure lists, and tax calculations will help you grow as a business while abiding by all its tax liabilities.
A good bookkeeping solution will uncomplicate your tax payments.
An organized closure of books will enable you to file your taxes on time. Even for a part-time business, you should keep a bookkeeping solution to ensure your accounts are maintained at all times.
What Will Be The Quarterly Taxes For The Self-Employed?
Consider an example where your business earns you more than $1000 per year.
In such a scenario, you need to pay taxes quarterly, in April, June, September, and January.
On the contrary, consider an example where you work for an employer and run a side business.
Despite your employer withholding your income taxes, you need to pay a self-employment tax on your income from your side business.
Always estimate your taxes based on the previous year and current year upfront to avoid any tax failure.
Save The Date For Contractor Tax Deadline
The IRS has the authority to impose a penalty on you for any late and insufficient payments. As a result, you must keep the important dates in mind.
Quarterly Tax Payments:
- April
- June
- September
- January
Ensure to check the due dates concerning your business or type of income. Personal income tax, Sole Proprietorships, S Corporations, Partnerships, and Sub-contractors all have different due dates and rules. You must look them up and pay your taxes on time to avoid any penalties.
In Conclusion
It is fascinating and fun to run your own business. At the same time, the tax implications associated with it can be quite challenging. The 1099 calculator offered by the passionate team at Fincent will always ensure that your books are filed accurately and on time. Try their industry-leading bookkeeping services to never worry about your bookkeeping again.