How to Account for Independent Contractors in Your Taxes

To achieve this, contractors should implement effective strategies and use the right tools. Unlike regular employees, contractors may experience unpredictable earnings, making budgeting more complex. Creating a budget that accounts for both peak and off-peak periods provides stability. Automated saving tools can allocate a portion of each payment toward tax obligations, ensuring funds are available when needed. Independent contractor finances revolve around tracking income, expenses, and taxes. Contractors need to collect Form 1099-NECs from clients to report income accurately to the IRS.

You’ll need the 1099-NEC form to calculate tax debts and help the IRS track tax expectations. Costs will vary widely depending on where you are located, what states you do business in and whether you choose an accountant or an accounting firm. As a general rule, you will either pay a fee per service, or an hourly rate. You should hire an accountant when the tracking, analysis and reporting of all the financial information related to your business are too complicated or overwhelming for you. Outsourcing this service gives you the time to stay in your zone of genius and keep working on what you are best at. Small business accounting mirrors this definition, but usually pays special attention to even the smallest details, since for most small businesses, every dollar counts and needs to be noted.

You might have purchased specific equipment required to perform the work. Over time, this equipment’s value will decrease due to wear, tear, and obsolescence. Cassie is a former deputy editor who collaborated with teams around the world while living in the beautiful hills of Kentucky.

According to the IRS, once you use a piece of equipment for more than a year, you can write off the value of the depreciation on your tax return. To learn more about making deductions based on your home’s business use, read IRS Publication 587 (2021), Business Use of Your Home. You can obtain the contractor’s name, Social Security number and address from the collected W-9 forms. Payroll platforms are also suitable for distributing 1099s to independent workers and helping to submit the forms to the IRS. All you need do is add the contractors to your account and email them the link. If your small business doesn’t include piles of paperwork and boxes full of receipts, you may want to consider handling your accounting yourself.

Add your estimated self-employment taxes ($14,130) and your estimated federal income taxes ($13,212), and you get an estimated federal tax liability of $27,342. Divide that number by four to determine the amount ($6,835.50) of your estimated quarterly payments. Your small business is booming, sales are strong and you’re on track for a record year. If you’re asking yourself these questions, it’s time to start working with a professional.

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Start by crowdsourcing and asking other small business owners who they use and trust with their finances. Once you have several names, complete some internet research on their background and experience, and read any available reviews. If you happen to overpay your taxes, don’t worry—the CRA will refund you. Alternatively, if you underpay your taxes, they’ll let you know, too, along with the possibility of interest and penalty charges.

• Do you know the difference between an employee and an independent contractor?
• The IRS will review your submission and respond with an official classification within six months.
• To pay via checks, you’ll need a record of information such as the contractor’s name, payment rate, total work hours, the amount accrued and payment date.
• Keep records such as receipts, invoices, and credit card statements to prove that you actually had the expenses you claim as itemized deductions.

Managing Irregular Income

You can accept worldwide payments and withdraw your earnings in over 120 currencies, including crypto, via the Deel platform. If you started a new accountant for independent contractor business in the tax year, you could deduct up to $5,000 in setup costs. Initial costs include market research, advertising, business launch activities, or hiring a consultant.

Education expenses

Janet has been nominated as a top Woman in Accounting by Practice Ignition and honored as a Top 100 Innovative Women in Tax by Canopy Tax. If you need help calculating your estimated payments, use IRS Form 1040-ES, try our income tax calculator or speak with a tax professional to get a more dialed-in estimate of what you might owe. Take your $100,000 in earnings and subtract $7,065 (half your $14,130 self-employment tax). Then, subtract $12,950 (the standard deduction for single taxpayers in 2022).

Quarterly Estimated Tax Deadline

You can then deduct a portion of the car expenses, mileage, tolls, and parking expenses used for business purposes. A deduction is a qualifying business expense that self-employed workers can use to lower their taxable income. By lowering your taxable income, the tax rate applies to a lower figure, which results in a smaller tax bill.

However, you might have to pay an additional 0.9% in Medicare taxes if you earn more than $200,000 as a single filer or more than $250,000 if married and filing jointly. You can deduct any business licenses, certifications, and regulatory taxes that are directly connected to your business operations. If there are any incorporation fees or small business licenses you need to operate, these qualify for a tax write-off as well. Independent contractors aren’t employees of the people or businesses they provide services for. They may or may not have written contracts spelling out the services they’re supposed to perform and their compensation for those services.

As you can see from the example, making $100,000 per year doesn’t mean that you have to pay 26% on the full amount. Instead, tax brackets are in place to ensure that you still make money despite tax rate increases. As a sole proprietor, you may also need to file a fictitious name statement with your city or county if your business name is different from your legal name. For example, if your name is Carlotta Calvin and your business name is The Carlotta Calvin Company, you probably won’t need a fictitious name filing, but if it’s Excelsior Solutions, you will.

The IRS will review your submission and respond with an official classification within six months. You should also check the laws of your state to see if there are any special rules to follow, such as California’s new AB5 legislation. Laura is a freelance writer specializing in small business, ecommerce and lifestyle content. As a small business owner, she is passionate about supporting other entrepreneurs and sharing information that will help them thrive. For details on the range of tax brackets within these minimum and maximum amounts for every Canadian province and territory, visit the CRA’s website.

Anyone who earns more than $400 a year working as a self-employed individual pays independent contractor taxes. Being an independent contractor has many advantages but also some unique tax responsibilities. From paying self-employment tax to filling out specific tax forms, freelancers and other self-employed people need to make special considerations when filing their independent contractor taxes.