Independent Contractor Tax Guide

Overview

An independent contractor is a person or corporation that provides a paid service to another business, person, or organization. Independent contractors are not regular employees and receive payment for freelance work. In general, independent contractors receive payment on a per-item or per-project basis. Independent contracts may also elect to receive payment by the day or based on the value of the project.

Freelancers set their own schedules and require little to no direction for their work. Fields where freelancing is common includes journalism, publishing, writing, editing, programming, graphic design, and consulting. Lawyers, couriers, pizza deliverers, athletes, landscapers, and entertainers are commonly employed as independent contractors.

Self-Employment

Contractors will either work for themselves through a self-owned company, or they may work through a larger agency. Legally, independent contractors have substantial choice when entering into employment relationships and choosing projects.

Unlike with regular employees, employers do not need to withhold taxes from contractors' paychecks. Independent contractors must maintain their own records and then adjust for relevant expenses for supplies and office space.

Independent contractors provide their own resources and workspace, while employees require company space and resources. Independent contractors monitor their own schedule and performance, and technically, they cannot be fired from a company. Many independent contractors sign contracts, and many companies hire independent contractors so that they can minimize tax expenses and avoid obligations to pay health insurance. Independent contractors are not entitled to any company benefits including health insurance or unemployment insurance.

Important Rules

People, organizations, or businesses that pay more than $600 to an independent contractor must send Form 1099-MISC to the Internal Revenue Service (IRS).

Independent contractors are not considered employees, no matter how many hours or how long they work on company projects. Technically, independent contractors are not required to enter into noncompetition agreements. They are not bound to an employer in any way. Independent contractors who create their own work are entitled to copyright ownership.

Employers are liable for the actions of their employees. Employer liability is limited with independent contractors.

Independent Contractor Taxes

As an independent contractor, you work for yourself and are self-employed. Most independent contractors are required to complete Schedule C or Schedule C-EZ with Form 1040. If your taxes are complex, you may want to consider working with a tax consultant to pay your taxes correctly and on time. If not, look into software such as TurboTax.

Independent contractors must pay Self-Employment tax, which is a social security and Medicare tax. People who are self-employed must pay estimated taxes to the IRS on a quarterly basis. This method allows people to maintain regular tax payments on income that is not withheld.

If you have your own business, you must pay business taxes. Depending on where you live, you may need to obtain a business license. If you have employees, you must withhold taxes from your employees' pay. It is important that you maintain accurate records throughout the year in case the IRS chooses to audit you.