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What are tax planning concerns for independent contractors?

| Jun 30, 2021 | Tax Planning |

As an independent contractor, you have the responsibility to handle all income tax liabilities. The company with which you work will not pay the normal employer portion of taxes, which means you must do that when filing your taxes each year.

SmartAsset explains you will usually get a 1099 form supplying your payment information which you will use to file your taxes. You will then need to file like a business to ensure you pay all required taxes.

No 1099 form

If you do not receive a 1099, you still must pay taxes. The law does not require companies to send contractors a form if they earned under $600, but you have to pay taxes on any earnings over $400. You should always keep records of your earnings to help you ensure your figures are correct when filing your taxes and to avoid missing any income for which you need to pay.

Self-employment tax

Because your employer does not pay any taxes on you, you must pay the self-employment tax, which covers the employer portion of taxes. On your tax form, you will calculate the full tax, but you get a credit for half of the amount. This tax is 15.3% of your earnings and includes a payment to Medicare and Social Security. If you are a high earner, you may have a higher tax rate.

Estimated taxes

If you will owe $1,000 or more in taxes, then you must make estimated quarterly payments to the IRS. You will pay every three months starting in April. Keep in mind that you can use deductions to reduce your tax liability, so you will need to figure your taxes to see if you need to make these payments.

It can be tricky to calculate taxes as an independent contractor. You must make sure to do it correctly or you could face penalties.