Tax Support

Tax Basics for Contractors

Starting from square one? Here's what you need to know.

Why is paying taxes for a contractor different than paying taxes as an employee?

• W-2 employees are paid regular wages from their employer for services performed. Before the employee is paid, the employer deducts the required taxes (including income tax, federal, and state (if applicable), Social Security, and Medicare).
• 1099 contractors are paid based on an agreed upon arrangement with a company, but the money they receive DOES NOT have any taxes taken out before payment.
• When it comes to taxes, the IRS considers independent contractors to be selfemployed individuals (even if you have a close relationship with the company for which you work). As such, a different set of tax payment and filing rules applies to independent contractors than for W-2 employees.

How does paying taxes as an independent contractor work?

If your net earnings as an independent contractor are $400 or more,
you'll need to file a tax return. Here's what you need to do:

• Collect Your 1099-NECs: By the end of each January, you should receive a Form 1099-NEC from all of the companies you contracted with the previous calendar year (If you've previously filed taxes as an employee, this takes the place of a W-2). A couple of things to be aware of:
  • Multiple Forms: If you work for multiple sources, you should receive a 1099-NECs from each source.
  • January Deadline: Payers are required to have these forms completed and postmarked by the end of January.
  • Income Less Than $600: If you earn less than $600 from a particular company, they are not required to send you a 1099-NEC. However, you are still required to report the income.
  • W-2's: If any of your jobs send you W-2s, you'll need to collect those, too.
• Report Your Income & Expenses: You will need to use a Schedule C to report your income and expenses for a given calendar year. You'll use the 1099 NECs you collect to report income on your Schedule C. Need more details? Learn more here.
• Pay Self-Employment Taxes: As a contractor, you're responsible for paying self-employment tax, which covers your annual contributions for Social Security and Medicare (note: for W-2 employees, these contributions are deducted before you receive your paycheck, but they are not deducted for contractors). Current rates are 12.4% for Social Security and 2.9% for Medicare, but please note that these rates can vary slightly depending on your income, and the percentages change when legislation changes. Don't worry about keeping track of the exact rates, your filing software or accountant will take care of that for you. You can calculate your self-employment tax using Schedule SE on Form 1040.
  • If you expect to owe more than $1,000 when you file, you'll need to file Quarterly Estimates. See below.
• A Note About Payment: One of the biggest stressors of tax season is, of course, the tax bill. If the final tally on what you owe is higher than you expected, step back and take a look at your options. You must still file your taxes so that you don't incur a penalty. The IRS recommends paying what you can by the filing deadline, and if you can't pay the amount in full, apply for a payment plan.

What are my responsibilities throughout the year?

• File Quarterly Estimates: If you expect to owe more than $1,000 when you file your return, the IRS requires that you file Quarterly Estimates on your taxes. Quarterly Estimates allow you to pay a portion of your Sociality Security, Medicare, and Income Tax each quarter, so that you're not paying a large lump sum on Tax Day. Here's what you need to know:
  • Form 1040-ES is used to figure out your Estimated Quarterly Tax. It uses information from your previous year's tax return, so make sure you have that handy. If your tax estimates are too low or too high one quarter, you have the opportunity to re-estimate the next quarter.
  • Please be aware that missed quarterly payments will result in penalties and interest.
  • You can pay online or by mail or by phone via the IRS Mobile App.
• Here are the 2023 Estimate Deadlines:
  • For income received Jan. 1 through March 31, estimated tax is due April 18.
  • For income received April 1 through May 31, estimated tax is due June 15.
  • For income received June 1 through Aug. 31, estimated tax is due Sept. 15.
  • For income received Sept. 1 through Dec. 31, estimated tax is due Jan. 16.