If you work as a 1099 employee or own your own business, your tax requirements differ from registered company employees.
If this is your first time paying taxes as an independent contractor, read on for a handy guide to make sure you are complying with state and federal tax law.
First, understand the structure of your business -
Independent contractors can operate as a sole proprietorship or limited liability company (LLC), Partnership or S Corp. Your earnings from any of these business structures are included in your personal income.
In the USA, 73% of businesses are registered as sole proprietorships. This is the most popular structure for entrepreneurs who want to start their own business. It's easy to set one up. If you don’t register as a specific type of business entity, the IRS will automatically treat you as sole proprietorship.
You will need to file your taxes using Form 1040 (US Individual income Tax Return) if you work part-time in your business. You can also get a W-2 (Wage & Tax Statement) from your employer.
Taxes work exactly the same way for freelancers and independent contractors. The IRS will only look at you as a self-employed individual if you are not a business entity. Understanding the structure of your entity type will help you understand how taxes work.
Taxes you will need to pay -
Self-employment requires you to pay self employment taxes (which equals 15.3% of your net income), as well as income tax from the state and federal.
FICA is your federal Social Security tax (12.4%), and Medicare tax (2.9%), which together make up 15.3% of your net income.
Self employment tax is the amount you pay on your freelance income. This means you are paying the same FICA you would pay to an employee plus the match from your employer.
Notice: If your employer withholds FICA from your income, your side hustle will still be subject to self-employment taxes.
Self employment tax can be filed using Schedule SE or Form 1040.
Income tax -
Income tax is the same as any other tax, and you will also have to pay self employment tax. Your taxable income is the sum of all your income for the year, minus any deductions.
Calculating your taxes and paying them -
All federal taxes will be paid together, four times per year.
Use the Estimated tax Worksheet to calculate how much you will need to tax. It is part of Form 1040 -ES.
To file your quarterly estimated taxes, you can also use Form 1040ES.
Federal taxes vs. municipal and state taxes -
This guide covers most federal taxes, but your state or municipality might also require you to pay taxes. This is because every state and municipality are different. It's not possible to cover all of them.
Visit the tax authorities in your state or municipality to find out how much you will need to pay if you are an independent contractor.
Agreements with subcontractors -
You rely on clients to file 1099-MISC forms for you as a freelancer. You'll be able to get the majority of your income from 1099s. However, it's not necessary to report all income.
The script flips when you hire subcontractors for freelance work. You must fill out Form 1099-MISC and file it for each subcontractor that you hire.
January 31, 2020 is the deadline to obtain a Form 1099–MISC for a subcontractor. All Form 1099-MISCs must be filed with IRS by January 31st, 2020, in order to maintain the current tax filing.
It is a good idea to have a subcontractor agreement when you are working with them. This agreement will include other information, such as the services the subcontractor will provide, and whether your equipment and facilities are being used by them.
It is important that a subcontractor does not do work other than what was agreed to. The IRS will attempt to determine if you are a contractor or an employee when you have an audit.
If they find that your subcontractors are fulfilling employee duties, you may be penalized for failing to file the correct taxes (ie. Your share of FICA.)
Ask a virtual bookkeeper if you are hiring contractors for the first-time and don't know how to classify them.
How to get tax deductions -
There are ways to reduce the amount of money that goes to the IRS while still complying with state and federal law.
This is where deductions are useful. The IRS will give you a break when you spend money on business expenses.
Your tax deductions will be reported on Schedule A of Form 1040. This form is used to report your personal income. The end of the year Form 1040 is filed along with your last quarterly estimated tax payment.
To get the most deductions possible while complying with IRS regulations, contact a virtual bookkeeper.
How to file taxes yourself -
If your past taxes are paid and your business has not changed in the last year, you may feel comfortable filing taxes yourself.
You have two options for filing taxes: online or by mail.
You can file your taxes by mail by ordering tax forms online and then filling them out. You can pay taxes by money order or check.
You can file online by creating an account on the IRS Website and transferring funds directly from your debit or credit cards.
Online filing is our preferred method of filing because of its speed and ease. Filing taxes online is also easier and more efficient than paper filing. Online filing saves trees and reduces the chance of paper cuts. Your payment history, along with other important information, is saved in your secure IRS account.
Hiring a virtual bookkeeper -
A professional bookkeeper is a great choice if you have questions about your taxes or if your company has experienced recent growth.
Even if a virtual bookkeeper is not hired to handle your taxes, they can provide advice, such as how to calculate your quarterly taxes.
Prepare your books for tax filing -
Even if your business only operates part-time, it is important to have a bookkeeping system in place. This will make tax season much easier.
Once you have "closed" your books at the end of the year, bring all accounts up-to-date and complete record-keeping for this financial year, you can quickly calculate your income.
To file your taxes, you need to know how much income you have. You may be scrambling to gather all the information you need in order to file a form 1040 by the deadlines.
It will be easier to track deductions for the year if your books are organized and there are separate ledgers that track different business expenses.
We recommend you get in touch with our team to simplify your bookkeeping. You will be paired with an in-house virtual bookkeeper, who will do your books and use smart software to track your finances. We can even file your taxes.
Quarterly self employment tax -
Are you earning more than $1,000? Pay taxes quarterly in April, June and September.
As an employee of someone else, your employer withholds taxes from your wages. The money earned on the side is also subject to tax. These taxes are in the form of a percentage of your income and must be withheld from you.
Calculating your estimated tax payments can be done based on income from the previous year or on income estimates for the current year.
Quarterly tax deadlines for 2021 -
Here are the deadlines for filing estimated taxes in 2021.
April 15, 2021
June 15, 2021
September 15, 2021
January 15, 2022
Tax season can be awkward and even painful if you’re not comfortable paying taxes yourself. Math isn’t for everyone. Nobody likes to think about how much they owe the IRS.
IAS Bookkeeping is a great option if you aren't up to filing your taxes. Your tax season woes are over- our comprehensive virtual bookkeeping ensures you save money and time.
Get in touch with us today to file taxes as an independent contractor.