Over the past couple of years, controversy rose around independent contractors. The line between employee and independent contractor has thinned, and many are confused over how workers should be classified. In general, the independent contractor is considered to self-employed, and the company is their client. This means that there are some vast differences between the tax obligations for independent contractors and employees.
The tax process starts with Form 1099-MISC. There are many types of Form 1099, but because you are an independent contractor, you will want to use 1099-MISC as it is the tax form for any non-employee miscellaneous income. 1099 breakdowns are given to independent contractors by the client company. They must be provided if the company paid contractor over $600. As an independent contractor, Form 1099 will be your lifeblood when it comes to taxes. It is the main form that tracks and breaks down what you were paid.
One of the good parts about being an independent contractor is that you are able to claim deductions through Schedule C. This is where you will put down any expenses (i.e. gas) from your work as an independent contractor. Schedule C is where you will find the amount of income that is able to be taxed under the self-employment tax. Claiming deductions for your 1099 work also helps prove you are an independent contractor and not an employee. As more companies push the boundaries on who can be considered an independent contractor, the IRS started investigating Form 1099 issuers, meaning the business had to prove the independent contractor status. In addition, if your deductions total less than $5000, you are eligible to file the shorter Schedule C-EZ. Because who wouldn’t want to make taxes simpler?
As an independent contractor, you are considered the owner of your own business. Although the business is technically you and not an incorporated entity, you are still required to pay self-employment taxes. Under Form 1040 Schedule SE, you will use your calculation from Form 1099 Schedule C to figure out how much in self-employment taxes you are required to pay. That is one of the reasons why it is vital for you to label your deductions. Deductions can have a major impact in the amount of self-employment taxes you pay.
Finally, since you are an independent contractor, your clients will not withhold income taxes for you. This means you need to fill out Form 1040-ES to figure out your estimated income tax obligations. You are expected to have four income tax payments per year unless you owe less than $1000 in back taxes.
The most important thing to remember is that as an independent contractor, you will be taxed as a self-employed individual. The company is your client and is not liable for withholding taxes like an employer. Although the tax requirements are more difficult, you may be able to use the deductions to your advantage.