With the shift of business operations to online platforms comes the rise of independent contractors. As defined by the IRS, independent contractors perform work for a company with little to no interference from that business entity. With that said, the company also furnishes a specific independent contractor payroll, different from their employees.
Independent contractors have the freedom to be their own boss; they can choose their work hours, the way they want the job done, and the processes they want to apply. The company can only dictate when they need the project to be completed.
Even then, whether you’re classified as an employee or an independent contractor, your responsibilities to state and federal laws in terms of taxes are still there. Filing these taxes, however, changes depending on your worker classification.
Taxation Laws for Independent Contractors
When you’re an employee, your employer will pay your taxes for you. Your taxes are generally deducted during each payday, and all you need to do is file for a refund after the year to redeem any overpayments.
On the other hand, when you’re an independent contractor, you will have to do this independently and pay the full amount for your taxes. To do this, you have to add your total income for that year and subtract any business-related deductions.
When you already have the numbers, you can refer to the tax tables provided by the IRS and state agencies to find out how much you need to pay for your taxes.
The good thing about being an independent contractor is that you can deduct some “personal” expenses and consider them as business expenses. These expenses can include phone and internet bills, rental, home office upgrades, personal vehicle use, office supplies, and certain meals.
While other independent contractors feel they can play with these expenses to their benefit, you may want to stay on the safe side. Look online to find out and learn more about allowable deductions.
What if I’m a Full-Time Employee Who Does IC Work as a Side Gig?
For full-time employees, your company will file the W-2 form for you. This form lists your annual income and the amount of money you need to pay as tax. When you have a side gig as an independent contractor, you have to pay your business taxes and self-employment taxes independently.
When Should I Pay Taxes?
As an independent contractor, you have to pay your taxes at a scheduled time. The first thing you need to do is tax estimates. When your income tax per year is less than $1,000, you have to pay your taxes when you would normally file your return.
On the other hand, if you expect to owe more, you pay your taxes quarterly. Divide what you paid last year into four quarterly payments.
Should I File by Myself or Hire a Professional?
Understandably, filing and paying taxes as an independent contractor is more complex than being in a large company as an employee. Luckily, you may choose not to do this unassisted. There are certified public accountants, financial advisors, or other tax professionals you can tap on and ask for help.
Mistakes with taxes can be costly and may harm the status and longevity of the services you worked hard to build.
Get Professional Help with Independent Contractor Payroll and Taxes
At ClearPath, we assist independent contractors with tax compliance. If you want to know about our services, call us today!