Even before the COVID-19 pandemic, the number of people working as independent contractors in the U.S. was on the rise. According to research Gallup conducted for QuickBooks at the end of 2019, 28 percent of American workers were self-employed at some point that year. Fourteen percent of those workers said being an independent contractor was their main job.
During 2020, some of those independent contractors saw their workloads change, and others turned to independent contractor work – also called freelancing or working a gig job – as a way to stay afloat financially during the economic crisis.
Whether you began working as an independent contractor in 2020 or have been doing it for years, there have been some recent changes to the way you file your taxes. The article offers a guide for filing your taxes as an independent contractor.
How to Know if You Need to Pay Tax as an Independent Contractor?
You need to file a tax return with the IRS if you earn $400 or more as an independent contractor. An independent contractor is a self-employed business person. You are paid for providing goods or services to an employer, but you are not an employee. An independent contractor may be working either full-time or part-time.
Unlike with an employer-employee relationship, a person or company hires an independent contractor to do a specific job but does not control how or where the work is done. Some of the many careers that offer the ability to work as an independent contractor include:
- Construction
- Accountant
- Delivery driver
- Writer
- Hairstylist
- Lawn care provider
- Electrician
- Dentist
- Attorney
- Physician
For all of these work relationships, it is important for both the employer and the independent contractor to have a written document – called an Independent Contractor Agreement – in place before the work begins.
This legal agreement puts all the terms of the work in writing so that there is no misunderstanding of the scope of the job, the timelines, and the payment.
Start Your Independent Contractor Agreement
How to Report Independent Contractor Taxes?
Independent contractors have different tax responsibilities than wage or salaried employees. Employees receive W-2 forms from their employers at the end of every tax year that show the taxes their employers deducted from their pay.
However, employers do not withhold taxes from independent contractors. Instead, businesses are required to issue the contractor a Form 1099-NEC on annual payments of $600 or more. It is the responsibility of the independent contractor to pay their own income taxes.
The 1099-NEC form replaces the 1099-MISC form employers used before this year. “NEC” stands for non-employee compensation.” If you earned less than $600 on an independent contractor job, you still must report the income to the IRS, but a business doesn’t have to send you a Form 1099-NEC. If you work with multiple clients throughout the year, you may receive multiple 1099-NEC forms.
If you sub-contracted any of your work during 2020 and paid those workers more than $600, you must file a Form 1099-NEC with the IRS and send a copy to the sub-contractor.
Keep in mind that you will have to pay income tax and estimated quarterly taxes at the state level as well.
Paying Taxes as Independent Contractor
Tax filing for the 2021 tax year opened on Jan. 31, 2022, a delay from the usual Jan. 1 date to give the IRS time to make system changes based on the second stimulus package that became law at the end of 2021.
Unlike it did last year at the beginning of the pandemic, the IRS is not extending the deadline for filing your taxes this year. You must file your 2021 taxes by April 18. You can request an extension by submitting Form 4868. Your final deadline would then be Oct. 15.
You must file a tax return with the IRS if your net earnings as an independent contractor for 2021 are $400 or more. Along with Form 1040, you will need a Schedule C to calculate your net income (or loss). You can use the Schedule C-EZ if you are filing your taxes with under $5,000 in business expenses.
You’ll also must pay a self-employment tax, which covers what you owe for Social Security and Medicare taxes for 2021. You can calculate this tax using Schedule SE on Form 1040.
If you expect to owe $1,000 or more in taxes when you file your annual return, you’ll also have to make estimated quarterly tax payments in April, June, September, and January of the following year. You can calculate your payments based on last year’s income or your estimated income for this year.
Tax Credits for Sick and Family Leave
There are some additional changes to filing taxes as an independent contractor this year. You may qualify for tax credits under the Families First Coronavirus Response Act. You can qualify for this sick leave credit if you had to self-isolate last year or if you had to care for a child under 18 whose school or place of care was closed due to the coronavirus.
The sick leave credit is equal to 100 percent of your average daily self-employment net income for a maximum of 10 days with a maximum of $510 per day. The family leave credit is equal to 67 percent of your average daily self-employment income for up to 50 days. This credit has a $200 per day limit.
Tax Deductions
Deductions can help you lower your taxable income as an independent contractor. However, they require you to keep detailed records of all your expenses.
The IRS states the deductible expense must be both ordinary and necessary. By “ordinary,” the IRS means the expense should be one that is typical to your line of work. By “necessary,” it means that the expense is needed for you to perform your work. Here are some of the common deductions for independent contractors:
- Advertising costs
- Vehicle expenses
- Mileage
- Utilities
- Commissions and Fees
- Health insurance (not including premiums)
- Home office expenses
- Rent or lease
- Legal and professional fees
- Travel expenses
- Education
There is no limit to the legitimate deductions you can take as an independent contractor. However, you must be able to verify that the money you report was spent and that it was for your freelance business.
Written Independent Contractor Agreement
Having written legal agreements with your clients is an essential part of working efficiently as an independent contractor.
Not only does an independent contractor agreement confirm all the terms of the work you have agreed to do, but it also helps establish your employment status with the IRS at tax time.
An independent contractor agreement should include the following basic elements:
- Terms – dates, names and locations of the parties involved, and a description of the tasks to be performed.
- Responsibilities and deliverables -- a detailed description of each party’s obligations and what should be delivered by the independent contractor.
- Payment – details on the amount of payment and when and by what means payments will be made
- Confidentiality clause – also called an NDA (non-disclosure agreement), this clause specifies who owns the work and how both the work and the work process are protected.
- End of contract-- acceptable terms and conditions for terminating the contract
- Choice of law – clarifies the state laws under which the agreement will be enforced (usually where the work is being done).
Create an Independent Contractor Agreement
Extra Agreements
After you have created your independent contractor agreement, you may find that you may need a few other documents to ensure every aspect of a job is clearly-defined and secure. Here are three additional agreements to consider adding to your file:
- W-9 form: This is the tax form that independent contractors and their hiring company or clients must complete. It is separate and distinct from a W-2 form, which is required for employees to fill .
- Non-Compete agreement: This agreement states that the independent contractor will not work for a competitor for a set period (usually during the course of the project).
- Non-Solicitation agreement: This addition specifies that the freelancer will not take the hiring company's clients along with them after they complete a project.
For many independent contractors, it is the freedom of setting their own schedule and choosing their own projects that draws them to this type of work. Some like that their taxes do not come out of their weekly or monthly pay. However, the downside is that there is no guaranteed income and no benefit plan that comes with being a freelancer.
Gig work currently brings more than $1 trillion to the U.S. economy each year, and many experts expect those figures to only grow in a post-COVD world. Some even predict that independent contractors will make up more than half the U.S. workforce within just two years.
Even before the COVID-19 pandemic, the number of people working as independent contractors in the U.S. was on the rise. According to research Gallup conducted for QuickBooks at the end of 2019, 28 percent of American workers were self-employed at some point that year. Fourteen percent of those workers said being an independent contractor was their main job.
During 2020, some of those independent contractors saw their workloads change, and others turned to independent contractor work – also called freelancing or working a gig job – as a way to stay afloat financially during the economic crisis.
Whether you began working as an independent contractor in 2020 or have been doing it for years, there have been some recent changes to the way you file your taxes. The article offers a guide for filing your taxes as an independent contractor.
How to Know if You Need to Pay Tax as an Independent Contractor?
You need to file a tax return with the IRS if you earn $400 or more as an independent contractor. An independent contractor is a self-employed business person. You are paid for providing goods or services to an employer, but you are not an employee. An independent contractor may be working either full-time or part-time.
Unlike with an employer-employee relationship, a person or company hires an independent contractor to do a specific job but does not control how or where the work is done. Some of the many careers that offer the ability to work as an independent contractor include:
- Construction
- Accountant
- Delivery driver
- Writer
- Hairstylist
- Lawn care provider
- Electrician
- Dentist
- Attorney
- Physician
For all of these work relationships, it is important for both the employer and the independent contractor to have a written document – called an Independent Contractor Agreement – in place before the work begins.
This legal agreement puts all the terms of the work in writing so that there is no misunderstanding of the scope of the job, the timelines, and the payment.
Start Your Independent Contractor Agreement
How to Report Independent Contractor Taxes?
Independent contractors have different tax responsibilities than wage or salaried employees. Employees receive W-2 forms from their employers at the end of every tax year that show the taxes their employers deducted from their pay.
However, employers do not withhold taxes from independent contractors. Instead, businesses are required to issue the contractor a Form 1099-NEC on annual payments of $600 or more. It is the responsibility of the independent contractor to pay their own income taxes.
The 1099-NEC form replaces the 1099-MISC form employers used before this year. “NEC” stands for non-employee compensation.” If you earned less than $600 on an independent contractor job, you still must report the income to the IRS, but a business doesn’t have to send you a Form 1099-NEC. If you work with multiple clients throughout the year, you may receive multiple 1099-NEC forms.
If you sub-contracted any of your work during 2020 and paid those workers more than $600, you must file a Form 1099-NEC with the IRS and send a copy to the sub-contractor.
Keep in mind that you will have to pay income tax and estimated quarterly taxes at the state level as well.
Paying Taxes as Independent Contractor
Tax filing for the 2021 tax year opened on Jan. 31, 2022, a delay from the usual Jan. 1 date to give the IRS time to make system changes based on the second stimulus package that became law at the end of 2021.
Unlike it did last year at the beginning of the pandemic, the IRS is not extending the deadline for filing your taxes this year. You must file your 2021 taxes by April 18. You can request an extension by submitting Form 4868. Your final deadline would then be Oct. 15.
You must file a tax return with the IRS if your net earnings as an independent contractor for 2021 are $400 or more. Along with Form 1040, you will need a Schedule C to calculate your net income (or loss). You can use the Schedule C-EZ if you are filing your taxes with under $5,000 in business expenses.
You’ll also must pay a self-employment tax, which covers what you owe for Social Security and Medicare taxes for 2021. You can calculate this tax using Schedule SE on Form 1040.
If you expect to owe $1,000 or more in taxes when you file your annual return, you’ll also have to make estimated quarterly tax payments in April, June, September, and January of the following year. You can calculate your payments based on last year’s income or your estimated income for this year.
Tax Credits for Sick and Family Leave
There are some additional changes to filing taxes as an independent contractor this year. You may qualify for tax credits under the Families First Coronavirus Response Act. You can qualify for this sick leave credit if you had to self-isolate last year or if you had to care for a child under 18 whose school or place of care was closed due to the coronavirus.
The sick leave credit is equal to 100 percent of your average daily self-employment net income for a maximum of 10 days with a maximum of $510 per day. The family leave credit is equal to 67 percent of your average daily self-employment income for up to 50 days. This credit has a $200 per day limit.
Tax Deductions
Deductions can help you lower your taxable income as an independent contractor. However, they require you to keep detailed records of all your expenses.
The IRS states the deductible expense must be both ordinary and necessary. By “ordinary,” the IRS means the expense should be one that is typical to your line of work. By “necessary,” it means that the expense is needed for you to perform your work. Here are some of the common deductions for independent contractors:
- Advertising costs
- Vehicle expenses
- Mileage
- Utilities
- Commissions and Fees
- Health insurance (not including premiums)
- Home office expenses
- Rent or lease
- Legal and professional fees
- Travel expenses
- Education
There is no limit to the legitimate deductions you can take as an independent contractor. However, you must be able to verify that the money you report was spent and that it was for your freelance business.
Written Independent Contractor Agreement
Having written legal agreements with your clients is an essential part of working efficiently as an independent contractor.
Not only does an independent contractor agreement confirm all the terms of the work you have agreed to do, but it also helps establish your employment status with the IRS at tax time.
An independent contractor agreement should include the following basic elements:
- Terms – dates, names and locations of the parties involved, and a description of the tasks to be performed.
- Responsibilities and deliverables -- a detailed description of each party’s obligations and what should be delivered by the independent contractor.
- Payment – details on the amount of payment and when and by what means payments will be made
- Confidentiality clause – also called an NDA (non-disclosure agreement), this clause specifies who owns the work and how both the work and the work process are protected.
- End of contract-- acceptable terms and conditions for terminating the contract
- Choice of law – clarifies the state laws under which the agreement will be enforced (usually where the work is being done).
Create an Independent Contractor Agreement
Extra Agreements
After you have created your independent contractor agreement, you may find that you may need a few other documents to ensure every aspect of a job is clearly-defined and secure. Here are three additional agreements to consider adding to your file:
- W-9 form: This is the tax form that independent contractors and their hiring company or clients must complete. It is separate and distinct from a W-2 form, which is required for employees to fill .
- Non-Compete agreement: This agreement states that the independent contractor will not work for a competitor for a set period (usually during the course of the project).
- Non-Solicitation agreement: This addition specifies that the freelancer will not take the hiring company's clients along with them after they complete a project.
For many independent contractors, it is the freedom of setting their own schedule and choosing their own projects that draws them to this type of work. Some like that their taxes do not come out of their weekly or monthly pay. However, the downside is that there is no guaranteed income and no benefit plan that comes with being a freelancer.
Gig work currently brings more than $1 trillion to the U.S. economy each year, and many experts expect those figures to only grow in a post-COVD world. Some even predict that independent contractors will make up more than half the U.S. workforce within just two years.
Most Popular Posts
An eviction filed by your landlord hurts your credit report. It is also held as a public record and other landlords can view your previous rental...
As a property owner knowing squatter rights is crucial. These aren’t your ordinary delinquent tenants and knowing how the law treats them is...