Independent Contractor Income and Taxes

As an independent contractor, your earnings are classified as self-employment income, which means you’re in charge of managing your own taxes. Unlike regular employees, taxes aren’t automatically deducted from your pay. Instead, you need to track how much you earn and pay taxes every three months. This includes not only income tax but also self-employment tax, which helps fund Social Security and Medicare.

Self-Employed Taxes Explained

Net self-employment income is your income after deducting allowable expenses. As a self-employed taxpayer, your return will be e-filed on Form 1040 and you will generally need include Schedule C and Schedule SE to your return - eFileIT these forms. Schedule C is used to report how much income you made or lost in your business as well as any deductible expenses from your business. Schedule SE is used to calculate the self-employment tax you owe.

The Social Security Administration will use your Schedule SE to figure your Social Security benefits. Schedule C and SE are automatically generated for you on eFile.com. In general, you must eFile Schedule SE and pay self-employment tax if your net self employment income is $400 or more.

Note: Self-employment tax is a tax paid on business income which pays into Social Security and Medicare. When you are an employee, your employer splits this with you - as a business owner, it falls on you.

In order to avoid a hefty tax bill and potential tax penalties at the end of the year, you will likely have to make quarterly estimated tax payments. To pay self employed tax, you can make these online to the IRS or via mail - these payments are made by you and are similar to the way an employer withholds tax via Form W-2, except the responsibility is entirely yours. We at eFile.com highly recommend creating an IRS account and making these payments directly to the IRS online rather than mailing Form 1040-ES - FileIT.

Additional Resources:

• How to create a small business or self-employed retirement fund or 401K.
• Declare your business and add Schedule C.
• Depreciate or write off assets and investments.
• Add Form 1099-NEC or 1099-MISC to your return.

What Is an Independent Contractor?

The "independent contractor vs employee" conversation is simple when looked at through a tax perspective. In short, contractors are paid via 1099-NEC with no taxes withheld while employees are paid via W-2 with taxes withheld. To work as an independent contractor means to take on roles with various companies on your own time without being an employee of these companies.

You are an independent contractor if you offer your services to people or organizations that pay you while they have the right to direct and control the result of the work, not how or what work will be done. You will generally sign an agreement or contract when you finalize a deal with the company. This agreement includes a fixed pay rate, terms of expected services, agreements for both the company and the contractor, and other items.

This position is often referred to as a nonemployee of the company, meaning you are on contract for the company rather than being employee by said company. As such, your income is likely reported on Form 1099-NEC, Nonemployee Compensation and taxes are not withheld.

Consider these resources below for your business or contract work:

• eFile source: business owner overview | IRS source: starting a business and record keeping overview
• eFile source: how to write off assets | IRS source: ways to depreciate equipment
• eFile source: estimated tax payments | IRS source: tax withholding and estimated tax payments.

In comparison, you are not an independent contractor if you perform services that are coordinated and controlled (e.g. what and how it will be done, even if you have some freedom of action) by another person as an employer. Additionally, for tax purposes, employees are given a W-2 which reports payments and taxes withheld.

Tip: In order to deduct as much of your self-employment income subject to self employment taxes, maximize your business expenses reasonably. Let eFile.com help you claim your home office expenses, report the new computer you purchased for work, and let's reduce your tax liability! Generally, you should expect to withhold or save around 30% of your self-employment income in order to pay your income tax based on your filing status and self employment tax since it is not withheld for you.

Getting set up as an independent contractor is increasingly easy as the gig economy grows. These can be one-off gigs where you work for multiple contracted positions at a time or you sign for a single contract which takes you on for several months. Find roles or gigs online through freelance websites or by finding a contracted job listing.

Examples of independent contractors:

• Babysitters and in-home childcare providers: They are generally self-employed and subject to self-employment tax. If you are a babysitter and perform work in your home or in the homes of your clients while substantially controlling the manner in which you do your job, then you are most likely self employed. A nanny, au pair, or other childcare provider that lives in their client's home and does not control the manner in which they perform their work may be a household employee. See household employment help and the IRS guide for households employers.
• Newspaper deliverers or news carriers: You are considered self-employed if you deliver or distribute newspapers or perform related tasks (such as soliciting customers), your pay is based on sales or other output and not on the number of hours you work, and you work under a contract which states that you are not an employee for federal tax purposes. If you meet all these requirements, then you are generally considered self-employed. Even if you are under age 18, you will have to pay into Social Security and Medicare by paying self-employment tax. However, if you are under age 18 and you do not meet all of the above requirements, then you generally do not have to pay self-employment tax.
• Delivery, rideshare: Many delivery and transportation services allow their drivers to sign on as independent contractors. This is how companies like Uber and Lyft allows users to sign up through their phone without conducting extensive interviews. Drivers benefit most from deducting their business miles.
• Other examples of independent contractors: Doctors, dentists, veterinarians, lawyers, accountants, public notaries, carpenters, electricians, plumbers, mechanics, stonemasons, home remodeler, house cleaners, lawn care providers, software developers, web designers, graphic artists, entertainers, guest speakers, truckers, cab drivers, farm workers, interpreters, project managers, hairstylists, salespeople, and freelance writers.

See the IRS Tax Guide for Small Business.

State Taxes and Independent Contractors

Especially in recent years, many taxpayers are working remotely. As an employee, state taxes are generally due for income earned in a certain state. For example, if you live in Nevada but work remotely for a company in California, you will likely pay CA state tax as reported on your Form W-2. Most states require a resident return which taxes you on all your income, even if earned in another state.

However, as an independent contractor receiving a 1099 form, if you live in a state with lower or even no state income tax and you perform remote work for a company in a state with this tax, you may not owe it. If you live in Nevada and work from home with no state income tax, but work as a contractor for a company in California, you would likely not owe CA state tax. Instead, you are responsible for federal income tax and self employment tax.

This is because being self-employed means you owe state taxes in the state which you do business. If you do all your work remotely in your home, then that the state which you will owe income taxes.

Independent Contractor Versus Statutory Employee

What is a statutory employee?

There are a few special cases where, even though you fit the definition of an independent contractor, you are considered a statutory employee (an employee by statute) for tax purposes. You will then receive a W-2 instead of 1099-NEC. This is shown in Box 13 of a W-2; if you are a statutory employee, your employer is not responsible for withholding income taxes from your pay, but Social Security and Medicare taxes will be withheld. To be considered a statutory employee, all 3 of the following statements must be true:

• There is a service contract that states or implies that all the services covered by the contract are to be performed personally by you.
• You do not have a substantial investment in the tools, equipment, or other property used to perform the services (other than vehicles or transportation facilities).
• Your services are performed for the same payer on a continuing basis.

In addition, at least one of the following statements must be true:

• You are a driver who distributes beverages (not including milk), meat, vegetable, fruit, or bakery products.
• You are a driver who picks up and delivers laundry or dry cleaning.
• You are a full-time life insurance sales agent, working primarily for one company.
• You work at home with materials or goods which are supplied by your employer and that must be returned to your employer, who also provides specifications for the work that you do.
• You are a full-time traveling (or city) salesperson who turns in orders to your employer from businesses like wholesalers, retailers, contractors, hotels, or restaurants. Additionally, the goods you sell are merchandise for resale or supplies for use in the buyer’s business.
• You are a volunteer officer of an exempt organization who is paid by reimbursement or an allowance (unless you have to make an accounting of your expenses and pay the organization back the excess amounts).

You might be both an independent contractor and employee at the same time if you have multiple jobs, roles, or positions.

As an employee, you will receive periodic paychecks and, for each tax year, a W-2 from your employer(s) by January 31 of the following year. If you also have independent contract income, that might be reported via one or more 1099 forms. By April 15 of the subsequent tax year, you would prepare, file, or e-file your income tax returns to the IRS and states. The eFile.com tax app makes it easy for you to prepare and eFile your income taxes for federal and state income tax together.

Independent Contractor and Self-Employed Tax Resources

• Income taxes for self-employed or independent contractors
• Job expenses and employee deductions
• How to prepare, file a tax return with 1099 information
• Home business taxes and office deductions
• Family businesses and taxes.

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