Before we know it, tax season will be upon us. Businesses and individuals alike are already starting to prepare to file their taxes in just a few short months. If you have been a full-time employee and you’re now self-employed as an independent contractor, you’ll find that your tax situation might be a little bit different. In particular, in regards to income taxes, you are considered a sole proprietor.
How Pay is Affected
You still get paid for the work you do, but payments are not a salary or wages. These payments are business income. It is important to note that you are considered an owner, not an employee. The amount of money you take out as an owner doesn’t affect your taxes; you must pay tax on all the income of your business, whether you take it out or not.
Because you aren’t an employee, the payments you receive from your business don’t have any federal income tax withholding taken from them, and there are no deductions for social security or Medicare. You must still pay federal and state income tax on your income from your work as an independent contractor, through the business tax return. Taxes for social security and Medicare also must be paid; called self-employment tax for independent contractors.
How Taxes Work as an Independent Contractor
You’ll prepare a Schedule C form, listing income from all contracting work, minus any expenses. You can file what’s called a Schedule C-EZ, to simply list your total income and summarize your expenses. You may need to make estimated payments for your business taxes. But, if you have other sources of income, you could be able to increase your withholding on income from a job to account for the additional income tax and self-employment taxes you might have to pay.
Estimated taxes must cover both your federal income taxes and the self-employment tax you owe for Social Security and Medicare. Check if you can increase the amount withheld from your pay from other income sources. If you don’t have any withholding amounts to adjust, you may need help to determine if you must pay estimated taxes on your income. As an independent contractor you will receive a 1099-MISC form (instead of receiving a W-2) showing the total amount you earned from each client you worked for throughout the year. If client payments are less than $600, you won’t receive a 1099-MISC form, but you still must include the amount you were paid on your business tax return.
You can deduct typical business expenses, but you must have excellent records made at the time of the expense to show the business expense and the amount, in case of an audit. Note that independent contractors liability insurance is available for your protection. Take as many legitimate deductions as you can, to prove that the money was spent for business purposes.
About Daniels Insurance, Inc.
At Daniels Insurance, Inc., we have a unique understanding of the risks that businesses like yours face on a regular basis. With the backing of our comprehensive coverages and our dedication to customer service and quick claims resolution, your business will be fully protected. For more information, contact us today at (855) 565-7616.