| Being your own boss is certainly rewarding, but few | | | | The self-employed individual must file their income and |
| people think about the extra work of preparing | | | | pay self-employment tax. |
| invoices and tax forms. Independent contractors need | | | | Any individual who makes more than $400 from |
| to be aware that being independent of the client | | | | freelancing or independent contracting work must file a |
| company is a special tax situation, and they will need | | | | 1040 Schedule C form with the rest of their taxes. This |
| to file differently with Internal Revenue Service than | | | | form will help the individual calculate how much tax |
| they might have in the past. | | | | they owe. The federal self-employment tax rate is |
| What is an Independent Contractor? | | | | 15.3% but it can vary depending on how much income |
| Those who work regularly for the same clients or who | | | | the person has earned and their deductions. |
| only contract under one company might wonder if | | | | Deductions are business expenses that can be |
| they are just an employee. Generally, independent | | | | deducted from the gross income. See the IRS website |
| contractors do not participate in the same programs | | | | for more information. |
| and activities as the rest of the employees do and are | | | | The calculated tax must be paid to the IRS. If the tax |
| not subject to the same restrictions. Those who are | | | | is likely to be more than $1000, see estimated tax |
| starting a job should define their obligations with the | | | | payments below. If the tax is less than $1000, the |
| clients and make sure the client will be listing them as | | | | business owner may pay the owed tax at the end of |
| an independent contractor in tax forms. If the company | | | | the year upon completing their tax return. |
| pays the contractor more than $600 over the course | | | | If the business is a sole proprietorship and the business |
| of a tax year, they will be required to send him or her | | | | owner does not have a social security number, they |
| a 1099 form. | | | | will need to file for an Individual Taxpayer Identification |
| These lines start to blur when the contractor spends | | | | Number or ITIN in order to submit their taxes. |
| much of their time in the office or conferring with | | | | Estimated Tax Payments |
| employees on the project. If the employer labels the | | | | Businesses that anticipate owing more than $1000 at |
| contractor a common-law employee and sends them | | | | the end of the tax year are required to make quarterly |
| a W2 by mistake, the individual can file Form SS-8 to | | | | estimated tax payments. Using an estimation of their |
| dispute the classification. | | | | income for the year, the business completes |
| The IRS defines an independent contractor using the | | | | worksheet 1040-ES and sends in one fourth of the |
| "20 Questions" test, which looks at a number of | | | | amount on each deadline. Payments can be made |
| factors including the amount of control the hiring | | | | electronically via credit card or automatic withdraw. |
| company has upon their work. According to them, an | | | | The IRS still accepts check and money orders by mail |
| employer "has the right to control or direct only the | | | | as well. |
| result of the work and not what will be done and how | | | | The payment deadlines generally fall in April, June, |
| it will be done or method of accomplishing the result." | | | | September, and January, but can vary by tax year. If |
| For tax purposes, however, an independent contractor | | | | the business miscalculates their income, the end of |
| is a business. Most will fall under the category of sole | | | | year filing will be adjusted. Unpaid tax will be added, |
| proprietorship. However if the contractor employs | | | | and those that overpaid will receive refunds. |
| others or is incorporated, their status may change. | | | | State Tax |
| Another option might be to run your business through | | | | Most U. S. states have separate state income tax |
| an "umbrella company" or so-called "pass-through | | | | laws. Filing procedures and rates vary widely from |
| agency," which can give the option of being either a | | | | state to state. Those who own a business should |
| W-2 or a 1099 for tax purposes, and this can be a | | | | investigate their local tax code for more information. |
| great option to simplify the back-office administration | | | | Obligations of the Self-Employed |
| that independent contracting requires. There are | | | | Independent contractors should keep excellent records |
| benefits to all of the tax business classifications, but | | | | to make the process of filing taxes easier. Receipts |
| business owners should do research on which one | | | | and invoices should be kept for reference, but also |
| best fits their organization. | | | | stored for use in case of a future audit or tax dispute. |
| Self-Employment Tax | | | | Tax code is complicated and ever changing, so make |
| When someone who is an employee receives a W2, | | | | sure to look up the new tax rules for each filing year. |
| income and social security taxes are already taken out | | | | Those with complicated finances may want to hire a |
| of their paycheck and sent to the IRS by the | | | | professional advisor to check or prepare the tax |
| employer. Those who receive 1099 forms do not have | | | | forms as they can prevent costly mistakes. |
| any taxes removed from their wages by an employer. | | | | |