Independent contractor vs. employee status
The IRS uses what’s often called the control test to sort workers into one category or the other:
- If a business paying you controls only the end result of your work, you’re likely an independent contractor.
- If a business also controls what you do and how you do it, meaning your hours, your methods, and your tools, you’re likely an employee, regardless of what your contract calls you.
This classification matters because it determines your entire tax situation. Employees have taxes withheld from every paycheck by their employer, including:
- Income taxes
- Social Security taxes
- Medicare taxes
Independent contractors get paid the full amount with nothing withheld, so you’re responsible for calculating and paying all of these taxes yourself.
Tax forms independent contractors need
The most common forms independent contractors typically need include:
| Form | Who fills it out | Purpose |
|---|---|---|
| W-9 | You (provided to each client) | Provides your taxpayer ID so the client can report what they paid you |
| 1099-NEC | Each client (sends to you) | Reports nonemployee compensation that exceeds the payment threshold for the tax year |
| Schedule C | You | Reports your total income and business expenses to arrive at net profit |
| Schedule SE | You | Calculates self-employment tax owed on that net profit |
| Form 1040 | You | Your main tax return, where Schedule C and SE totals ultimately land |
How much independent contractors pay in taxes
You’ll owe two separate things:
- Regular income tax on your net profit, at whatever marginal rate applies to your total income.
- Self-employment tax, a flat 15.3% covering the Social Security and Medicare contributions an employer would otherwise split with you.
A common rule of thumb is to set aside 25% to 30% of your net income for taxes throughout the year, though your actual income tax rate depends on your:
- Total income
- Filing status
- Deductions
Setting aside too little is one of the biggest tax-prep mistakes for independent-contractors. Since nothing is withheld automatically, it’s easy to spend money that’s already owed to the IRS.
Paying quarterly taxes as an independent contractor
If you expect to owe $1,000 or more in tax for the year after subtracting any withholding and credits, the IRS generally requires you to make estimated payments four times a year rather than settling everything at once in April.
| Payment period | Due date |
|---|---|
| January 1 – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| September 1 – December 31 | January 15 (following year) |
Source: Internal Revenue Service
Note: If any of these due dates fall on a weekend or legal holiday, the deadline is moved to the next business day.
Tax deductions independent contractors can claim
Some common business expenses you might be able to claim include:
- A home office deduction, if you have space used regularly and exclusively for your work
- Mileage or actual vehicle expenses for business-related driving
- Supplies, equipment, and software used to run your business
- Professional fees, such as payments to an accountant or business attorney
- Health insurance premiums, if you’re not eligible for coverage through an employer or a spouse’s plan
Step-by-step: filing your independent contractor taxes
- Gather every 1099-NEC you received, along with records of any income you earned that didn’t generate a 1099.
- Total your business income and subtract your deductible business expenses to find your net profit on Schedule C.
- Calculate your self-employment tax on Schedule SE using that net profit figure—see the Schedule C instructions for line-by-line guidance.
- Carry both totals over to Form 1040 and calculate your overall tax liability for the year.
- If you haven’t already covered your liability through quarterly payments, pay any remaining balance by the filing deadline.
- File your return, either electronically or by mail, and keep copies of everything for your records.
