How to File Independent Contractor Taxes

Filing taxes as an employee is different than filing taxes as an independent contractor. When figuring out how to file your taxes, note how the IRS classifies your work.

An independent contractor is a self-employed individual providing goods or services to other people or businesses. As the IRS defines it, an independent contractor gets to specify how and when they do their work. The payer (or client) can only determine what the final product should look like.¹

This designation can include freelance writers and graphic designers, gig economy workers like Uber drivers and pet sitters, and even independent doctors, lawyers, and consultants.

If you aren’t sure if you’re considered an independent contractor, you can fill out Form SS-8, and the IRS will determine your status for you – but it could take up to six months to get an answer.²

In some cases, it’s possible to be an employee (and get a W-2 from your employer) and an independent contractor. This is common for full-time employees working on a side hustle.

If you earn income as an employee and a freelance or gig worker, you’ll still have to file taxes like the latter – including quarterly estimated taxes (more on that in a minute!).

When you get your paycheck as a traditional employee, you probably notice it’s a little smaller than it should be. That’s because your employer takes out some of your earnings to cover your taxes. Don’t worry – your employer is also paying some taxes for you, too.

But when you’re a contractor, your clients don’t take any money out on your behalf and aren’t paying a portion of your taxes. That’s why knowing how to pay taxes as an independent contractor is incredibly important.

Reporting self-employment income

While employers report employee income to the IRS, you must take care of all income reporting when self-employed as a contractor or freelancer. You do this with your annual tax return with the 1040 tax form.³

If you hire an accountant to do your taxes or file with a preferred tax software, the forms and reporting are done for you.

Deductions

No matter your employment status, it’s important to take advantage of all the tax credits and tax deductions available. Independent contractors may have additional deductions than people with traditional W-2 employment.

What you can deduct depends on how you operate your business. Expenses directly related to your business are often deductible, which lowers your income for tax calculation purposes.

Here are a few common self-employment tax deductions to consider:⁴

• Home office: If you work from a home office, you can deduct a portion of your mortgage or rent, utilities, repairs and maintenance, and other home ownership/rental fees.
• Car: If you use your vehicle for work, you may be able to deduct certain expenses. If you can’t deduct your vehicle, you may still be able to deduct an IRS-approved rate per mile driven for business purposes.
• Continuing education: Sometimes, you can deduct the cost of continuing education if it advances your career. Learn more about educational tax credits and deductions.
• Health insurance: Without a full-time job, you likely purchased your own health insurance plan for you and your family. These costs may be deductible – but if you’re enrolled in a spouse’s plan (or are eligible to), you can’t deduct these costs.
• Phone and internet: If you have a dedicated business phone or internet plan, you can deduct that expense during tax season. If you share your connections for personal and business purposes, you may be able to deduct a portion of your bill.
• Retirement contributions: While you may not have a traditional 401(k) like full-time employees, independent contractors can fund solo 401(k) plans – and contributions are tax deductible. SEP-IRAs are another option for tax-advantaged retirement savings when self-employed.
• Other business expenses: The line of work you’re in will affect your expenses. If you pay for a website, travel for work, or need expensive equipment, they may be fair game for a deduction. Other costs could include advertising, memberships, office supplies, and business insurance premiums.

It’s on you as the taxpayer to ensure you only claim deductions for which you qualify. If you fudge the numbers or even accidentally claim something you shouldn’t, you could be subject to additional taxes, interest, and penalties if you’re audited.

It’s essential to save your receipts and financial statements to prove expenses are deductible. While it’s possible to use online bank statements to track your expenses, physical receipts (or scanned copies) are helpful if you need to prove to the IRS you made a business purchase that you deducted.

Qualified business income deduction

One of the most significant deductions independent contractors may be able to take is the qualified business income (QBI) deduction. If eligible, you can deduct up to 20% of your business income, dramatically reducing how much you pay in taxes.

This deduction has a lot of fine print, so it’s a good idea to research it thoroughly on the IRS website or work with a tax preparer to see if you qualify.⁵

Self-employment taxes

The first place to look when filing 1099 independent contractor taxes is self-employment taxes. All independent contractors must pay self-employment taxes to cover Social Security and Medicare. And because there’s no employer footing half the bill, contractors and freelancers are on the hook for all of it.

As of this writing, the self-employment tax rate is 15.3%.⁶ Here’s how that breaks down:

• 12.4% for Social Security
• 2.9% for Medicare

But wait, there’s more! The self-employment tax deduction lets you deduct a portion of your self-employment tax from your adjusted gross income.⁶

Here’s how it works: You’ll deduct the employer-equivalent portion of your self-employment taxes. Remember, the self-employment tax rate is 15.3%, and the employer-equivalent portion is half, or 7.65%.

That means 7.65% of your adjusted gross income is tax deductible as an independent contractor. If the math gets confusing, utilize online tax preparation software or a professional accountant.

Quarterly estimated tax payments

There’s another big difference when filing taxes as an independent contractor or freelancer: You generally must estimate your taxes for the upcoming year and make quarterly payments. You’re responsible for quarterly estimated tax payments, and if you don’t pay, you could owe penalties in addition to your regular federal income tax.⁷

When you have a job as an employee with a W-2, your employers automatically deduct estimated taxes from employees’ paychecks and submit those funds to the IRS throughout the year. Contractors don’t get regular paychecks or have a traditional employer relationship, so it’s up to the contractor to withhold taxes, and they’re usually required to make a payment quarterly.

Use Form 1040-ES to submit your estimated taxes, and you can adjust the amount as necessary throughout the year to match what you’re earning.⁷

To avoid paying penalties for underpayment, you need to have paid at least 90% of what you owe through your quarterly payments – or 100% of what you owed the previous tax year.

Tax software gives you forms for estimated taxes, or you can work with an accountant for more personalized advice on handling quarterly estimate tax payments.

Getting lost in the jargon? Here are all the important tax terms and definitions you should know when filing.

Like traditional employees, self-employed workers must pay income taxes. So, how much do independent contractors pay in income taxes? You can work with an accountant or online tax software to prepare a tax return, which tells the government how much you earned and helps you calculate the taxes you owe.

Tax rates and brackets can change annually. Tax software automatically calculates how much you owe based on your household information and data from other tax forms.

Depending on where you live, you may also need to pay state and municipal taxes as an independent contractor. States and cities have their own tax regulations, so you’ll need to research guidelines for where you live and operate your business. Like federal taxes, tax software calculates what you owe, if anything, while preparing a state tax return.

You can usually file taxes electronically at the end of the tax software process. When working with an accountant, they’ll file for you. In either case, it’s best to closely review your tax forms for errors before submitting them.

Tax forms you receive and submit when working as a self-employed contractor are different from full-time and part-time employees. While there’s no single independent contractor tax form, you’ll typically file your taxes by adding a Schedule C to your tax return, which adds your self-employed taxes to your regular tax return.

If you’re new to the process, using paid tax software or hiring a tax professional can be helpful. These options can be expensive, but they count as a tax write-off for your business.

Full-time employees receive a W-2 at the start of tax season. Contractors and freelancers generally receive 1099 forms.

There are all kinds of 1099 forms – for example, Chime members receive a 1099-INT form for interest earned from our high-yield savings account.

But in terms of income as an independent contractor, you’ll likely get one of these two forms:⁸

• 1099-NEC: Independent contractors should receive a 1099-NEC (nonemployee compensation) from any business or client who paid them $600 or more during the tax year. Even if you don’t get a form, you’re still responsible for paying taxes on self-employment income. Freelancers and contractors with multiple clients will receive multiple 1099s.
• 1099-MISC: 1099-MISC used to be the standard for freelancers and contractors, but the IRS now prefers 1099-NEC forms for non-employment compensation. If you still get a 1099-MISC, it functions similarly to a 1099-NEC when completing your taxes.

Self-employment tax forms for filing

Once you receive all your 1099s (and any other documents), you’ll need to utilize special tax forms to file your taxes. Online tax software should auto-populate these forms for you.

You must report self-employment income on Schedule C on Form 1040. You’ll also use Schedule SE to calculate self-employment taxes if you made $400 or more in net income.⁹

Note: These forms are for sole proprietors or single-member LLCs. If you run a business with employees, you’ll use different forms.

Because independent contractors have to pay taxes quarterly, they have extra tax deadlines to remember. In general, these deadlines are:¹⁰

• April 15: Previous year’s taxes due and first quarter estimated taxes for the current year
• June 15: Second quarter estimated taxes due
• September 15: Third quarter estimated taxes due
• January 15: Fourth quarter estimated taxes due

While the first-quarter estimates deadline will vary based on the April tax deadline, the other deadlines should always fall on the 15th of their respective months.

Taxes as an independent contractor can be overwhelming, but if you plan ahead, stay organized, and recognize when to seek professional help, you can stay on track and find helpful deductions to reduce how much you owe.

Whatever you do, just don’t put off filing your taxes. Here’s what happens if you file your taxes late – and when you should consider filing a tax extension.