Tax season can be stressful, but at the end of it all, you could walk away with a hefty refund from Uncle Sam. Unless you’re an independent contractor.
Independent contractors are responsible for paying a self-employment tax on top of traditional income tax, and they’ve got to track revenue, expenses, and quarterly tax deadlines.
Independent contractors who don’t report their earnings properly may incur significant penalties for underpayment. Freelancers and gig workers must understand how the tax process works.
Never fear! We’ve put together this handy guide to independent contractor taxes to get you through tax season. But when in doubt, consider hiring a tax professional. It’s a business write-off, after all!
Am I an independent contractor?
Filing taxes as an employee differs from 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 can take up to six months to get an answer.
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 independent contractor, you’ll still have to file taxes like the latter – including quarterly estimated taxes (more on that in a minute!).
How do independent contractor taxes work?
When you get your paycheck as a traditional employee, you probably notice that it’s a little smaller than it should be. That’s because your employer takes out a portion of your earnings to cover your taxes. Don’t worry – your employer is also paying some taxes for you, too.
But when you’re an independent contractor, your clients don’t take any money out on your behalf, and they definitely aren’t paying a portion of your taxes.
That’s why independent contractors pay a larger percentage of their earnings in taxes than traditional employees. Here’s what they pay:
All independent contractors must pay self-employment taxes to cover Social Security and Medicare. And because there’s no employer footing half the bill, independent contractors are on the hook for all of it.
For the 2022 tax season, the self-employment tax rate is 15.3%.³ Here’s how that breaks down:
- 12.4% for Social Security
- 2.9% for Medicare
Like traditional employees, self-employed workers must also pay income taxes. That’s on top of that 15.3%.
So how much do independent contractors pay in income taxes? That depends on their tax bracket.
The United States has a progressive tax system – the more income you make, the higher the percentage you’re taxed.
For the 2022 tax year (filed in 2023), the IRS has defined seven federal tax brackets, ranging from 10% to 37%. You’ll need to determine which tax bracket you’re in to calculate your income tax rate.
State and municipal taxes
You might not be through after paying Uncle Sam. 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.
How to file independent contractor taxes
So, how do you file taxes as an independent contractor? Things are a little trickier than they are for regular employees.
If you’re new to the process, using paid tax software or even hiring a tax professional can be helpful. While these options can be expensive, they count as a tax write-off for your business.
When filing taxes as a freelancer, you’ll want to think about three main things:
- Special self-employment tax forms
- Tax write-offs
- Quarterly payments and deadlines
Self-employment tax forms you’ll receive
Full-time employees can expect to receive a W-2 from their employer at the start of tax season, but what about independent contractors? Self-employed individuals 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 need to navigate two key forms:
Independent contractors should expect to receive a 1099-NEC (nonemployee compensation) from any business or client that paid them $600 or more during the tax year.
Freelancers with multiple clients will receive multiple 1099-NECs. Together, these represent a contractor’s earnings during the tax year.
Remember when? Independent contractors who’ve been in the biz for a while may remember the 1099-MISC. While this form is still in use, the IRS no longer uses it for self-employment income as of the 2020 tax year.
Most independent contractors won’t get a 1099-K for the 2022 tax year. To receive one, you need to have earned more than $20,000 through 200+ business transactions on a single app or platform, such as Venmo or PayPal.
But due to recent changes to tax law, independent contractors should expect to get 1099-Ks more easily in future tax years.
The IRS is still fine-tuning implementation, but down the road, freelancers who make just $600 through a single platform – think Uber, Etsy, or Facebook Marketplace – will get a 1099-K for that income.4
Remember: Even if you don’t qualify for a 1099-K in 2022, you still have to report that income to the IRS!
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. If you’re using online tax software, it should find 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 – as long as you made $400 or more in net income.
Note: These forms are for sole proprietors or single-member LLCs. If you run a business with employees, you’ll use different forms.
Independent contractor tax deductions
What you can deduct depends on how you operate your business.
For example, people who work in food delivery or drive to meet clients might be able to deduct mileage, plus actual car expenses (insurance, gas, tolls, parking fees, maintenance, etc.). But if you’re a freelance writer who never leaves your home to conduct business, your car isn’t fair game.
Here are a few self-employment tax deductions to consider:
- 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 car for work, you may be able to deduct certain expenses – and shave money off your taxable income for every mile you drive.
- Continuing education: In some cases, 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, that’s a business expense that you can deduct come tax season.
- 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.
- 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 make sure you’re only claiming deductions you qualify for. If you fudge the numbers or even accidentally claim something you shouldn’t, you could be audited.
What is the most important thing to remember as an independent contractor? Save your receipts! 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 purchase that you deducted.
Qualified business income deduction
A newer (and big!) deduction that independent contractors may be able to take – even without itemizing – is the qualified business income (QBI) deduction. If eligible, freelancers can deduct 20% of their income, dramatically reducing how much money they’re paying taxes on.
There’s a lot of fine print with this deduction, 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.
Self-employment tax deduction
This one’s a bit of a head-scratcher at first, but it can result in a big deduction for independent contractors: The self-employment tax deduction lets you deduct a portion of your self-employment tax from your adjusted gross income.
That’s right – when calculating your taxes, you can deduct some of the taxes you’ll pay.
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.
How quarterly taxes work
Let’s recap: Independent contractors have to pay more taxes than regular employees, but many tax deductions are available that can help reduce your tax liability. Easy enough!
Unfortunately, there’s another big difference when you’re filing taxes as an independent contractor: You’ve got to estimate your taxes for the upcoming year and make quarterly payments.
Why? Employers automatically take out estimated taxes from employees’ paychecks and pay the government throughout the year. At tax time, these employees file to determine if they overpaid (and are owed a refund) or underpaid (and owe the government more money).
Independent contractors don’t get regular paychecks to withhold taxes from – but Uncle Sam still wants his money. So freelancers must estimate their income for the upcoming year and pay taxes based on those estimates throughout the year.
The IRS provides forms for estimating taxes, and you can adjust the amount as necessary throughout the year to match what you’re actually earning.
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.
If you’re overwhelmed by estimating your taxes and paying each quarter, work with a professional tax preparer.
Independent contractor tax deadlines
Because independent contractors have to pay taxes quarterly, they’ve got extra tax deadlines to keep in mind. In general, these deadlines are:
- April 15: Previous year’s taxes due and first quarter estimated taxes for 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 deadline for first quarter estimates will vary based on the tax deadline in April, the other deadlines always fall on the 15th of their respective months.
Is 1099 self-employed?
Independent contractors receive 1099-NEC and 1099-K forms for self-employment income. However, taxpayers may receive other 1099 forms even if they aren’t self-employed.
For example, taxpayers may receive a 1099-INT for interest income, like with a savings account. The 1099-MISC form covers miscellaneous income, like from an award or rental income.
How much taxes do I pay on 1099 income?
If you are a self-employed individual who received a 1099-NEC or 1099-K for income earned as an independent contractor, you’ll pay regular income taxes on that money (based on your tax bracket) plus self-employment taxes of 15.3%. You may also owe state and local taxes on that income.
How much should I set aside for taxes (1099)?
Determining how much money to set aside for taxes as an independent contractor depends on your tax bracket. The lowest tax bracket for 2022 is 10%. That means, at a minimum, you’ll pay 10% in income taxes and 15.3% in self-employment taxes, or 25.3% in total.
If you earn a lot of money, you’ll be in a higher income tax bracket – and you’ll need to set aside even more. And don’t forget that you may need to earmark money for state and local taxes as well.
Don't sweat tax season
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.