Filing Taxes As An Independent Contractor

February 9, 2011 | Posted By: Rae Alton | Categorized in: Finance, Tax Advice & Tips


As if tax season weren't daunting enough, filing as an independent contractor for the first time can be an overwhelming experience. You may find yourself wondering, "have I budgeted and saved efficiently to pay my self employment tax?" or "will tax software catch my errors if I opt to e-file?" These are very important questions as independent contractor taxes are more complex than regular employee taxes by nature. Let's first look to the basic concepts with which you need to familiarize yourself.

Which form do I file?
  • Form 1040-Schedule C: The basic tax form used by independent contractors and self-employed individuals who are not on a tax-withholding payroll.

  • Form 1040-Schedule C-EZ: File this form if your income was less than $5,000. However, if you are planning to make a deduction for the use of your home office, you may not file this form.

  • Form 1040-Schedule SE: The function of this form is for independent contractors to report income for social security and Medicare tax purposes.

  • Form 1099-MISC: This form is filed by individuals who hired the services of an independent contractor.

How do I file online?
Aside from filing directly to IRS.gov, there are many other options available - most of which exist to simplify the process. TurboTax is popular for its free tools that estimate your tax returns, calculate your IRA contributions, and address inaccuracies as you file. However, you cannot organize a payment plan with online tax services or software. But the IRS does allow you to set up your plan online.

Do independent contractors file quarterly?
The short answer is yes. However, you will not need to begin filing quarterly taxes until April 15th rolls around.

Do independent contractors receive tax refund checks and if so, how often?
Only in the instance of tax overpayment will an independent contractor receive a tax refund check.

How can I alleviate some of my income tax burden?
It's a shame how many taxpayers regularly overpay taxes simply because they've neglected to deduct health care costs and charitable contributions, or aren't accurately reporting their business losses. If you are self-employed and pay for your own health care, your self-employment tax can be further alleviated due to the Small Business Jobs Acts of 2010.

How do other independent contractors budget for quarterly tax payments?
Basically, an independent contractor needs to save between 30-35% of his or her income for taxes. Budgeting for quarterly taxes is easier for some than others. Individuals who find it cumbersome to conserve their earnings for taxes can benefit greatly from simple receipt keepers and household organizers modified for business losses and planned deductions.

It may be of comfort to know the IRS makes payment plans for income taxes. Some banks offer programs to help you save money from everyday purchases, like Bank of America's Save the Change program. If you're handy with spreadsheets, commit to organize a system for personal bookkeeping. All these things combined with your ability to anticipate monthly expenses can create a support system for seemingly runaway budgets.

Should I consult a professional?
Taxes are particularly stressful for independent contractors and if you're unsure of your ability to save, account for and report all business expenses, it will be worth it to you in the end to hire a professional. If you expect your business to grow within the next year, the time to consider hiring a certified public accountant, or CPA, is now.

Guest contributor Rae Alton is an online marketer and content specialist from North Carolina. She is commissioned by companies like TurboTax to offer helpful articles and is thrilled to contribute to FatWallet.com. Rae can be found on Twitter at @raezin1984.


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Comments
April 24, 2011 | Posted By: McSire
You are right on about the 30%-35% of your income being taken/used for taxes. For those that get paid normally, all the money that is being taken from your check each paycheck is run through a crazy formula, but at the end of the day, that crazy formula is just touching that 30%-35% depending on how much you make. (Think tax brackets)
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