Congratulations! You set up your business, you attracted clients, you completed the work, and you got paid. Now, it’s time to pay your taxes. Here’s what you need to know about paying income taxes as an independent contractor.
In addition to paying federal and state income taxes, independent contractors, the self-employed, freelancers, and anyone who receives a 1099 are also responsible for paying self-employment income taxes, i.e, Social Security and Medicare taxes. Employers take these taxes out of employee earnings as part of payroll and split the cost with the employee. But since you are self-employed, you’ll need to pay for 100% of the cost yourself.
Social Security taxes
Social Security taxes are 6.2% for both the employer and the employee, but since self-employed people are actually both, their Social Security tax rate is effectively 12.4%. So if you make $40,000, you’ll pay $4,960 in Social Security taxes. Social Security taxes apply only to the first $127,200 of income, so you don’t have to pay these taxes on any money earned above that level. For example, if you make $140,000 in a year, you pay only 12.4% of $127,200 ($15,772.80), with the remaining $12,800 untaxed by Social Security.
Self-employed individuals also have to pay the Medicare tax rate for both employer and employee. Unlike Social Security, there is no income cap to Medicare taxes, so you’ll pay on all money you make, no matter how much it is.
Make sure to keep track of your business expenses, since these can be deducted from your income.
Business expenses are directly tied to the operation of your business. They can include supplies, travel, office space, and other expenses.
In addition to business expenses, self-employed people can also receive deductions for things like health insurance, retirement accounts, and professional services such as accountants and lawyers.
When to Pay
Some self-employed individuals have to pay these taxes in quarterly installments over the course of the year, while others file just once a year. IRS Form 1040-ES can tell you if you need to file quarterly, as well as the quarterly due dates that must be met throughout the year to avoid penalties.
You can also use this form to file your taxes for income from self-employment, and it has vouchers you can use to send money to the IRS. You can also securely pay these taxes over the Internet through the Electronic Federal Tax Payment System (EFTPS). To file annually, you must complete Form 1040-C. All of these forms, and additional information on how to pay self-employment taxes, can be found on the Self-Employed Individuals Tax Center on the IRS website.