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.
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.