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Say you work from home on a site like Fiverr or another service that connects freelance writers, graphic designers, and web developers to companies in need. Or, perhaps, you’re a student in high school running their own pool cleaning service for neighbors in your community.
Whatever the case may be, an independent contractor is considered a person, business or corporation that provides goods or services to another entity. These terms may be specified within a contract, such as the former example, in which a marketing agency might hire independent contractors to fulfill copywriting needs.
The agreement may also be verbal, as in the latter example where someone may agree to pay X amount of dollars in return for various pool cleaning services.
Regardless of your situation, if you’re an independent contractor who gets paid in return for service, you’re still collecting taxable income—whether you know it or not. Many people are unaware that income, even if it’s earned from odd jobs or side hustles, is taxable by the IRS.
Once you earn a certain amount, and fail to pay taxes on said earnings, you could find yourself in some hot water with the federal government.
So in short, yes: independent contractors do need to file taxes. Here’s how and why.
Self-Employment Tax
The IRS lists several types of careers which commonly fall under independent contractors, including:
- Doctors
- Lawyers
- Veterinarians
- Accountants
- And more
Whether these individuals are considered employees or “independent contractors” depends on a number of facts, but generally speaking, you are considered a contractor only if the entity paying for the service can control or direct the result of the work—not how and when it will be performed.
If you’re any type of solopreneur, do some research to find out whether you’re subjected to the IRS self-employment tax. You’ll do this by calculating your business’s net profit or net loss using this formula:
Business Income – Business Expense = Net Profit (or Loss)
Are your earnings from your self-employed business over $400? If so, you’re required to file an annual income tax return. If your net earnings are under $400, you may still be required to file depending on whether you meet any additional requirements on the Form 1040 instructions.
Keep in mind that you’re also obligated to submit estimated quarterly payments for Social Security, Medicare, and income tax since you do not have an employer who would ordinarily withhold this money for you.
Self-Employed Tax Relief
If you haven’t been filing or paying taxes for your independently operated business, don’t panic. First of all, the IRS is unlikely to go after the 16 year-old cleaning pools for cash once in a while over summer.
However, if you operate on a larger scale, it may be possible that you’re in a bit of back tax debt. There are tax relief programs available to you and your business, and you may be able to receive tax abatement by filing Form 843.
The most important thing moving forward is to begin fulfilling your filing requirements, even if you’re still settling years past. Failing to do so could incur monthly penalties and interests on your outstanding debt.
How to File Taxes as an Independent Contractor
It’s better to err on the side of caution and keep in good standing with the IRS than assume you’re duty-free and risk jeopardizing your business. Keep these tips in mind when preparing to file and you’ll be smooth sailing to success:
- Either keep meticulous records yourself or hire an accountant to bookkeep on your behalf. You’ll need records of every sale, expense, write-off and business-related transaction in the event of an audit.
- With respect to write-offs, be cautious when deducting claims for your home office. This is one of the biggest IRS red flags, so be sure your workspace is dedicated to work and work only.
- File your annual return using Form Schedule C or Schedule C-EZ to report your income or loss from a business you operated or a profession you practiced as a sole proprietor.
- To submit quarterly payments, calculate your designated amount using the worksheet found on Form 1040-ES, Estimated Tax for Individuals (you’ll need your prior year’s tax return in order to fill this out). Once you calculate your estimated payment amount, submit it online using the Electronic Federal Tax Payment System.
Entrepreneurs shouldn’t be intimidated by their company’s tax obligations. Equipped with this knowledge, you can keep your small business out of the red and maintain your freedom as an independent contractor.
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