Working for yourself has its perks. Unlike a standard employee workplace structure, you set the rules, decide your work hours and determine which jobs to take. Some aspects make individual work difficult unless you know where to turn. Unlike working for an employer, independent contractors must pay their income and self-employment taxes. These taxes include Social Security and Medicare taxes, too.
Independent Contractor Tax Rates
Self-employment taxes are 15.3% of your earned wages as an independent contractor. We advise anyone in this capacity to withhold at least a third of their income to pay these taxes. What is ultimately required by the IRS depends on your financial situation, deductions, how your business is structured and more.
Independent contractors must make quarterly estimated tax payments on income not subject to withholding. Even part-time independent contractors must pay on earned wages, even if that work isn’t their primary source of income. The IRS sets dates for when quarterly payments are due. The IRS can assess additional fines and penalties if you fail to pay. It is best to work with us so we can help you determine your estimated tax payments due to the IRS each quarter.
Employee vs. Self-employment
What differentiates an independent contractor from a regular employee is based on the following:
- Behavioral Control – Who controls what the individual does and how they do it? Does the employer provide specific directions to the individual? What about training or planning? Can the person hire assistants or outsource the work?
- Financial Control – Who controls the business aspects of employment? Does the employer reimburse the individual for business expenses such as supplies or workspace? Can the individual realize a profit or loss?
- Relationship – What type of relationship exists between the individual and the employer? Is there a written contract involved? Does the employer provide benefits or have a specific term for the work requested? Is the work completed by the person hired a key determination of the employer’s business?
These factors are considered when classifying worker status. If as an independent contractor, you are not certain how the employment relationship should be properly classified, give us a call. We can file a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to the IRS and find out for you.
Tax Advice
Being an independent contractor gives you the freedom and flexibility to call your shots, but you must realize your responsibility to pay taxes accordingly. Self-employment can be confusing, so give us a call and let us help. We can guide you through establishing the proper entity structure to maximize your tax deductions, reduce liability and increase revenue. Our Tax Time CPAs staff is here to help!