So, how do you file taxes as an unbiased contractor? Issues are just a little trickier than they’re for normal workers.
In the event you’re new to the method, utilizing paid tax software program and even hiring a tax skilled will be useful. Whereas these choices will be costly, they depend as a tax write-off for your corporation.
When submitting taxes as a freelancer, you’ll need to take into consideration three predominant issues:
- Particular self-employment tax varieties
- Tax write-offs
- Quarterly funds and deadlines
Self-employment tax varieties you’ll obtain
Full-time workers can anticipate to obtain a W-2 from their employer firstly of tax season, however what about unbiased contractors? Self-employed people typically obtain 1099 varieties.
There are every kind of 1099 varieties – for instance, Chime members obtain a 1099-INT type for curiosity earned from our high-yield financial savings account.
However when it comes to earnings as an unbiased contractor, you’ll have to navigate two key varieties:
1099-NEC
Impartial contractors ought to anticipate to obtain a 1099-NEC (nonemployee compensation) from any enterprise or shopper that paid them $600 or extra throughout the tax 12 months.
Freelancers with a number of purchasers will obtain a number of 1099-NECs. Collectively, these symbolize a contractor’s earnings throughout the tax 12 months.
Bear in mind when? Impartial contractors who’ve been within the biz for some time might bear in mind the 1099-MISC. Whereas this kind remains to be in use, the IRS not makes use of it for self-employment earnings as of the 2020 tax 12 months.
1099-Okay
Most unbiased contractors gained’t get a 1099-Okay for the 2022 tax 12 months. To obtain one, you could have earned greater than $20,000 via 200+ enterprise transactions on a single app or platform, resembling Venmo or PayPal.
However because of latest adjustments to tax legislation, unbiased contractors ought to anticipate to get 1099-Ks extra simply in future tax years.
The IRS remains to be fine-tuning implementation, however down the street, freelancers who make simply $600 via a single platform – assume Uber, Etsy, or Fb Market – will get a 1099-Okay for that earnings.
Bear in mind: Even when you don’t qualify for a 1099-Okay in 2022, you continue to should report that earnings to the IRS!
Self-employment tax varieties for submitting
When you obtain all of your 1099s (and another paperwork), you’ll have to make the most of particular tax varieties to file your taxes. In the event you’re utilizing on-line tax software program, it ought to discover these varieties for you.
You should report self-employment earnings on Schedule C on Type 1040. You’ll additionally use Schedule SE to calculate self-employment taxes – so long as you made $400 or extra in internet earnings.
Observe: These varieties are for sole proprietors or single-member LLCs. In the event you run a enterprise with workers, you’ll use completely different varieties.
Impartial contractor tax deductions
As a result of self-employment taxes are inherently larger, it’s vital to make the most of all of the tax credit and tax deductions out there to you as an unbiased contractor.
What you possibly can deduct relies on how you use your corporation.
For instance, individuals who work in meals supply or drive to fulfill purchasers may be capable of deduct mileage, plus precise automobile bills (insurance coverage, fuel, tolls, parking charges, upkeep, and many others.). However when you’re a contract author who by no means leaves your house to conduct enterprise, your automobile isn’t honest sport.
Listed below are just a few self-employment tax deductions to think about:
- House workplace: In the event you work from a house workplace, you possibly can deduct a portion of your mortgage or hire, utilities, repairs and upkeep, and different dwelling possession/rental charges.
- Automotive: In the event you use your automobile for work, you could possibly deduct sure bills – and shave cash off your taxable earnings for each mile you drive.
- Persevering with training: In some circumstances, you possibly can deduct the price of persevering with training if it advances your profession. Study extra about academic tax credit and deductions.
- Medical insurance: With no full-time job, you doubtless bought your personal medical health insurance plan for you and your loved ones. These prices could also be deductible – however when you’re enrolled in a partner’s plan (or are eligible to), you possibly can’t deduct these prices.
- Cellphone and web: If in case you have a devoted enterprise cellphone or web plan, that’s a enterprise expense which you could deduct come tax season.
- Retirement contributions: When you might not have a conventional 401(ok) like full-time workers, unbiased contractors can fund solo 401(ok) plans – and contributions are tax deductible.
- Different enterprise bills: The road of labor you’re in will have an effect on your bills. In the event you pay for an internet site, journey for work, or want costly tools, they could be honest sport for a deduction. Different prices might embody promoting, memberships, workplace provides, and enterprise insurance coverage premiums.
It’s on you because the taxpayer to be sure you’re solely claiming deductions you qualify for. In the event you fudge the numbers and even unintentionally declare one thing you shouldn’t, you would be audited.
What’s a very powerful factor to recollect as an unbiased contractor? Save your receipts! Whereas it’s potential to make use of on-line financial institution statements to trace your bills, bodily receipts (or scanned copies) are useful if you could show to the IRS you made a purchase order that you just deducted.
Certified enterprise earnings deduction
A more recent (and massive!) deduction that unbiased contractors could possibly take – even with out itemizing – is the certified enterprise earnings (QBI) deduction. If eligible, freelancers can deduct 20% of their earnings, dramatically lowering how a lot cash they’re paying taxes on.
There’s quite a lot of superb print with this deduction, so it’s a good suggestion to analysis it completely on the IRS web site or work with a tax preparer to see when you qualify.
Self-employment tax deduction
This one’s a little bit of a head-scratcher at first, but it surely can lead to a giant deduction for unbiased contractors: The self-employment tax deduction allows you to deduct a portion of your self-employment tax out of your adjusted gross earnings.
That’s proper – when calculating your taxes, you possibly can deduct among the taxes you’ll pay.
Right here’s the way it works: You’ll deduct the employer-equivalent portion of your self-employment taxes. Bear in mind, the self-employment tax price is 15.3%, and the employer-equivalent portion is half, or 7.65%.
Which means 7.65% of your adjusted gross earnings is tax deductible as an unbiased contractor. If the mathematics will get complicated, make the most of on-line tax preparation software program or knowledgeable accountant.
How quarterly taxes work
Let’s recap: Impartial contractors should pay extra taxes than common workers, however many tax deductions can be found that may assist cut back your tax legal responsibility. Simple sufficient!
Sadly, there’s one other large distinction if you’re submitting taxes as an unbiased contractor: You’ve acquired to estimate your taxes for the upcoming 12 months and make quarterly funds.
Why? Employers mechanically take out estimated taxes from workers’ paychecks and pay the federal government all year long. At tax time, these workers file to find out in the event that they overpaid (and are owed a refund) or underpaid (and owe the federal government more cash).
Impartial contractors don’t get common paychecks to withhold taxes from – however Uncle Sam nonetheless desires his cash. So freelancers should estimate their earnings for the upcoming 12 months and pay taxes primarily based on these estimates all year long.
The IRS gives varieties for estimating taxes, and you’ll modify the quantity as needed all year long to match what you’re really incomes.
To keep away from paying penalties for underpayment, you could have paid a minimum of 90% of what you owe via your quarterly funds – or 100% of what you owed the earlier tax 12 months.
In the event you’re overwhelmed by estimating your taxes and paying every quarter, work with knowledgeable tax preparer.
Impartial contractor tax deadlines
As a result of unbiased contractors should pay taxes quarterly, they’ve acquired further tax deadlines to remember. On the whole, these deadlines are:
- April 15: Earlier 12 months’s taxes due and first quarter estimated taxes for present 12 months
- June 15: Second quarter estimated taxes due
- September 15: Third quarter estimated taxes due
- January 15: Fourth quarter estimated taxes due
Whereas the deadline for first quarter estimates will differ primarily based on the tax deadline in April, the opposite deadlines all the time fall on the fifteenth of their respective months.