Are you an independent contractor, or an employee? The distinction matters.
There are substantial differences when it comes to taxes. Unlike employees, independent contractors are responsible for paying for the totality of their taxes liability. Employees on the other hand, have a portion of the taxes paid by the employer, specifically 50% of Social Security, and Medicare and Medicaid taxes.
When independent contractors are paid, the employer does not withhold any taxes out of their compensation. This means that independent contractors are responsible for making appropriate estimated payments on their own.
Estimated payments are made in four, quarterly installments throughout the year. Estimated payments are made by using Form 1040-ES.
Tax deductions for independent contractors:
Independent contractors may be able to reduce their taxable income by applying business expenses. For example, if one uses part of the home for business, one may be qualified for the home office deduction. Similarly one may be able to deduct for business operating expenses and travel.
Note that this deciding who is an employee versus an independent contractor depends on multiple factors, which I will address in a different blog.
We hope this post helps to provide some clarification on independent contractor taxes. If you need help managing any aspect of your business’s or nonprofit’s finances, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.