If you are working on your own providing services to individuals or businesses, you are most likely an independent contractor. The money you make is considered business income, and you must pay income taxes along with other taxes. If you have employees, there are additional taxes you will owe.
This article is an overview of the taxes that an independent contractor must report and pay, so that you know what to expect and can plan ahead for tax time.
What Is an Independent Contractor?
An independent contractor (IC) is someone who directly offers services to the general public. Independent contractors may be people who work in professions, like dentists, doctors, or attorneys, or people in trades, like plumbing, building contracting, or electrical work. They may also include other types of service workers or gig workers such as rideshare drivers or freelancers.
As an independent contractor, you are considered to be self-employed, in business for yourself rather than an employee of someone else.
You don’t have to register your business as a specific type to be an independent contractor. The default business type for tax purposes is called a "sole proprietorship," a one-person business that isn’t formed as a corporation. The other common business type for ICs is the single-member (owner) limited liability company (SMLLC).
What Taxes Do Independent Contractors Have to Pay?
As a self-employed individual who is in business as a sole proprietor, you have several types of taxes to pay:
Everyone who works in the U.S. must pay Social Security and Medicare taxes. For independent contractors and others who are self-employed, these taxes are called "self-employment taxes."
These taxes are based on your business net income (profits). The tax rate is 15.3%, with 12.4% for the Social Security part and 2.9% for Medicare. You can take a deduction for half of the total, equal to the amount that an employer would pay for these taxes.
Each year, the Social Security part is capped at a specific maximum. If your combined earnings as an IC and as an employee are greater than $200,000 for the year, you must pay an additional Medicare tax of 0.9% on your combined earnings as an IC and as an employee (if this applies).
You’ll need to use Schedule SE to calculate the total self-employment tax you owe. Then, you must add this amount to your personal tax return (Form 1040/1040-SR).
Self-employment income is used for Social Security credits each year. If you don’t have any business income for the year, you don’t have to pay self-employment taxes, but you don’t get Social Security credits based on that income for that year.
Federal Income Taxes
As an independent contractor, you are considered to be a business owner, and you must include your business income and take business tax deductions on your personal tax return.
Most independent contractors are sole proprietors or single-member LLCs who report their federal income taxes on Schedule C as part of Form 1040. Calculate your business income, and take deductions on Schedule C to find your net profit or loss total that is added to other sources of income (from employment or investments, for example) to get your net taxable income for the year.
If you received a Form 1099-NEC from a customer showing payments made to you and tax withheld as part of your business income, you must include that income on Schedule C and report it on your tax return.
State Income Taxes
You must also report and pay state income taxes on your business income in most states. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have a state income tax. New Hampshire doesn’t tax earned income, but it does tax interest and dividends. Contact your state’s tax agency for information on how its income taxes work.
As a business owner, you usually don’t have amounts withheld from pay for income taxes and Social Security/Medicare taxes during the year, as employees do. You can use the tax worksheets on IRS Form 1040-ES to calculate estimated taxes and self-employment taxes. You must pay estimated taxes during the year to avoid penalties for underpayment. In most years and for most taxpayers, the due dates are April 15, June 15, September 15, and January 15 of the next year.
Due to the disruption caused by Hurricane Ida, Louisiana residents and business owners have until Jan. 3, 2022, to file and pay their quarterly individual and business tax returns. Residents of Mississippi and certain counties in New York, Pennsylvania, and New Jersey are also eligible for relief. You can consult IRS disaster relief announcements to determine your eligibility.
If you have employees, you must withhold federal income taxes from employees, pay several types of employment taxes, and file tax reports to the IRS and the Social Security Administration (SSA).
You and your employees must each pay half of FICA taxes for Social Security and Medicare. The rate is the same as for self-employment tax (15.3%), based on the employee’s taxable income. You withhold the employee part from employee paychecks and set aside your part as the employer to be paid to the IRS. You must pay FICA taxes and federal income tax withholding at least monthly and report quarterly on IRS Schedule D, Form 941.
Employers pay federal and state unemployment taxes to fund unemployment benefits for employees who lose their jobs. Employees don’t pay that tax. The rate is 6% on employee wages above $1,500 in any calendar quarter. You’ll need to complete IRS Form 940 to report and pay those taxes each year.
Tax Deductions for Independent Contractors
You can reduce your business income by taking deductions for business expenses. To be deductible, these expenses must be for the purpose of making a profit. They must also be ordinary (common) and necessary (helpful and appropriate).
See the list of allowable expense deductions on Schedule C. Here are some important deductions you may be able to take, depending on your business situation.
"Cost of goods sold" is a separate calculation on Schedule C for materials, labor, shipping, and other costs for producing products for resale.
Home business costs are for the space you use as a home office or for other business uses. You can only deduct the space you use regularly and exclusively (only for business purposes). This deduction is calculated on IRS Form 8829 for actual expenses or on Schedule C using a simplified method for smaller spaces.
Business driving expenses are deductible in your independent contractor business. If you use a vehicle for both business and personal driving, you can only deduct business use, using either actual expenses or a standard mileage rate that changes every year. Report these expenses on Schedule C.
If your business owns major asset, like a car, a building, furniture, or equipment, you can deduct the costs over a number of years. This process, called "depreciation," is a non-cash deduction that is reported separately. Use IRS Form 4562 to calculate depreciation and report it on Schedule C.
Independent contractors may also be able to take a 20% tax deduction called a "qualified business income deduction," based on their business net income. This deduction, which can be taken through the 2025 tax year, is in addition to the normal business deductions. You’ll need to use IRS Form 8995 to calculate this deduction and add it to your Form 1040.
How to File Income Taxes as an Independent Contractor
Before you begin the process of filing your business income tax return, you’ll need information on your income and expenses for the year. Prepare a profit-and-loss statement (also known as an "income statement"), and retain detailed records of expenses to support all of the deductions you want to take.
Many small businesses use business tax preparation software that walks you through the various sections of Schedule C, Schedule SE, and other schedules and forms to include business information on Form 1040.
Tips for Filing Taxes as an Independent Contractor
Here are some tips to help you cut your tax bill and avoid tax audit issues.
Lowering Your Business Tax Bill
No one likes paying income taxes, but you can keep your business tax bill lower by deducting all legitimate expenses possible. In addition to taking all of the deductions possible, you may be able to apply for tax credits for various business activities. Some examples are a work opportunity tax credit for hiring disadvantaged workers or a credit for giving employees health insurance.
Recordkeeping from Startup to Tax Filing
You don’t have to show all of your business records when you file your tax return, but what if you are audited? The IRS looks carefully at deductions for driving expenses and home business space, among other areas, so it’s important to keep excellent records. With driving expenses, for example, you must keep at-the-time records that include date, mileage, and business purpose.
Getting Help with Independent Contractor Taxes
Business taxes are complex, and there are many qualifications, limits, and exceptions to consider. For instance, even a seemingly simple deduction, like the one for business use of your home, has many issues. Finding a licensed tax professional to help you with your business taxes can save you money and help you survive a tax audit.
Frequently Asked Questions (FAQs)
How do I pay taxes as an independent contractor?
The easiest way to pay your federal taxes, including estimated taxes, is online. The IRS allows direct payments from a bank account or debit or credit card payments, and it offers the Electronic Federal Tax Payment System (EFTPS) for businesses, among other options. You can also make payments by mail.
You must use the EFTPS system or another IRS-approved online method to pay federal employment taxes, including FICA taxes and federal unemployment taxes.
How much can an independent contractor make before needing to pay taxes?
Before you can know whether you'll need to file a tax return and pay income taxes for the year, you must know:
- Your filing status
- Any withholding amounts
- Your sources of income for the year, including your self-employment income.
You can use this calculator from the IRS to see whether you need to file a federal tax return.
You can make up to $400 per year in self-employment earnings and not have to pay self-employment taxes.
Are payments to me from my business as an independent contractor taxable?
As an independent contractor, you are considered a business owner, and not an employee of someone else. Any payments you take out of your business are considered to be taken from your owner account on your business balance sheet (called "owner’s equity"). You are taxed on the total amount of your business net income for the year, no matter how much you take out for personal use.