Some (US) Tax Implications of Being An Independent Consultant
When you are employed by a company, your taxes are withheld and paid for you by your employer. However, not everyone is employed by someone else. Some prefer to work for themselves and provide their services and expertise for fees. These independent consultants do not have taxes withheld or paid throughout the year.
If you are contemplating becoming an independent consultant, there are some changes in the way you'll have to file and pay your taxes. Independent consultants are required to pay estimated taxes quarterly and file an annual return.
Determine Your Employment Status
First, you'll need to ensure you meet the requirements set by the IRS to be considered an independent consultant. Generally, the entity you are contracted to must provide you with guidance on what they want you to do, while you determine how to do it. If the entity tells you what they want to have done and how it should be done, then you are considered an employee by the IRS.
If you are an employee by the IRS' standards, the entity you are conducting work for is required to withhold taxes and pay them for you. If you are indeed an independent contractor, then you'll need to pay your taxes quarterly.
Quarterly Payments Are Required
If you are an independent consultant, your estimated tax payments are due to IRS on the 15th of the month following quarter's end. This means you'll have estimated taxes due (for 2019) on Jan. 15, April 15, July 15, and Sep. 15 as well as filing your annual return by April 15.
If you miss your payments or decide to pay only at the end of the tax year, the IRS will see that as a quarterly payment for the fourth quarter of the current year.
If you make one large payment in the fourth quarter, the IRS will want you to go back and determine when the income was actually derived (per quarter). You'll likely be required to assess each quarterly tax responsibility, then pay penalties and interest for late payments.
Filing Taxes as an Independent Consultant
As an independent consultant, you are considered to be a sole proprietor unless you have established yourself as another entity. Sole proprietors are required to file their business taxes along with their personal income taxes.
This means that you'll need to file on or before April 15th. If you have registered as a limited liability company (LLC), you'll file your business taxes with your personal taxes (Schedule C) on the 15th of April (unless you choose to file differently).
If You File Jointly, Work Another Job, or Both
If you are an independent contractor, and your spouse is employed, you may be able to have them include your payroll deductions from their paycheck. You can still file jointly if you don't do this, but you'll have to ensure you make your quarterly payments.
If you work and consult on the side, you may be able to have your employer withhold taxes from your paychecks to cover your consulting income. If you and your spouse both work, and you consult on the side, you could combine any of these methods as long as the IRS is receiving the estimated payments they are expecting.
What Is Included in Your Taxes
As a self-employed individual, you are taxed with social security and medicare taxes. The social security tax is 12.4% of your net earnings up to the current wage base (an amount at which social security stops being withdrawn), and medicare is 2.9% of your net.
If you keep your self-employed income below $400 for the year after deductions you don’t have to pay social security tax at all.
You do not have to pay unemployment taxes since you are self-employed. This only applies if you hire employees. You, as a sole-proprietor, aren’t eligible for unemployment or disability, even if you are paying yourself a salary.
You may be able to deduct a portion of the value of your home if you have a dedicated space in which you conduct business. This space has to be exclusively used for business, however. Any personal use of the space disqualifies it as a deductible.
Office supplies or equipment may be deducted, as well as any vehicle, utilities, or other business-related expenses. Again, if you conduct business from your home, and are using the utilities or vehicle for personal and business use, they do not qualify for a deduction. A good rule of thumb (generally), is if an item is being used personally as well as for business, you cannot deduct it from your taxes.