While full-time employment is the standard, the gig economy has gained momentum over the last several years. If you are considering whether going into business for yourself is the right decision for you, you must understand the tax implications and responsibilities that can come with being an independent contractor. Like employees, contract workers must meet their tax obligations — and pay taxes when they are due — to avoid incurring monetary penalties and serious legal consequences.
What Taxes Is an Independent Contractor Required to Pay?
Unlike an employee who receives a W-2 at the end of each tax year, an independent contractor is sent a 1099-NEC from each company with whom they contracted. This form is used to report non-employment income to the IRS. The specific taxes an independent contractor must pay will depend on the net profit and losses of their business.
Independent contractors and freelancers must pay federal, state, and local income tax. Contractors are also subject to a self-employment tax if they have earned $400 or more during the year — self-employment taxes include social security and Medicare taxes. Although employers withhold these taxes in the form of FICA tax, independent contractors must pay these tax liabilities themselves. You do receive a deduction for the employer portion of your self-employment taxes paid.
How Does an Independent Contractor Pay Their Taxes?
When you’re an employee, your employer withholds income taxes from your paycheck and sends them to the IRS and state tax authority. Independent contractors are responsible for paying their own taxes on a quarterly basis. This payment can be made by estimating your income for the year or using the previous year’s income as a basis for what you will owe.
Although you won’t know the exact amount of tax you will owe until you have filed your return at the end of the tax year, underpaying throughout the year can result in penalties. The estimated quarterly tax payments are due on April 15, 2024, June 17, 2024, September 16, 2024, and January 15, 2025.
What Types of Deductions are Available to Independent Contractors?
A wide range of business deductions may be available to an independent contractor. Also called “write-offs,” these deductions are subtracted from your taxable income and can result in lowering your tax liability. If something is an “ordinary and necessary business expense” accepted in your industry, it can typically be written off.
Common tax deductions for independent contractors can include:
- Office space (including a home office – but I do not recommend it)
- Office supplies, furniture, and expenses
- Advertising
- Mail costs
- Cell phone and internet
- Health insurance
- Business insurance
- Travel expenses
- Work-related meals
- Dues for trade associations
- Equipment depreciation
To claim these deductions, you must keep good records and organize documents for anything that might be considered a business expense. You should keep your business and personal expenses separate by opening a different bank account for your business. Doing so can help ensure you do not run afoul of the Internal Revenue Service’s rules or triggering an audit.
Contact an Experienced New York Tax Attorney
If you’re an independent contractor, it’s vital to ensure compliance with your tax obligations. Offering skillful counsel and high-quality legal services, Brinen & Associates advises clients regarding a wide variety of tax matters, including those involving 1099 contractors. Call (212) 330-8151 or send us a message to learn more about how we can assist you.