Many independent contractors worry about how to do taxes. And many of our housesitters who find the lifestyle appealing for the freedom it affords them, continue to extend their travels and independent lifestyle working while travelling. However, it is always important to do your taxes on time and accurately. Here’s how to avoid issues and paying penalties by managing your taxes well.
How to Do Taxes as an Independent Contractor
As an independent contractor, one of the first questions people usually ask is “how do I do my taxes as an independent contractor?” So, an independent contractor is responsible for paying his or her taxes. They can be the federal and state income taxes. The person must also pay Social Security and Medicare taxes, which are federal and state taxes that are paid on the person’s wages or a pay stub.
In this article, we’ll cover the basics of how to file taxes as an independent contractor so you can get your taxes taken care of quickly and easily.
Benefits of Being an Independent Contractor
As an independent contractor, you’re your own boss. In addition, you set your own hours, choose your own projects, and are solely responsible for generating a profit or covering expenses.
Plus you don’t have to answer to anyone but yourself (and the tax man), and that freedom can be liberating. You work on an “as-needed” basis. But working as an independent contractor comes with a lot of responsibilities, too.
You’re responsible for creating invoices, keeping track of all your income and expenses so that you can submit your taxes on time. You don’t have to be registered with the federal government as a business, and you don’t have to pay yourself a fixed salary.
As an independent contractor, you likely deal with a lot of questions. The good news is that there are a few easy ways to keep your taxes simple. One of the most fool-proof ways to keep your taxes simple as an independent contractor is to use a paystub generator. It is a software program that automatically calculates your taxes based on the information you input.
Sometimes we all need a Wage Day Advance, as being a contractor we can be at the mercy of our clients for payments.
Who Qualifies as an Independent Contractor?
- Freelance writers
- Hair Stylists
- Lawn care providers
The word “independent contractor” may be used to describe someone who works for a business but is not an employee. It is important to understand where you sit as you learn how to do taxes. Independent contractors are often offered fewer benefits than employees, such as 401Ks or health insurance. But that doesn’t mean the IRS doesn’t have a hand in independent contractor taxation.
Independent contractor status is available to any business. You can be an independent contractor regardless of how your business is structured. If you operate as a sole proprietor, form an LLC, or adopt a corporate structure, you are not considered an employee and are therefore eligible to be an independent contractor.
Checkout the best LLC services from the LLCBuddy site to learn more about the LLC registration process.
How to Do Taxes?
Personal responsibility and accountability
As an independent contractor, one of the most important things you need to do each year is file your taxes. Fortunately, getting your taxes filed as an independent contractor isn’t as complicated as it may seem.
If you work as an independent contractor, you likely file tax returns as an individual instead of a corporation. You’re still responsible for paying taxes, and you should still log hours and submit invoices to substantiate your expenses. The main difference is that you’ll need to report and pay taxes on your individual return.
You’ll also have to track and report your taxes as an independent contractor instead of an employee. Additionally, you may have to report income from different sources, track business expenses, and more.
Taxes for independent contractors from the US
You’ll have to file a tax return with the IRS if your net earnings from self-employment are $400 or more. Along with your Form 1040, you need to file a Schedule C to calculate the net income or loss for your business. Also, you will need to file a Schedule C-EZ form if you have less than $5,000 in business.
You will also have to pay self-employment tax, which covers the amounts you owe for Social Security and Medicare taxes. For tax year 2021, the self-employment tax rate is 15.3% (this rate is made up of 12.4% for social security), which includes old-age, survivors, and disability insurance; and 2.9% for Medicare.
An additional 0.9% Medicare surtax has applied to high-income earners since 2013. For tax year 2021, the Medicare surtax applies to single filers whose income exceeds $200,000, heads of household whose income exceeds $250,000 and married couples filing jointly whose income is over $250,000.
Quarterly tax payments
If you’re an independent contractor and wondering how to do taxes, consider you may have to make estimated quarterly tax payments. These cover your self-employment tax and income taxes. The first payment is due the fourth month after the end of the previous year (April). Payment due dates are June and September, and then January of the following year.
If you fail to pay your estimated quarterly taxes or underpay them, you may have to pay a penalty. The size of the penalty will be regulated by the amount you underpaid. And keep in mind, you’ll have to pay state income taxes too. You may also owe quarterly taxes, which must be paid at the state level. If your quarterly tax payments are late or underpaid, you may face a penalty.
Additionally, one of the most popular ways that independent contractors can keep their invoices organized is to use an invoice generator. It is a simple tool that can be used to create invoices, statements, and estimates for independent contractors. It also provides an easy way to track time, expenses, and other key parts of an independent contractor’s business.
Tax Deductions for Independent Contractors
As an independent contractor, one of the most difficult parts of filing your taxes is determining which deductions you’re eligible for. Fortunately, you have a lot of lee ways when it comes to deductions. Depending on the type of business you own, your deductible expenses might include:
- Business insurance
- Rent or lease expenses
- Retirement contributions
- Home office expenses
- Advertising and promotion costs for your business
- Legal expenses
- Mileage expenses for driving to customers’ locations or events
- Vehicle-related expenses
- Equipment purchases
Final Thoughts on How to Do Your Taxes
In this article, we’ve provided you with some basic information about how to do taxes as an independent contractor. While there are a lot of rules and regulations that come into play when filing taxes as an independent contractor, the tips outlined in this article should provide you with a good starting point for navigating your tax situation. We hope these tips have been helpful!
FURTHER READING ON FINANCE ISSUES FOR HOUSESITTERS