Tax Pro

Difference Between Employee & Independent Contractor

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As an independent contractor, you have the luxury of working when you want and how you want, but with that benefit, also comes more tax responsibilities than if you were an employee. But the good news is that you can also take advantage of more tax breaks and deductions. Let’s go over what you need to know when filing taxes as an independent contractor.

What is an independent contractor?

You’re considered an independent contractor, also known as a self contractor, by the IRS independent contractor definition, if you provide work for another business or person. If you meet the criteria established in the IRS independent contractor test, then you are considered self-employed. Examples of independent contractors include doctors, lawyers, accountants, and contractors – all of who are in an independent trade, business, or profession where they offer their services to the general public or other companies. 

Employment Laws: Independent contractor vs employee

  • Employee – Covered by a number of federal and state employment and labor laws
  • Independent Contractor – Not covered by employment and labor laws

What is the difference between independent contractor versus employee?

You may be unsure whether you qualify as an employee or independent contractor. The IRS independent contractor test can answer this question for you, but put simply, the difference between an employee and independent contractor is that as an employee, your employer controls the job you do and how you go about doing it. As an independent contractor, by definition, the business or person paying you only has control over the result of your work.  

How to file taxes as an independent contractor: W-2 versus 1099

The W-2 and 1099 are the tax forms for employees and contractors, respectively. A W-2 employee has less paperwork to handle, as their employer automatically takes taxes out of their paycheck. Conversely, a 1099 independent contractor is responsible in calculating what they owe in taxes.

A 1099 contractor must file an income tax return if their net earnings from self-employment were $400 or more. If your net earnings were less than $400, you’d still need to file if you meet any other filing requirements listed in the Form 1040 instructions.

Employee Reimbursements versus Self-Employed Taxes

With the new laws in place, employees are no longer able to deduct the company reimbursable mileage they were able to in the past, making it more important than ever for employees to record their mileage using a company mileage tracker. Self-employed individuals are not reimbursed by their companies in most cases and are able to deduct those miles from their quarterly or annual taxes

What taxes do independent contractors need to pay?

If you’re considered to be self-employed, you’re required to pay self-employment tax in addition to federal income tax. The self-employment tax includes Social Security tax and Medicare tax. It is similar to the Social Security and Medicare taxes that are withheld from an employee’s paycheck by their employer, who pays it to the IRS on the employee’s behalf.

The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. Unless you pay yourself as a W-2 employee, you’ll need to pay this tax directly to the IRS through quarterly tax payments. 

How to file quarterly tax payments

If you believe you’ll owe $1,000 or more when you file your annual tax return, you’ll need to make quarterly estimated tax payments to the IRS throughout the year. These are due on the following dates: April 15, June 15, Sept. 15 and Jan. 15 (for the previous year’s final quarter).

Making estimated quarterly tax payments helps ease the burden of a having to pay a more massive tax bill in full when you file your taxes yearly. How much an independent contractor will owe depends on their expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Since those figures aren’t always readily available, you can use Form 1040-ES to help estimate your payments.

Estimated payments can be made online through the IRS website, by phone, or through the mail.

Independent contractor tax write-offs

Independent contractors are entitled to claim more tax deductions than wage employees. These include:

  • Car mileage – If you’re an independent contractor traveling from your office to meet with a client, you can use that mileage as a deduction using the IRS standard mileage rate or actual expense method. Uber & Lyft drivers can deduct most of their mileage, learn more here: Uber mileage tracker, Lyft mileage tracker
  • Home office – If you work from home, and it meets the IRS’ requirement that it is your  “regular and exclusive use and your principle place of business,” then figure the percentage of square footage of your home that’s devoted to your office and deduct that portion of expenses for your real estate taxes, mortgage interest, rent, utilities, insurance, repairs, and depreciation.
  • Equipment – Your computer, cell phone, and any other electronics you use for your business can be written off on your taxes. If you use the same devices for both business and personal use, your deduction is proportional. If 25% of your phone usage is used for business calls, texts, and emails, you can deduct 25% of your monthly bill payments.
  • Insurance – Premiums paid for liability insurance, disability insurance, cybersecurity insurance, and other types of insurance are tax deductible for independent contractors. You may also be eligible for the self-employed health insurance deduction.

Other expenses that independent contractors can deduct on their taxes include professional training and subscriptions, business travel, contributions to retirement savings, client gifts (up to $25) and more. It’s best to work with a tax professional to make sure you’re using all the tax deductions and credits you’re entitled to, which will help lower your total tax responsibility. It’s also important to keep accurate records of all your expenses and business mileage.

Everlance is the #1 app used by businesses and those who are self-employed for automatically tracking car mileage, and capturing and storing expense receipts. This saves you valuable time and money, while also being able to report these expenses in compliance with the IRS when it’s time to file your taxes. 

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